Human Resource Management


Stephen Gall

MGMT-3003 - Human Resource Management

Instructor: Dr. Susan Jespersen

Date submitted: November 23, 2005

Walden University

Executive Summary

Background and Introduction


This paper discusses the issues related to the use of the stack ranking method in conjunction with the employee performance review for promotions and benefits. The paper analyzes the problem situation, identifies issues affecting performance, and proposes alternatives to the way the method is currently used.

Main Conclusions

  • The stack ranking system, if not implemented carefully, can result in legal issues being raised

  • The use of the stack ranking method may have value as an internal tool for Human Resources when used as a tool to evaluate the effectiveness of the overall employee review system, but as a performance measurement that is shared with individual employees, it is shown to have far-reaching unintended consequences. Employees are smart, and they quickly figure-out how to manipulate the system to their least disadvantage.

  • Stack ranking provides questionable value as to insight into an individual’s actual job performance. Its use highly politicizes an organization. The rank number is most often based on unsubstantiated subjective judgment by an evaluator who may feel pressured to respond according to a narrow set of guidelines.

Recommendations

Stack ranking results should not be used in the performance review process or shared with employees. If used at all, stack ranking should be well documented using the 360 degree feedback method, where a variety of stakeholders provide input into the ranking based on objective (or using the least amount of subjective) criteria. Results are best used to evaluate the performance review process itself.

Stack Ranking in the Performance Appraisal at Microsoft

PROBLEM SITUATION

Stack Ranking Defined

What is Stack Ranking? The concept behind stack ranking, or forced-choice rating, is to rank the people on a given team from "most valuable" to "least valuable” without the use of all the data available from performance review scores, ladder levels, and other appraisal data.

The Forced-choice rating system is now the fourth most commonly used appraisal technique among the 75% of U.S. companies that now have performance appraisal programs. Stack ranking is actually an offshoot of the forced-choice method, which requires the rater to rate individuals based on best fit to least fit. As an appraisal technique stack ranking is the 8th most common technique. [Oberg, 2005, http://www.unep.org/restrict/pas/paspa.htm]

Where did the idea of stack ranking come from? Stack ranking has been a project management technique used for years, to prioritize and manage to-do lists, lists of features, actions, and (non-human) resources. It is a tool for identifying those items that are most important to the project and to prioritize items accordingly.

Business Case for Stack Ranking

Stack ranking is proposed as a method to deal with inflated employee rating where everyone is rated as superior due to a failure to differentiate. It is believed that a forced ranking exercise guarantees that managers will differentiate talent, and provide an insightful view of employees in relationship to one another over that offered using conventional performance appraisals.

It is believed that forced ranking also causes the company to articulate success criteria for the organization, and to regain focus. The system produces an interesting set of data for spotting talent, purportedly across departments, as well as helping to identify the bottom 10% and under-performers. [Grote, 2005, http://hbswk.hbs.edu/item.jhtml?id=5091&t=organizations]

Unintended Consequences of Stack Ranking at Microsoft

What are the consequences of using the stack rank system as part of the employee evaluation? One of the consequences has become apparent at Microsoft, where very smart people have now figured-out how to subvert the stack rank system to such an extent that the review process has been completely politicized. In fact, the issue around the practice of stack ranking at Microsoft has become quite vocal and there is much resentment against HR for its use. Many of the rank and file employees are calling for the removal of senior management who support the practice. Why has it become such a contentious issue?

PERFORMANCE STANDARDS

How Stack Ranking Works at Microsoft

The members of a given team are divided into columns of high, medium, and low rated individuals and then each column is given a person-by-person relative ranking. These relative ranking positions are negotiated by the group managers (where a group can consist of multiple teams) who argue over the merits of their people. One technique is to ask: "if the team was on a sinking boat and we had to decide who we would put on the life-boats, who would be included?" The best way to get a better position relative to one’s peers is to be defended by not only one’s group lead but by other group leads as well who are involved in the process. A person's popularity among team leads is very important.

To apply stack ranking, a given peer group is graded on a curve. But the rating is more like being placed into one of 4 buckets; 1) 4.0 - the bucket everyone wants, 2) 3.5 - the bucket that is acceptable but not preferred, 3) 3.0 - the bucket that means you are at risk of getting fired, 4) a 2.5 is effectively the career-ending kiss of death.

By requirement, each product team needs to provide 25% of its members as 3.0s. This means trouble if the group is made-up of super stars. To placate the group, members are told that a 3.0 rating is peer-relative; but no one believes it. Managers feel stuck: "As a lead, it's one of the most painful experiences at work to have to give a review back to someone and say ‘you worked hard last year and accomplished great stuff...I can't tell you how much I personally appreciate it. However, the review model came back down the chain and the best I could do is get you a 3.5 (or *shudder* a 3.0)’. Nothing kills morale faster." [Mini-Microsoft, 2005, http://www.minimsft.blogspot.com/]

Rank and Yank

Stack ranking fits into the dark side of performance appraisals. Jack Welch, CEO of General Electric, popularized stack ranking when he said that if you want a high-performing company, you should fire the bottom 10 percent of your employees each year come performance appraisal time. [Daniels, 2001, http://www.entrepreneur.com/article/0,4621,290720,00.html] Is a low rank number just a way to justify poor performance prior to the firing process?

The Stack Rank system is often used to identify poor performers who can be given a short time to either improve or to leave the company. Some companies, such as Microsoft, use a forced curve, so that some employees, no matter what the circumstances, must be rated in the bottom 10%. These 'underperformers' may face a bleak future. Microsoft, like other organizations using the stack rank system, views the forced ranking approach as a way to create a continuously improving workforce. It's interesting to note that Enron, a leading proponent of the practice just before its collapse, was praised as "a hotbed of overachievers" partly due to the use of stack ranking. [Dell, 2005, http://www.performance-appraisal.com/news.htm]

Issues Raised

What are the issues associated with the use of stack ranking? The stack rank system creates an environment that is not conducive to high employee moral and team performance. By ranking employees there becomes a sub-optimization in terms of team unity because it singles-out the performance of some at the expense of those who provide the daily support that is necessary for the team effort.

What follows is a listing of some of the issues and some postings in response to a dialog about the technique’s use at Microsoft. These postings are found on a Web site, run by an anonymous Microsoft employee, which has recently gained high visibility both within Microsoft and among a wider audience.
Some of the problems are:

  • It kills morale and is demoralizing. One employee wrote [Mini-Microsoft, 2005, http://www.minimsft.blogspot.com/]:

“AAAHHH!@!! "Why bother? I'll get the same review no matter what I do."
I killed myself one year. I mean the whole year; just one giant death-march Ho-Chi-Minh nightmare. Shipped. Accolades from customers....drumroll..3.5; because "You went dark". Yeah, no s*** Sherlock, I was working not preening. And I know it wasn't that I "went dark"; I really felt for my manager at the time, because he just wasn't a forceful enough person to push for a better ranking. He just flat fell down against a much more experienced manager in the peer team. Anyway I left. The phenomenon you describe is known in psychology as "learned helplessness", and I did not want to become one of those depressed rats...now I'm a happy rat employed where there's no curve ranking.”

  • It creates an environment where employees can feel discouraged and bitter. One employee wrote [Ibid]:

“Anyway, the whole kerfluffle over Gretchen's blog entry got me to thinking: she brings the candidates in telling them they're geniuses, and then we feed them into the review meat grinder, and some come out 3.0s. No wonder people start to feel bitter. Microsoft is not a very healthy psychological environment. We create this horrible environment of mixed messages where even the smartest people get told "that's the stupidest thing I've ever heard," by the chairman as a way to motivate them.”

  • It’s Political and breads bad Politics. One employee wrote [Schofield, 2005, <<http://radio.weblogs.com/0133184/2005/09/29.html>>]

“It's an incredibly difficult exercise, and every time I've had to do it, there's always been a LOT of arguing, which I think is healthy. When you're finally done (whew), you go back and put all that other information -- review scores, levels, promotions... next to each name. Things immediately jump out at you; you see people who are ready (or nearly ready) to be promoted. You see people who are at a high level but are just not delivering compared to their peers, or people chronically under-rewarded despite blowing away all of their peers. You see when one manager gives systematically higher review scores for the same level of work, or when people in one group are at higher levels than people doing equivalent work in another group. You see people hired in two years ago being paid less than someone who just started because the initial salaries needed to get more competitive but the internal compensation system is lagging behind. And you get an opportunity to tweak and correct things, to fix injustices, before all the numbers are final.”

Another employee wrote:
I could share stories of less competent IC’s who climbed the ladder to management in a Machiavellian manner and then pushed out those they felt could threaten them while surrounding themselves with yes-men lieutenants (who get automatic 4.0s), but it is best just to ask this question. If those in charge of ranking individuals have priorities that take precedence over and are at odds with the greater goals of the company, will forced (stack) ranking still be as effective?

  • It makes employees distrust management and want to unionize, and may even drive the best employees to want to quit. One employee wrote [Mini-Microsoft]:

“I've worked in a startup in boom and bust times, and you know what? If this forced 3.0 business is about the money, people can live without the cash. But tell them - I know you earned an A, but I've got to give you a B. Not based on merit. It's our policy. And to be honest, you really almost got it, but Jane Doe just knows how to kiss ass better than you do. Learn to toss some salad, and you might get what you earned next year. That's a great way to make a 3.5 start skewing towards a 3.0 for the next FY, or walking out the door. Do people not realize that Google has moved down the street and is ready to snap up good people who've become disenchanted?”

  • It promotes competition, not cooperation, because it pits employees against each other. One employee wrote [Ibid]:

“There is also the problem with team members competing with each other on teams. By making team members compete with each other, we weaken teams. On my last team, team members would withhold information from other team members in order to slow them down in their work and make it easier to beat in the stack rankings (as I said, there was a lot of work and any delay in getting things done could impact the deadline).I don't think the merit system is working. I'm not sure what they could replace it with, but making employees compete against each other certainly is not the way to go.”

  • It creates the perception of unfairness. One employee wrote [Ibid]:

“The worst about a review is being promoted late in year (e.g. March) and being told you're reviewed on your new level instead of the old one. Somehow my review score magically dropped from a 4.0 to a 3.5 that way. Funny enough this year I was facing the same possibility of a promotion before the annual review, and my (same) manager gave me the opposite spin that I'd be rated on my old level. Way to admit that I got screwed last year. Even better is that my group rates people based on how many bugs they resolve (oh yes, this sounds bad already). Never mind people can go into product studio and jack up their stats...the managers in my group have never cared. They've even admitted it was a possibility, but didn't want to tread any further. Want a 4.0, just cheat...that's what this company is about (or maybe just my group).”

  • It destroys intrinsic motivation because employees respond to rewards tied to short-term goals instead of working toward the overall success of the company. One employee wrote [Ibid]:

“what if you really have seven 4.0 performers but the model says you can only give three 4.0 review scores? ...most get pissed but stay anyways and now join the ranks of disgruntled employees who are no longer passionate about their work.”

Another employee wrote:
“The culture within MS is just plain stupid. A culture that rewards people (the 4.0s) for taking risk and punishes the people (the 3.0s) who cover the asses of the first group, is just silly. I would not want to own a company of exclusively 'type A' highly motivated risk takers. You need a balanced and diverse employee base to make a successful company.”

  • It creates the perception of impossibility because the curve only allows for a few to be singled-out as exceptional performers. One employee wrote [Ibid]:

“I remember in the early days of the IE team, an ad appeared in the Micronews: "Are you a consistent 4.0 performer? Come join the hottest team at Microsoft!" And I thought to myself, either this team is exempt from the curve, or these 4.0 performers are going to doom their review scores by all getting onto one team together. Mini has a different way of putting it: if you get rid of the low performers, who get the low scores next time? Your answer seems to be -whoever stumbled because they were distracted by going through a divorce."


Many of these issues are not new, and were also recognized by the management theorist, Deming, who opposed the ranking system. "Deming opposed ranking because it destroys pride in workmanship, and he opposed merit raises because they address the symptom, rather than the causes of problems." Deming believed that “the only way to improve a product or service is for management to improve the system that creates that product or service. Rewarding or punishing individuals trapped in the system is pointless and counterproductive.” [W. Edwards Deming Institute, 2005, http://www.deming.org/theman/articles/articles_gbnf04.html]

Is Stack Ranking Defensible?

If stack ranking works at all it is only when it is not part of the shared performance review system. Instead, it can be used as one way to look at the results of the review system and find mistakes and trends. But it is one of many ways to do that. Although not directly linked to the performance review in practice, Microsoft employees have come to recognize the stack rank as the review that really matters when determining bonus and career path. Is this practice legally defensible?
Figure 1: Comparing the use of the stack rank method to criteria for surviving a court test [Mathis, Jackson, 2006, p. 335]
Needed to be Legally defensible
Meets Criteria? Y/N
Potential legal conflict? Y/N
Criteria based on job analysis No Yes
Absence of disparate impact and evidence of validity No Yes
Formal evaluation criteria that limit managerial discretion No Yes
Rating linked to job duties and responsibilities No Yes
Documentation of appraisal activities No Yes
Personal knowledge of appraised individual Yes No
Training of supervisors conducting appraisal Yes No
Prevents action from controlling employee’s career No Yes
Counseling to help poor performers improve No Yes

ALTERNATIVE SOLUTIONS

Legal Suggestions

AHI's (Alexander Hamilton Institute) Employment Law Center suggests proceeding carefully before rating employees as "poor performers." [Dell, 2005, http://www.performance-appraisal.com/news.htm]
The following guidelines are suggested:
  • Ensure that there sufficient evidence to support the claim that an employee's performance is genuinely substandard, and that evidence is properly documented
  • Ensure that there is no perceived or credible argument that any action or poor review can be viewed as retaliatory or discriminatory
  • Ensure fairness; Have other's received such a rating (or been discharged) for similar circumstances?
  • Are, or can the ratings be confirmed by an objective third party reviewer?

If the stack ranking practice continues, companies will have an increasingly difficult time showing a significant difference between the first person being fired and the lowest scoring person not fired. [Daniels, 2001, http://www.entrepreneur.com/article/0,4621,290720,00.html]

Proactive Career Management (or how to Subvert the System)

Employees are smart, and they quickly figure-out how to manipulate the system to their least disadvantage. Microsoft employees who understand how the stack ranking system works heed to the following advice to ensure that they receive a high rating: [Mini-Microsoft, 2004, http://minimsft.blogspot.com/2004/07/microsoft-stack-rank-as-popularity.html]

Do what is necessary to get increase visibility in the group
. This means ensuring that everyone in the group understands what projects you are working on, your role, and your accomplishments.

Get a mentor - someone who is well-versed at playing the stack-rank game
. It is always a good idea to find someone, preferably a manager well-versed in the process, to advise and coach you on how to manage your career and get a good stack rating.

Always know when the stack ranks are because they occur at different times for different groups.
It’s best to be prepared and that means having completed a checklist that ensures you the greatest visibility and support, as well as being sure that any looming deadlines are completed, before your boss attends the stack rank meeting. If your successes are fresh in the mind of your boss, then he/she is probably more likely to support a high rating for you.

Set-up a skip level one-on-one meetings
. This means to meet with other managers, leads, and even your bosses’ boss to expose your value to the company by discussing your projects and accomplishments. During the stack rank meeting your boss may need the support of other managers, and it doesn’t hurt if your bosses’ manager knows of you and your contributions to the group.

Become a resource for other team members and especially team leads
. Lend a hand to those who can support your cause and help you be a success.

Constantly seek feedback and modify your efforts based on this feedback
. You want to make sure that your efforts are in total alignment with the group, the boss and company objectives. Never assume that you are doing a good job; verify it early and often.

Make sure your boss knows why you are so great
. Use every opportunity to promote yourself to your boss.
Of course, this advice can apply to any employee in any company, but when employees start spending increasing amounts of time promoting and politicizing their work and themselves, less actual work get done.

IMPLEMENTATION

Use of the 360˚ Evaluation Method in Stack Ranking

If used at all, stack ranking should be well documented using the 360 degree feedback method, [Mathis, Jackson, 2006, p. 342] where a variety of stakeholders provide input that is then separately evaluated by HR who performs the actual ranking, and then uses the results to evaluate the performance review process itself.

Find Alternatives to Stack Ranking

Poppendieck makes some strong recommendations as clear alternatives to stack rank in relation to merit pay [Poppendieck, 2004, Compensation.pdf]
  • Establish a clear and fair promotion system instead of a merit pay system where merit pay is the primary way to make more money. Merit systems always become contentious. De-emphasize the merit pay system but not at the expense of an unfair promotion system.
  • One way to de-emphasize merit pay is to tie profit sharing to economic drivers, which foster a team oriented approach.
  • Instead of creating competition for rewards by singling-out individuals, reward teams and groups for taking responsibility and meeting those economic drivers.
  • Promote intrinsic rewards instead of money, such as achievement recognition and more control over one’s work.

Revising Appraisals and Monitoring Results

Revise the role of appraisals so that they help develop a highly motivated workforce instead of creating an environment of conflict. Appraisals should be part of a strategy to accomplish the following [Coens, Jenkins, 2001, http://www.winstonbrill.com/bril001/html/article_index/articles/501-550/article532_body.html]:
  • Create a compelling vision that connects the employees' contribution directly to the organization's service or product, so that employees understand their value. Appraisal Monitoring: Any employee at any level should be able to give a 'walking tour' of the organization and be able to explain the organization's value proposition.
  • Recognize that everyone's interests are different, so give employees the ability to choose the work that aligns with their interests and abilities by allowing employees to exercise their discretion and judgment.

Appraisal Monitoring:
Offer employees challenges if they seek challenges, and work with the employee to design the appraisal criteria.
  • Most importantly, create a climate of people working together.

Appraisal Monitoring:
Open communication channels where employees feel free to contribute opinions and ideas without retribution, for example, the use of internal weblogs designed for such purposes. Then respond and address issues quickly.



Bibliography


Mathis, Robert L. & Jackson, John H. (2006). Human Resource Management. (11th ed.). Cincinnati, OH: Thomson South-Western. ISBN: 0-324-28958-8

Mary Poppendieck, "Unjust Deserts?" StickyMinds.com, July 2004, <<http://www.poppendieck.com/pdfs/Compensation.pdf>>

Winston Oberg, Professor of Management at the Graduate School of Business Administration, Michigan State University. "Make performance appraisal relevant," United Nations Environment Program, 2005, <<http://www.unep.org/restrict/pas/paspa.htm>>

Author is Anonymous, Mini-Microsoft Weblog, 2005, <<http://minimsft.blogspot.com/>>, search term: “stack rank”

Mini-Microsoft, "Microsoft Stack Rank as a Popularity Contest," Mini-Microsoft Weblog, July 2004, <<http://minimsft.blogspot.com/2004/07/microsoft-stack-rank-as-popularity.html>>

Aubrey Daniels, "Appraising the Performance Appraisal," Entrepreneur, July 2001, <<http://www.entrepreneur.com/article/0,4621,290720,00.html>>

Christine Dell "Performance Appraisal, the complete online guide," Archer North and Associates, 2005, <<http://www.performance-appraisal.com/home.htm>>

"Out of the Crisis - Quality, Productivity, and Competitive Position," W. Edwards Demming Institute, <<http://www.deming.org/theman/articles/articles_gbnf04.html>>

Tom Coens and Mary Jenkins, "Abolishing Performance Appraisals" Innovative Leader, v. 10, N. 7, July 2001, <<http://www.winstonbrill.com/bril001/html/article_index/articles/501-550/article532_body.html>>

Dick Grote, "Forced Ranking: Making Performance Management Work," Harvard Business School Working Knowledge, Nov. 2005, <<http://hbswk.hbs.edu/item.jhtml?id=5091&t=organizations>>

Kevin Schofield, "Curves and Stack Ranking Are Not Evil," Kevin Schofield's Weblog, Sept. 2005, <<http://radio.weblogs.com/0133184/2005/09/29.html>>

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