Performance Management

Forced Ranking Systems

• Gained popularity following GE
• Up to 20% of companies
• Used by:
– Conoco
– Microsoft
– Capital One
– Hewlett-Packard
– Sun Microsystems
– Cisco – Intel
– EDS – Texas Instruments
– Hallmark Cards – Enron

• Used and abandoned by:

– Ford
– Goodyear
 The “Vitality Curve”

“The “The top

bottom 10” 20”
“The
Vital 70”

“A company that bets its future on its people must remove the
lower 10% and keep removing every year – always raising
the bar of performance and increasing the quality of
leadership.”
Jack Welch “Jack: Straight From the Gut” 2001
 Why Conduct Forced Rakings?
• Replacing worst employees improves perf.
• Poor perf. not tolerated.
• A competitive, high perf. culture.
• Constant improvement of the workforce.
• Force leaders to make the tough decisions
• Rewards top-perf.
• Legal: used for promotion, demotion or layoff.
 Helping Under-Performers
• Sun Microsystems ranks its 43,000 employees in 3
groups.
• CEO Scott McNealy is famous for telling his executives
that the bottom 10% must be "loved to death".

• Underperformers are provided with one-on-one coaches.

• Underperformers who fail to improve are offered a 'prompt
exit' package.
 Evolution of Ford’s Policy
July 1998: Ford begins buyout offers
– U.S. salaried employees designated by as "low performers" or
"limited potential.”
– Offers go to less than 2,000 employees with around 1,000
accepting.

January, 2000: Ford begins new performance evaluation

– Top 20,000 managers
– 10% of the executives will get A's, 80% will get B's, and 10% will
get C's.
– C’s are not eligible for bonuses. Two C's in a row are grounds for
dismissal.
– Quota for C’s later reduced to 5%
 Evolution of Ford’s Policy
July, 2001: Ford eliminates the "A," "B," and "C" ratings in
favor of "top achiever," "achiever," or "improvement
required.” Quotas dropped for employees to be ranked
as "achiever" and "needs improvement."

December, 2001: Ford agrees to pay $10.5 million to settle

lawsuit
– 620 employees
– Mostly older, white men

April, 2002: Ford revises its performance review system to

“focus on creating bonds between managers and
employees”, and will have no ranking quotas.
 Hidden Costs
• Turnover & replacement costs
• Creates competition
• Managers may disown the system and not
develop employees.
• Gaming the system
– Only fire people after performance appraisals.
– Set up people for political reasons.
– Horse trading among managers.
– Overstaffing for cannon fodder.
• Low morale
 Potential Problems
• Adverse impact
• Danger that satisfactory performers will be tagged.
• Differences among units are ignored
• Political exercise that measures a manager’s power.
• Can we assume a normal distribution?