Microsoft, GE, and forced ranking systems

A month ago, Steve Ballmer announced he would be stepping down as CEO of Microsoft within a year. This led to a flurry of commentary about why he’s leaving and what this means for the company. Many cited an article in Vanity Fair to detail what went wrong. I wrote about this article and Microsoft in a section of my book about forced ranking systems for performance management. Here is an edited excerpt of what I wrote:

A classic expression of fear-based culture is employee performance management, particularly the type that ranks people against each other. GE has used such a system for years and done quite well as a company. However, it’s not clear whether their success is because or in spite of forced ranking. If you work at GE, your manager places you in one of three categories: high performer (the top 20%), middle performer (the middle 70%), or low performer (the bottom 10%). If you’re a low performer, you get removed or improved. Sounds like meritocracy at its best, right? Not really. As USC management professor, John Boudreau, points out:

Is removing or improving the bottom 10 percent valuable in all cases? Certainly in some situations even the bottom 10 percent are doing an adequate job and are doing better than those who could be hired or promoted. By definition, continually removing or improving the bottom 10 percent will make the bottom 10 percent more similar to the middle 70 percent and thus make removing the bottom 10 percent less effective in improving workforce quality.

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What about companies that rank employees but don’t automatically remove people? A clue may come from Microsoft. After years of extraordinary success, the company stumbled during the decade after the year 2000. A cover story in the August 2012 issue of Vanity Fair explores why. The author, Kurt Eichenwald, reveals a startling discovery:

Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft…

“The behavior this engenders, people do everything they can to stay out of the bottom bucket,” one Microsoft engineer said. “People responsible for features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the rankings.”

Worse, because the reviews came every six months, employees and their supervisors—who were also ranked—focused on their short-term performance, rather than on longer efforts to innovate.

“The six-month reviews forced a lot of bad decision-making,” one software designer said. “People planned their days and their years around the review, rather than around products. You really had to focus on the six-month performance, rather than on doing what was right for the company.”

Like many artifacts of a fear-based culture, ranking systems also waste extraordinary amounts of time. As a manager you spend time proposing rank orders and debating them with others, worrying about how you’re going to explain to a perfectly competent employee that they are below average, meeting with employees, and dealing with the emotional fallout.

How about everyone else? The biggest time sink here is the effort it takes to position yourself with your boss, your boss’s boss, and your boss’s boss’s peers. Looking good gets rewarded more than doing what’s good for the company. Any new idea that challenges others’ perspective or status also threatens your own compensation and job security.

In companies that employ such a system—and I’ve worked with several—many people spend performance review month in a mood of resignation. They go to all the same meetings and have all the same conversations, but with a bit less energy and a lot less enthusiasm. It’s not that they cannot tolerate the system or don’t know how to navigate through it. Instead, it’s that they despise and resent it even while believing there is nothing they can do about it.

I’m tempted to say, “Throw the whole thing out.” Wouldn’t it be great to see how much positive energy gets freed—and how much time is created—by an organization taking this single bold act?