The news that a corporation is overhauling the way it does performance reviews usually only matters to the employees who work there.
But it's much more than just a trivial H.R. change when that company is Microsoft, and when the overhaul includes axing a longstanding and controversial tactic. Rather, this could very well be an obituary for one of the corporate world's least popular workplace practices.
"Stack ranking," or "forced rankings," which compares employees' performance against one another and requires that managers plot team members along a distribution curve, may not ever truly die away. Yet as companies increasingly try to reward collaboration, and meanwhile grow frustrated with the performance evaluations they have in place, many H.R. consultants and researchers expect more and more organizations to side with Microsoft's recent move.
"Microsoft getting rid of forced ranking signals an end of an era," says Cliff Stevenson, senior human capital researcher for the Institute for Corporate Productivity (I4CP), a research network that studies management practices.
Forced rankings were popularized in the fast-growth years of the 1980s and 1990s by General Electric's Jack Welch, whose management tactics were replicated throughout Corporate America as if Moses himself had handed them down on tablets. The competitive system is also sometimes known as "rank and yank," especially when low performers are shown the door.
Some companies, of course, still find that useful. Just last week, around the same time Microsoft announced it was abandoning the practice, Yahoo made news for reports that it has been using a forced distribution to rank employees and make decisions about layoffs. Many companies, however, have already dumped the controversial approach.
According to research by Stevenson's organization, just 14 percent of companies surveyed in 2011 reported that their performance evaluations included a "forced ranking," down from 49 percent in 2009. That steep drop may reflect executives' awareness that the term has a bad rap, or may be due to differences in the way the term is defined. But when I4CP asked respondents how many had a "forced distribution," a wonky H.R. term for a bell curve, it found similar numbers. Fifty-four percent used the practice in 2009, but two years later, only 16 percent reported doing so.
Not all surveys show quite such low numbers. Brian Kropp, who oversees human resources content for CEB, an Arlington, Va.-based corporate adviser, says their research shows that 29 percent of companies force managers to grade people on a curve (44 percent if you count those using it for some portion of their employees). Still, he has "no doubt" that Microsoft's decision will prompt a bunch of other companies to do away with it as well. "Whenever you see a really big company with a really big name that’s known for managing talent make a big shift like this, it will raise a bunch of questions for everybody."
The practice has been declining for several reasons. In an era of slower growth that rewards collaboration as much as--if not more than--individual contributions, more and more companies are recognizing that rankings can increase unwanted internal competition, further dramatize office politics and discourage employees from sharing resources and information with their peers.
Companies also have realized how demotivating the process can be. Good performers just below the top tier get complacent, knowing that, even if they try harder, they won't get rewarded unless someone at the top messes up. Meanwhile, managers who've created a truly outstanding group of folks get penalized. "What happens if you’re working with a superstar team?" asks management adviser Marcus Buckingham. "You've just forced a distribution that doesn’t exist. You create this stupid world where [great] people are punished."
A few companies have become so frustrated with their performance evaluation programs that they not only don't rank employees, they don't even assign grades—tossing out labels like "meets expectations" and scores of 1 through 5. Along with getting rid of its bell curve, Microsoft chose to end all such ratings in its recent overhaul. The new system will include more of a focus on teamwork and collaboration, more timely feedback and more flexibility for managers to hand out rewards as they see fit, as long as they stay within budget.
Companies ranging from Medtronic to Adobe to Motorola have all recently made big changes to their programs as well. They ditched ratings from their evaluations, with some even axing the annual review altogether. The reasons companies do so are many: Research has shown that employees stop listening to feedback once they hear their score, making the conversation that follows ineffective. The process of "calibrating" the scores across teams (an effort to try to ensure grades are being fairly bestowed) can be extraordinarily time consuming. And in an era of lower personnel budgets, the difference in bonus for someone earning a "3" or a "4" can be so minuscule that the rating becomes irrelevant.
According to CEB, 86 percent of companies have either made changes to their performance reviews in the past year or are planning to do so shortly. So if the bell curve--and perhaps someday the ratings that go with it--is on its way out, what are companies doing instead?
That's not entirely clear yet. Many companies are instituting more frequent reviews--quarterly, monthly or even real-time--rather than remaining locked into the annual year-end discussion. And those who chuck ratings are allowing managers greater individual judgment when it comes to handing out raises and bonuses. Meanwhile, some are shifting even more of their training, attention and cash to their stars rather than spending a bunch of time lifting average performers up a notch, especially as more evidence (including a possible replacement for the bell curve) illustrates the outsized power that A-list players can have.
"What's pretty obvious is that everyone is running from something," Buckingham says. "They're just not sure what they’re running to."
Jena McGregor is a columnist for On Leadership.