Forced ranking , why?
Something I have been thinking about while reading Welch (2001) "Lessons I learn leading a great company and great people" along side with Kohn (1994) "Punished by Reward". A similar question has been asked by Mei Hu in her blog here
"After the other team presented their understanding about false ranking, I thought I should raise the question that if false ranking has so many critics, why are there still so many companies using it?"(Hu, 2008)
To me this is a very interesting question. Because in many ways it challenges our fundamental believes about competition. We have all been brought up in an environment where we have to compete to get what we want. Survival of the fittest as they say is the nature of the world. Compeitition and fair play is the best bureaucracy buster.
Forced ranking , then is simply a technique to simulate that environment.
If competition is the best way to differentiate the best companies from the mediocre ones , applying the same princple within the company would theoretically only homogenize the people into the best.
But is that the right way to manage people, and to lead? Moreover, competition between companies or between individuals who have no incentive to work together is probably a healthy sign of equality, but do we really want people that work together to compete with each other within the same company? Doesn't people work best when they cooperate and share information? Is putting people in a situation where they are judged as success/failure by company ranking the best way to harbour cooperation and teamwork? Or more directly, would you share information with someone else if this person's success could lead to you being forced out of the company? No , I guess not. Ultimately people care about whether they've gained their fair share and if today people feel unjustly treated by the ranking or reward schemes and all management say to them is "hey! tough luck, try harder", then it is unlikely people would look forward to coming to work and give their best shot.
"What is the problem?" You may ask, "just make the reward system fair and all the problem will go away!". How do we do that exactly? what measures do we base performance on ? is it sales revenue? is it total profit? or is it how much new account you bring into the company? Maybe it's how well you keep your customer happy! Not to mention Deming's variability of the system. Even if someone seems to be doing a good job and we reward him for it, there is no guarantee that he is doing something different, on top of his routine day to day activity. Are we really rewarding him for good performance then? or just giving him a "nice to have" or "feel good" company lottery? The truth is, there is no truly objective way to measure "added value" each employee bring to the company. And if the reward is tied to the so called "perceived value" such as performance by sales revenue then it will likely lead to resentment and possibly undesirable behaviors such as cheating the system. Now do we have a company that is built to last or do we have something that will quickly collapse into its own demise?. Consider a hypothetical situation where a Wall Street broker tries to meet the target for the number of new account his boss set him, or else he will not get the company bonus which he plans to buy a new Astin Martin with. Will he not try to persuade his client in the most soothing and reassuring manner that their money will be well looked after while investing them in the high risk high return housing market. When the housing bursts, his clients lose all the money invested, his company goes into bankrupcy, and he will still have kept his Astin Martin. Sounds familiar? maybe this situation isn't so hypothetical afterall (Wall Street example adapted from Paul Krugman's column in NY Times here). All I am trying to say is there is a real risk associated with ranking and rewarding if that's all you use to drive performance out of your people.
So far my discussion is a little off track. Coming back to the original question if forced ranking has little merit in terms of management, why has many other companies choose to adopt one form of ranking or another? I believe in most cases it is a simple case of "monkey see monkey do". When successful companies such as GE practice ranking of employee, it leads other companies to believe it is a great way to manage performance. Welch himself believes that principle to its root. But if we look at Welch or GE as an organisation, forced ranking or pay for performance isn't the only performance management used in GE (Mei also clear on this point). Other methods suchs as Section C (take place in Crontonville- GE's management training centre), Mentor/Coaching, and boudaryless communication (Work-Out) are the real examples of leadership and getting people onboard on the real business issues. Just to highlight how Welch values the development of people, while under enormous internal pressure, he spent US$45 millions on improving Crontonville at the same time laying off tens of thouthand workers to cut cost. I am not saying laying off people is good but he knows who are the people he wants to develop in the company and provide them with all the resources.
So coming back to the original question, if forced ranking wouldnt work in theory, why has GE and other company continue to use it? Any attempt to relate the vitality curve with GE success perhaps has little meaning. To bring GE practise into your own company, without devoting the same amount of management resource into training, reviewing, and building a boudaryless culture is perhaps like walking in the dark without a flashlight- you don't really know where you're going. Use it , you can if what you want is to get smart people on board without spending time to develop the unpolished gems. One word of caution though, if you don't follow that up with some real, solid, and proven management leadership, and rely solely on reward and punishment to drive performance, then you run the real risk of harbouring self interested individuls while losing the value driven employees who form the cornerstones of a truly great company.