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Why performance reviews like Yahoo’s are out of favor

Yahoo President and CEO Marissa Mayer’s nearly four-year attempt to turn around Yahoo is ripe for its own turnaround. (Julie Jacobson/Associated Press)

As Yahoo's Marissa Mayer was preparing to outline a cost-cutting plan to shareholders Tuesday during its earnings announcement -- one that included cuts to the struggling company's workforce -- a former employee filed a lawsuit alleging that the company's performance review system was discriminatory and violated federal and state laws on mass layoffs.

The lawsuit, filed Monday in U.S. District Court in San Jose, Calif., by Gregory Anderson, a former editorial director at Yahoo who was terminated in 2014, alleges that top managers manipulated employee ratings and specified the percentage of workers who should receive low performance scores. The suit reports that Mayer publicly denied Yahoo's system was a "stack ranking," as such forced grading patterns are known in H.R. parlance, but it also alleges that "first-tier managers had no meaningful discretion and were bound by the instructions from, and the actions of, their supervisors and managers above." The suit was first reported by the New York Times.

In an emailed statement, a Yahoo spokesperson said that "fairness is a guiding principle of our annual review and reward process," noting that the process "also allows for high performers to engage in increasingly larger opportunities at our company, as well as for low performers to be transitioned out." When asked for further details about how the program works, the spokesperson declined to comment further.

But past reports paint a similar depiction of Yahoo's performance measurement system, one that reportedly offers guidelines -- which some employees interpreted as being much more than mere suggestions -- for what percentage of workers should get certain ratings.

"The system was meant to encourage hard work and weed out underperformers, but it soon produced the exact opposite," wrote Nicholas Carlson in late 2014 in the Times. "Because only so many 4s and 5s could be allotted, talented people no longer wanted to work together; strategic goals were sacrificed, as employees did not want to change projects and leave themselves open to a lower score."

Yet systems like Yahoo's, at least as it's been described, are quickly disappearing from Corporate America, where the performance review is undergoing a revolution of sorts as companies replace traditional reviews with more regular, less rigid check-ins about how an employee's faring.

Large companies including AccentureAdobe, Deloitte and IBM have overhauled their performance review systems. Some are dumping labels such as an average score of "3" or "meets expectations" entirely. Others are putting technology to work to track more regular feedback.

"The biggest trend we’re seeing are companies moving to conversations, more frequent feedback and more engagement with management," said Kris Duggan, CEO of the performance management software company BetterWorks.

"Stack ranking" -- also known as "forced rankings," "forced distributions," or the less wonky "rank-and-yank" -- meanwhile, were popularized during Jack Welch's tenure at General Electric and then copied widely in American H.R. departments. Though created as an effort to force managers to make tough calls on the performance of their teams, the practice has fallen heavily out of favor. GE long ago gave it up. Microsoft, one of its most well-known practitioners, moved away from a stack ranking in 2013.

Surveys from the Arlington, Va.-based consultancy CEB show that 27 percent of companies in the Fortune 1000 in 2015 report using a forced ranking to measure the performance of some part of their workforce. That's down from 44 percent in 2013.

Other reports suggest that even fewer companies are still using a forced ranking. Cliff Stevenson, an analyst for Brandon Hall Group, said in an interview that its survey of more than 200 mostly mid- to large-size companies found that just 16 percent still use the system. He says more companies are dropping the practice because of a poor link to improvements in company performance, as well as a perception of unfairness by employees.

"It sends the signal that it’s used for culling the masses," he says, "not trying to develop employees." 

Brian Kropp, who leads the human resources practice for CEB, said that there are several reasons fewer companies use forced rankings or "distributions" today. For one, work is far more collaborative and team-based, making groups of employees much more interdependent on each other's work.

"We've created this paradox in organizations where we’re asking people who are competing with each other to also collaborate," he said. "And that paradox between competition and collaboration is hugely exaggerated in a forced ranking system. It makes it so that as an employee, if I help this person and this person succeeds, I move down on the list." 

In addition, after years of taking costly layers of management out of organizations, companies are flatter, with far fewer promotions available for most employees to look forward to. For employees who consistently get a 'highly exceeds' rating or get put in the top 10 percent -- and then don't see a promotion or reward -- a good score can be just as demotivating as a bad one. "The positive side doesn't exist anymore," Kropp said.

So is there ever a good time for companies to use forced rankings? Ed Lawler, a professor at the University of Southern California's Marshall School of Business, said that Yahoo's current situation could be one of them.

"The most defensible place to use a forced distribution is in a turnaround, when you desperately need to make some tough decisions and don't trust managers to make them," he said.

But even then, he said, it should only be used once or twice, rather than becoming standard operating procedure over time.

"You wouldn't want to repeat it," he said. "Now that you've told people the bottom people are gone, you've really heightened the competition among the remaining people to survive."

Read also:

Why big business is falling out of love with the annual performance review

With Steve Ballmer’s departure, a look at Microsoft’s flawed system of performance reviews

The corporate kabuki of performance reviews

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