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'Stack Ranking' Ends at Microsoft, Generating Heated Debate
The controversial approach to performance evaluation and pay provokes strong opinions

By Stephen Miller, CEBS  11/20/2013
 

In November 2013, Microsoft Corp. announced it had ended its controversial "stack ranking" employee-review and compensation system and no longer requires managers to grade employees against one another and rank them on a scale of 1 to 5. The most contentious aspect of this approach was its targeted, or forced, distribution requirements, which meant managers had to designate a small percentage of their direct reports as underperformers.

As the Seattle Times reported, Lisa Brummel, Microsoft’s head of human resources, wrote in a Nov. 12 e-mail to employees:

"No more curve. We will continue to invest in a generous rewards budget, but there will no longer be a pre-determined targeted distribution. Managers and leaders will have flexibility to allocate rewards in the manner that best reflects the performance of their teams and individuals, as long as they stay within their compensation budget."

The stack ranking system was put in place for Microsoft's 2011 performance reviews. Employees received one rating based on their manager's assessment and a calibration process (typically with managers one or two levels above the employee). The rating ranged from 1 (highest) to 5 (lowest). A 3 rating equaled target compensation that was competitive with what was offered in the local job market. Targeted distribution limits the percentage of workers in each rating category. 

Stack Ranking: Job Ratings and Rewards and Microsoft

1 (highest)

2

3

4

5 (lowest)

Merit pay

$$$$

$$$

$$

$

--

Bonus

$$$$

$$$

$$

$

--

Restricted stock units

$$$$

$$$

$$

$

--

 

The single rating triggered increases in merit pay, bonuses and the awarding of restricted stock units, with the size of the increase tied to factors such as job family and discipline. This was intended to allow the company to invest its compensation budget more heavily in positions deemed most critical and in disciplines most significant to the company's success, such as engineering, research and development. (For more information about how stack ranking worked at the software giant, see the SHRM Online article "Integrating Performance Management and Rewards at Microsoft.")

'Rank & Yank' or 'Differentiation'?

Stack ranking is still championed at many companies, and in particular at technology firms. Nevertheless, critics refer to it derisively as "rank and yank," meaning that employees who end up in the bottom ranks are often fired or encouraged to leave.

"If you are hiring competent people, what does it say about an organization when 10 percent of those people fail each year?" management consultant Aubrey Daniels commented to SHRM Online. "Rank stacking is punishing to the rater and the ratee. It produces an environment where employees compete with each other more than with competitors in the marketplace."

However, in a Wall Street Journal op-ed published in the wake of Microsoft's announcement, former General Electric CEO Jack Welch, credited with popularizing stack ranking while running GE, defended the process—when it’s done right. "Most experienced businesspeople know that 'rank and yank' is a media-invented, politicized, sledgehammer of a pejorative that perpetuates a myth about a powerfully effective real practice called (more appropriately) differentiation," Welch wrote.

One criticism of stack ranking specifically, and pay differentiation generally, is that it devalues teamwork. Welch responded: "Nonsense. If you want teamwork, you identify it as a value. Then you evaluate and reward people accordingly. You'll get teamwork; I guarantee it."

Similarly, David Calhoun, CEO of Nielsen Holdings and former vice chairman of GE, told Fortune magazine that he still uses and supports stack ranking, saying, "I'm a fan of relative ranking, a big fan. At GE there was only one objective, and that was to force honesty. … And there's nothing that quite forces that more than employees knowing that they expect to know how that manager ranks them, and then asking that manager, 'Tell me where I rank and tell me why.' "

Organizations have different cultures, and those cultures change over time, as does corporate leadership. A pay philosophy that may work best for one company, at one point, may not be the right solution for others. What's vital is that performance-review and compensation systems be aligned with and support an organization's overall mission and values, have the backing of senior leaders, and be clearly communicated and explained to line managers and employees throughout the company. 

A Contentious Practice

Typical of the water-cooler debate over stack ranking are comments posted on a Fortune article about Microsoft's action, which included remarks such as these:

Let's say you have 10 people who would all rate 8/10 at a company that rates their employees against an objective scale. Why would you want to force out someone who's a rock star anywhere else?

Everyone isn't a top performer. You have to assess performance somehow. Ranking at least provides a tool to improve human capital over time.

These kinds of systems…only "work" inasmuch as a person successfully manipulates the political environment at their work. They invariably result in sabotaging fellow co-workers.

No…You do not want the quality of your work evaluated against the work of others. You want a gold star for participating.
           

 

SHRM's HR News takes a further look at the controversy in "Announcements on ‘Stack Rankings’ Touch Off Debate," which also discusses Yahoo's commitment to stack ranking.

Stephen Miller, CEBS, is an online editor/manager for SHRM. 

Related External Articles:

Jack Welch: 'Differentiation' Personnel Management Isn't 'Rank and Yank,' moneynews.com, November 2013

A CEO's Passionate Defense of "Stack Ranking" Employees, Fortune, November 2013

Microsoft, GE and the Futility of Ranking Employees, Fortune, November 2013

Stack-Ranking’s Alive and Well in Tech, Dice, November 2013

Why Stack Ranking Worked Better at GE Than Microsoft, Forbes, July 2012

Microsoft Ends Controversial Employee Rating System, Yahoo Ramps It Up, International Business Times, November 2013

Microsoft Abolishes Stack Ranking as Yahoo Ramps It Up, Forbes, November 2013

Microsoft Kills Its Hated Stack Rankings, Business Week, November 2013

Related SHRM Articles: 

Rewarding Stars in the Age of Flat Salary Growth, SHRM Online Compensation, November 2013

Incentive Pay Tips and Pitfalls Shared, SHRM Online Compenation, May 2012

Rewards Should Target Key Talent, SHRM Online Compensation, May 2012

Integrating Performance Management and Rewards at Microsoft, SHRM Online Compensation, May 2012

How to Use 'Carve-Outs' to Truly Pay for Performance, SHRM Online Compensation, June 2011

Pay for Performance: Make It More than a Catch-Phrase, SHRM Online Compensation, May 2011 

How Kimberly-Clark Ties Pay to Performance (with discussion of calibration), HR Magazine, November 2006

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