Performance Management

Why Employee Ranking Systems

Lead To Disaster

In our white paper entitled

"Performance Management -- Why Doesn't It Work we discuss

some reasons why most performance appraisal systems fail to add

value to organizations. Despite our work, and the work of more

illustrious experts such as Deming & Scholtes, most people believe

in the usefulness of performance management. In a way that's

understandable, since it CAN succeed in the hands of an excellent

manager, and the importance of performance management has

been stressed for decades in much of the management literature.

What is more perplexing is the continued use of ranking methods

to evaluate employees. Ranking employees, particularly for

determining promotion, and pay, or even for providing developmental

feedback simply makes no sense. It is not a neutral process, or just

a costly process--it is a recipe for disaster. This month we look at

why this is so. (Next month we will take on the use of rating systems).

Rankings In Appraisal

The core element of the use of rankings is that employees are

compared to each other, and given some number that supposedly

indicates whether they are better than, about the same, or less

effective than their colleagues. That ranking is often used to

determine who will receive pay raises from a limited pool of money,

or for other decision-making processes.

The criteria for ranking can range from specific and objective to

totally fuzzy and subjective. For example, it is possible to rank

sales staff objectively, in terms of the sales generated in a year,

and identify the top salesperson, the next best, down to the

bottom based on some reasonably meaningful numbers.

Or, one can rank people on a set of fuzzy criteria such as

"gets along well with team members".

The Arguments In Favour

There are only a few arguments to support the use of rankings

in any plausible way. The major argument appears to be

that ranking employees versus each other creates a situation

where competition can be encouraged--the assumption being

that if staff compete with each other they will push each other

to greater productivity.

The second argument is more administrative. Organizations

that rely on merit assessments for decision-making on

pay levels and promotions need to decide who will get what.

Proponents of ranking systems suggest that rewards for

productivity should go to the top performers as defined by

comparison with their peers. So a ranking system allows

organizations to decide to reward the "top 25%" or the

"top 10%". On the surface this makes some sense.

Given a limited pool of rewards, shouldn't the rewards

go to the top performers in the organization? We'll see.

The Arguments Against

Let's counter the administrative argument first. We want

to reward people for the value they contribute to the organization

(however that might be defined). The catch is that a ranking

system doesn't do that. It rewards for being better than

one's peers, and that's a very different thing. The easiest

way to show this is to look at an example. We are going

to use a sales example with rankings by total yearly sales,

because that's a best case scenario, since we can measure

sales objectively. If ranking systems don't make sense there

when we have good data to guide the rankings, they aren't

going to work with more fuzzy ranking criteria.

Let's take a small group of five people with sales figures

as follows:

Bob $25,001
Ken $25,000
Mary $24,000
Barb $23,000
Fred $20,000

Our system calls for rewarding the top 20% (one of the staff)

with a significant pay raise, while giving a small "average"

reward to the middle 60%, and giving no reward at all for the

person at the bottom.

Bob gets a big raise while Ken, Mary and Barb get a little,

and Fred receives nothing. Does this make sense? No.

If we look at the figures, we see that we are rewarding Bob

for his ability to be one dollar better than Ken. In fact the

difference among all of the salespeople is small...and this isn't

surprising since we assume a reasonable job selection process

where only the best are hired and retained. So what we are

doing here is making important decisions based on almost no

differences in production because our "system" specifies that

we must reward the top 20% with no room to evaluate the

absolute contributions.

Apart from the fairness of this, what effect might it have on the

performance of Ken and the others?

But here's the real kicker. Let's look at the value that each of

these people contribute to the organization. Let's assume that

each of the sales staff draws a base salary of $30,000 a year.

When we look at the absolute value of each staff member,

we see that NONE of them are adding value. They are costing

the company more than they are earning. Under a strict ranking

system we would still be obligated to pay that top performer his

raise, even though Ken is simply the best of the really lousy!

Ranking systems don't assess value and contribution, even in

a best case scenario.

The other argument put forth is that ranking systems encourage

competition, and that is probably true. The error with this

argument is that it assumes that competition will lead to increased

productivity, and increased success for the larger organization.

This is rarely the case. Why?

Quite simply, we tend to get the kinds of behaviour we reward.

We can set up a system with good intentions, but unintentionally

encourage behaviour and actions we don't want. Ranking systems

(and related reward systems) allow for two ways to "win" extra rewards.

The first, and the one we would like to see most is for people to

work harder, better and smarter and become more productive.

By being more productive they can vault over their lesser performing

colleagues to receive additional rewards. The second possibility is

to contribute to degrading the performance of those competing

for the same reward. An employee can vault into the upper echelons

of ranked performance by helping others do worse.

This is certainly NOT what we want.

While it is only the most cut-throat employees who will deliberately

attempt to reduce the effectiveness of colleagues, the use of

ranking and related rewards does push even "nice" people

into doing things damaging to the organization.

If you reward based on relative ranks, you encourage:

1. hoarding of resources so they are "there when needed"
2. with-holding of information
3. reduction of team-work and helping others
4. and generally self-centred and self-serving actions.

Other Considerations

1) While ranking may seem to provide an objective means of

evaluating (since it can be used to assign numbers to people),

the rankings themselves are only as good as the criteria used

for ranking. They can be extremely deceptive, making it appear

that there is an objective valid evaluation process going on when,

in fact, there isn't.

2) The value of an employee RELATIVE TO PEERS, is irrelevant to

the success of any organization. It matters not a bit whether a

person is the best or the worst. What does matter is their absolute

contribution to the goals of the organization. Ranking doesn't

improve organizations. It only classifies people and does not

reflect the actual value of employees.

3) As a form of feedback ranking is virtually useless. If our goal

is to develop people, we need to provide specific concrete feedback.

Informing someone that they ranked in the top (or bottom)

twenty-five percent on something may send some sort of message,

but tells the recipient virtually nothing about how to improve.

4) Ranking can be devastating to the morale and trust of an

organization. Because it is difficult to rank objectively, employees

will almost always disagree with a ranking that places them

anywhere but in the top percent in the organization. Employees

often perceive the process as unfair and arbitrary. Research has

shown that the large majority of people believe they are above

average in job performance. Ranking guarantees disagreement.

5) Finally there is the issue of comparisons. In today's work world,

even people with the same job titles in the same "shop" may be

doing very different jobs and contributing in very different ways.

How is it possible to compare someone who functions as an

informal workplace leader to someone who is technically talented

but interpersonally unskilled? Both contribute in their own way.

It really is like comparing apples and oranges.