This article offers an expanded description of the summary listed in our post 40 Must-Know HR, OD, L&D Models.
Background: Forced ranking, also known as stack ranking, forced distribution, and “rank and yank,” is a concept popularised during the 1980s by Jack Welch, former CEO of GE, under the term “vitality curve.” Welch’s vitality model applies a 20-70-10 division whereby 20% of employees are top performers (A players), 70% are in the middle (B players), and 10% are bottom performers (C players) — who should generally be removed from the business. The method earned him the name “Neutron Jack” (someone who got rid of the people but left the buildings intact).
It is typically estimated that between 20-30% of Fortune 500 companies in America use stack ranking, however more recent research indicates a sharp decline in its popularity. In 2012, a survey by consultancy firm Achievers found that 98% of 645 HR managers believed that yearly evaluations were not useful.
It should be emphasised that the practice of forced ranking is outlined here as a must-know management concept due to its contentious history and not as a practice that is implicitly favoured or recommended within this list of models. We believe it is important to clarify what is meant by the term and to highlight the main reasons behind why it has fallen from favour.
Overview: A forced ranking system is an approach to performance management in which managers are required to grade employees (often on a 1-5 scale at the end of the year) in order to differentiate top performers from middle performers and low performers.
The segmentation of employees according to pre-determined criteria is used to help determine how bonuses and rewards should be allocated fairly and — frequently where the bottom 5-10% is concerned — who should be removed from the business. The practice is not always applied to the organisation as a whole; some companies only apply it to the top levels of management or to certain business units.
The business management concept of forced ranking is frequently related to the mathematical concept of normal distribution, the most well-known method of population distribution in statistics, colloquially known as the "bell curve." A normal distribution of data means that about 68% of items in a set of data (in this case, employees’ performance) fall within 1 standard deviation of the "mean" or average, while fewer and fewer items are found the further away one deviates from the mid-point. Many typical phenomena have been found to follow the symmetrically-shaped bell-curved pattern including IQ scores, height, weight, and typing speed.
Forced ranking is a broad term that refers to many approaches rather than something that always denotes a specific number of categories or a standard means of managing rewards and addressing low performance. For example, in the past, companies have used divisions such as 10-80-10; 25-25-25-25; 20-60-20; however the most well known is the 20:70:10 division developed by Jack Welch, which influenced many other companies. The common denominator among all approaches is that people are forced into a small number of "buckets" based on their performance.
The use of forced ranking is highly controversial and many consider the system to be both archaic and damaging. Some of the many criticisms are listed below.
Someone is always forced to be in the bottom 5-10%, even if every team member is exceeding their targets. Measuring performance can be highly subjective and is thus prone to bias. Performance does not always fit a normal distribution. The process is stressful for both managers and employees. The difference between a “star” and a “low” performer may only be marginal. Reducing someone’s whole year of work to a single number is belittling. Creates animosity towards managers, particularly if people believe their rankings are unfair or based on personal favouritism. The company is rewarding employees who stand out above their peers rather rewarding their contribution to the company. Encourages competition. (e.g., hoarding resources, withholding information, political maneuvering, backstabbing, sabotage.) Reduces collaboration and innovation. There is a precedent of legal challenges in court cases against companies that have been unable to prove that their ranking systems accurately identify poor performers. Not sustainable over the long-term. (It may help to get rid of “dead wood” after the first year, but sooner or later competent performers are going to be cut out.) Dismissed employees may leave with complex tacit knowledge that can’t easily be replaced. When new hires are brought in they may simply replace the dismissed lower performers, creating a costly fire-rehire cycle.
The primary benefit of utilising a forced ranking system is that it forces managers to deal with poor performers. Usually these poor performers are offered time to improve along with some form of coaching assistance or development plan, however the disadvantages of the system are often said to outweigh the advantages. The central criticism is not that companies should ignore poor performers, but that forced ranking systems are not the most effective way to deal with the issue.
Sources: Get Rid of the Performance Review! (2010), Samuel Culbert Forced Ranking: Making Performance Management Work (2005), Richard C. Grote The Myth Of The Bell Curve: Look For The Hyper-Performers, Josh Bersin, Forbes, 2014 The Folly of Forced Ranking, Edward E. Lawler III, Strategy&, 2002 For Whom the Bell Curve Tolls: The Controversial Practice of Forced Ranking, Loren Gary, Harvard Business Review, 2001 Rethinking the Review, Julie Cook Ramirez, HR Executive, 2013 Why Stack Ranking Is A Terrible Way To Motivate Employees, Max Nisen, Business Insider, 2013 Microsoft Kills Its Hated Stack Rankings, Joshua Brustein, Bloomberg, 2013