Vitality curve

A vitality curve is a leadership construct whereby a workforce is graded in accordance with the individual productivity of its members. It is also known as forced ranking, forced distribution, rank and yank, quota-based differentiation, and stack ranking.

For example, there is an often cited "80-20 rule" — also known as the "Pareto principle" or the "Law of the Vital Few" — whereby 80% of crimes are committed by 20% of criminals, or 80% of useful research results are produced by 20% of the academics, and so forth. In some cases such "80-20" tendencies do emerge, and a Pareto distribution curve is a fuller representation.

According to a 2013 survey by WorldatWork, the method is used by about 12% of US corporations.[1] According to The Corporate Executive Board Company, it is used by 29% of companies.[2][3] According to Dick Grote, a consultant who specializes on the topic, 60% of the Fortune 500 companies used it in 2012.[4]

Rank-based employment evaluation

Jack Welch's vitality model has been described as a "20-70-10" system. The "top 20" percent of the workforce is most productive, and 70% (the "vital 70") work adequately. The other 10% ("bottom 10") are nonproducers and should be fired.[5][6] Rank-and-yank advocates credit Welch's rank-and-yank system with a 28-fold increase in earnings (and a 5-fold increase in revenue) at GE between 1981 and 2001.

Straight from the Gut

In Straight from the Gut, Welch says that he asked "each of the GE's businesses to rank all of their top executives". Specifically (in accordance with the 20-70-10 model) the top executives were divided into "A", "B", and "C" players. Welch admitted that the judgments were "not always precise".

"A" players

"A" players, Welch claimed, are

"B" players

The vital "B" players may not be visionary or the most driven, but are "vital" because they make up the majority of the group.

"C" players

"C" players are nonproducers. They are likely to "enervate" rather than "energize", according to Serge Hovnanian's model. Procrastination is a common trait of "C" players, as well as failure to deliver on promises.

Consequences

Welch advises firing "C" players, while encouraging "A" players with rewards such as promotions, bonuses, and stock options. However, if such rewards become a meaningful portion of “A” player's overall compensation, it can lead to perverse incentives. This is especially true when the rewards of being an “A” player are predictable and recurring (such as a normal part of the annual review process). When broad based stock compensation is the norm, as in high-tech,[7] avoiding perverse incentives can be difficult.

Turning promotions into pay cuts

When the rewards given to "A" players are significant, accepting a promotion has added risk. For example, consider an employee who is “A” rated at a their current job level. When promoted to the next level, they continue to perform at their exemplary level. But due to higher expectations, the employee may become “B” rated. If the performance based rewards prior to promotion exceed the raise accompanying the promotion, the promotion is an overall reduction in compensation. This creates an incentive for the employee to refuse promotions.

Encouraging sabotage

The vitality curve creates incentive for employees involved in hiring of peers to avoid the best candidates. The personal impact of adding excellent coworkers is more competition at the “A” end of the curve. It is in the individual's personal interest to seek out candidates skilled enough to retain their job, but not skilled enough to excel. This helps to fill the quota of “C” rankings, and makes themselves rank better. This incentive grows over time as sub-par talent is removed, since it becomes increasingly difficult for good employees to obtain good ratings. Simply “working harder” is an unreliable strategy for obtaining good ratings if everyone is doing it.

Criticisms

The model assumes that the players do not change their rating. In practice even the fear of being selected as a "C" player may result in an employee working harder, reducing the number of "C" players.

Some critics believe that the 20-70-10 model fails to reflect actual human behavior.[8][9] Among randomly selected people assigned to a task, such a model may be accurate. They contend, however, that at each iteration, the average quality of employees will increase, making for more "A" players and fewer "C" players. Eventually, the "C" players comprise less than 10% of the workforce.

The style may make it more difficult for employees to cross rate from one division to another. For example, a "C" employee in a company's Customer Service division would be at a disadvantage applying for a job in Marketing, even though he or she may have talents consistent with an "A" rating in the other division.

This is a competitive model of organization. The criticisms of both the morality and actual effectiveness of such a dog-eat-dog method of social cohesion apply. Challenges to the model include: "C" player selection methods; the effect of office politics and lowered morale on productivity, communication, interoffice relations; and cheating. Rank-based performance evaluations (in education and employment) are said to foster cut-throat and unethical behavior.[10] University of Virginia business professor Bruner wrote: As Enron internally realized it was entering troubled times, rank-and-yank turned into a more political and crony-based system.[11]

Rank-and-yank contrasts with the management philosophies of W. Edwards Deming, whose broad influence in Japan has been credited with Japan's world leadership in many industries, particularly the automotive industry. "Evaluation by performance, merit rating, or annual review of performance" is listed among Deming's Seven Deadly Diseases. It may be said that rank-and-yank puts success or failure of the organization on the shoulders of the individual worker. Deming stresses the need to understand organizational performance as fundamentally a function of the corporate systems and processes created by management in which workers find themselves embedded. He sees so-called merit-based evaluation as misguided and destructive.

According to Ryan Smith, the CEO of Qualtrics, stack-ranking (or similar systems) are suitable for ranking sales personnel among whom the management wishes to foster a spirit of competition, but less suitable for engineers, among whom management may want to encourage closer collaboration.[12]

According to a 2006 MIT study cited by Bloomberg Businessweek, forced ranking can be particularly detrimental for company undergoing layoffs: “As the company shrinks, the rigid distribution of the bell curve forces managers to label a high performer as a mediocre. A high performer, unmotivated by such artificial demotion, behaves like a mediocre.”[13]

MIT Research Fellow Michael Schrage has argued that the forced ranking policy has perverse effects even in organizations that are successful: "Organizations intent on rigorous self-improvement and its measurement inevitably confront an evaluation paradox: The more successful they are in developing excellent employees, the more trivial and inconsequential the reasons become for rewarding one over the other. Perversely, truly effective objective employee-evaluation criteria ultimately lead to personnel decisions that are fundamentally rooted in arbitrary and subjective criteria. [...] The coup de grace occurs when the top employees are all told that they must collaborate better with one another even as they compete in this rigged game of managerial musical chairs."[14]

Rob Enderle has argued that "No sane person could sustain the argument for forced ranking once it's applied it to products instead of people. Apply it to automobiles and make 20 percent or even 10 percent of any run unsatisfactory by policy, regardless of actual quality, and you'd immediately see that you were institutionalizing bad quality. With people, though, folks remain blind to the fact that forced ranking is walking example of confirmation bias."[15]

Jeffrey Pfeffer and Robert I. Sutton have criticized the practice on the grounds that there is limited empirical evidence of its overall usefulness to organizations.[16]

Companies utilizing this management philosophy

General Electric

GE is by far the most famous company to utilize this form of corporate management. However, since Jack Welch's departure from the company, less emphasis has been placed on eliminating the bottom 10% and more emphasis placed on team-building.[17] During Welch's leadership, the system at GE was dubbed "rank and yank".[18]

Enron

Enron traders also commonly were under the threat of being fired if they did not produce the desired results. Though the accounting scandals are most credited with the demise of the company, it has later come out that part of the downfall was attributed to employees inflating results in part to help protect their jobs. More about this can be seen in the movie Enron: The Smartest Guys in the Room.

Motorola

Motorola instituted a Vitality Curve plan in the mid-90's under the name IDE (Individual Dignity Entitlement). First six, then nine metrics questions were used to rank employees' perception at the corporation. In 2000-2002, the plan was changed to the PM (Performance Management) program, which was a direct 10-80-10 philosophy and used to "weed out" the lowest producers and reward the highest producers, while offering little to no rewards compensation to the mid-level producers. Some 50,000 employees globally were cut from the Motorola global workforce between 1995 and 2005, and many of these can be attributed to the Vitality Curve. Economics also played a major role, as the stock suffered major losses in the same period.

Dow Chemical

Dow Chemical uses a Vitality Curve program as part of its Performance Management. The program started in 2005 with mixed results.

IBM

IBM has used a Vitality Curve program (known as "PBC", or Personal Business Commitments) since before 2006. While often used to shift workforce to geographical areas with the lowest compensation, its main purpose is to provide the appearance of objective performance-related reasons for eliminating staff, when the real motivation is cutting expenses. The PBC process starts with a corporate distribution target which is applied at the lowest levels of the hierarchy and then iteratively applied through the higher levels. The process involves meetings where managers compete for a limited number of favorable rankings for their employees. An employee's rating is thus dependent not only on the manager's opinion, but also on the ability of the manager at “selling” and how much influence the 1st line manager has on the 2nd line manager (for example, if the 1st line manager is rated highly, that manager's employees are more likely to be ranked highly).[19][20][21]

LendingTree

The LendingTree company uses a system that assigns every employee a 1, 2 or 3 ranking with the buckets set to 15%, 75% and respectively 10%.[22]

GlaxoSmithKline

GlaxoSmithKline uses a four point system, with 25% getting the top rating, but no fixed quotas for the other buckets.[23]

AIG

Under the leadership of Bob Benmosche, American International Group (AIG) implemented a five point system in 2010, with a split of 10%/20%/50%/10%/10%. The top 10% are deemed "1s," and receive the largest bonuses; the next 20% are "2s," and receive somewhat smaller bonuses; the bulk consists of "3s," which get the smallest bonuses, while the "4s" receive no bonuses, and the "5s" are fired if they don't improve. According to Jeffrey Hurd, AIG's senior vice president of human resources and communications, "Prior to this, everyone was above-average [...] You never really knew where you stood."[24]

Yahoo

Yahoo CEO Marissa Mayer instituted its "QPR" (quarterly performance review) system in 2012, using the rankings: Greatly Exceeds (10 percent) Exceeds (25 percent), Achieves (the largest pool at 50 percent), Occasionally Misses (10 percent) and Misses (five percent).

In a new version for the fourth quarter 2013, sources said, those percentages are changing, but only at the discretion of leadership within the units: Greatly Exceeds (10 percent), Exceeds (35 percent), Achieves (50 percent), Occasionally Misses (five percent) and Misses (zero percent).

This new evaluation system has resulted in 600 layoffs in the fourth quarter of 2013. [25]

Other notable companies

Other notable examples cited in a 2010 paper include Cisco Systems, Hewlett-Packard, Lucent, Intel, Goodyear Tire, Goldman Sachs, American Express, Sun Microsystems and Conoco.[26]

Companies utilizing but later abandoning this technique

Microsoft

Microsoft was involved in lawsuits regarding its forced ranking system as early as 2001. Detractors argued that the use of the system in small groups was inherently unfair and favorized those employees who socialized more heavily over actual technical merit.[27] At the time, Microsoft officially claimed, through Deborah Willingham, Microsoft's senior vice president for human resources, that it had no such "stack rank" system.[28]

Starting in 2006, Microsoft began to use a Vitality Curve despite intense internal criticism.[29] Posts on "the curve" by Who da'Punk, an anonymous blogger internal to the company, on his blog Mini-Microsoft became a hot topic of commentary by other presumed employees.[30][31]

In a memo to all Microsoft employees dated April 21, 2011, chief executive Steve Ballmer announced the company would make explicit the Vitality Curve model of performance evaluation: "We are making this change so all employees see a clear, simple, and predictable link between their performance, their rating, and their compensation." [32] The new model had 5 buckets, each of a predefined size (20%, 20%, 40%, 13%, and 7%), which management used to rank their reports. All compensation adjustments were predefined based on the bucket, and employees in the bottom bucket were ineligible to change positions, since they would have the understanding that they might soon be yanked.

Following Balmer's announced departure, on November 12, 2013, Microsoft's HR chief Lisa Brummel announced they were abandoning the practice.[33][34][35]

Since the 2000s, Microsoft used a stack ranking similar to the vitality curve. Many Microsoft executives noted that company "superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings". It has been said that this stack ranking stifled innovation, as employees were more concerned about making sure that their peers or rival projects failed instead of proposing new inventions, overall turning the company into a collection of non-cooperating fiefdoms which was unable to catch onto many technology trends.[36] The stack ranking system was relatively secretive for a long time at Microsoft. Non-manager employees were supposed to pretend they didn't know about it.[37]

The practice at Microsoft became a topic of significant media attention following the 2012 article in Vanity Fair written by Kurt Eichenwald.[38][39][40][41] According to a subsequent article by Nick Wingfield in the New York Times Bits blog: "While that story overstated the harmful effects of stack ranking in the view of many Microsoft employees, it clearly represented the views of many others. [...] The negative publicity around Microsoft’s old employee review system reverberated loudly around the company, according to people who work there. [...] The executive who spoke [to Wingfield] on condition of anonymity recalled Ms. Brummel saying: “I hope I never have to read another article about our review system ever again.”"[34]

Adobe

Adobe Systems used the method but abandoned it in 2012.[42][43]

Ford

Around 2001, Ford used a forced ranking system with three grades, labeled A, B and C, with preset quotas set to 10%, 80%, and respectively 10%.[44] Ford stopped using this ranking system for its managers and engineers amid class action lawsuits from employees,[45] which Ford settled for $10.5 million.[46]

See also

References

  1. ↑ http://www.computerworld.com/article/2486003/it-management/-stack-ranking--employee-eval-practice-falls-out-of-favor.html
  2. ↑ http://blogs.hbr.org/2013/11/dont-rate-your-employees-on-a-curve/
  3. ↑ http://www.washingtonpost.com/blogs/on-leadership/wp/2013/11/20/for-whom-the-bell-curve-tolls/
  4. ↑ http://online.wsj.com/news/articles/SB10001424052970203363504577186970064375222
  5. ↑ Jones, Del (April 18, 2005). "Let people know where they stand, Welch says Ranking workers pays, former GE chief says". USA Today (5B). Retrieved 2009-09-09.
  6. ↑ Murray, Alan. "Should I Rank My Employees?". Wall Street Journal. Retrieved 2009-09-09.
  7. ↑ http://www.nceo.org/articles/employee-stock-options-factsheet
  8. ↑ Sedam, Scott (June 1, 2005). "Rank and Yank: The curious legacy of Jack Welch". Retrieved 2009-09-09.
  9. ↑ Johnson, Gail (May 1, 2004). "Forced Ranking: The Good, the Bad and the Ugly". Retrieved 2009-09-09.
  10. ↑ Callahan, David (2004). The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead. Harvest Books. p. 384. ISBN 0-15-603005-5.
  11. ↑ Streitfeld, David; Romney, Lee (January 27, 2002). "Enron's Run Tripped by Arrogance, Greed". Los Angeles Times. Retrieved 2009-09-09.
  12. ↑ http://abcnews.go.com/Business/microsoft-abolishes-stack-ranking-employees/story?id=20877556
  13. ↑ http://www.businessweek.com/articles/2013-11-13/microsoft-kills-its-hated-stack-rankings-dot-does-anyone-do-employee-reviews-right citing http://web.mit.edu/chintanv/www/Publications/Chintan%20Vaishnav%20Punishing%20by%20Rewards%20for%20Publication%20Final.pdf
  14. ↑ http://archive.fortune.com/magazines/fortune/fortune_archive/2000/02/21/273841/index.htm also quoted by Stewart, Gruys and Storm (2010)
  15. ↑ http://www.cio.com/article/2394165/careers-staffingorced-rankings-are-institutionaliz/careers-staffing/forced-rankings-are-institutionalized-stupidity-at-its-worst.html
  16. ↑ Blume, B. D.; Baldwin, T. T.; Rubin, R. S. (2009). "Reactions to Different Types of Forced Distribution Performance Evaluation Systems". Journal of Business and Psychology 24: 77. doi:10.1007/s10869-009-9093-5. citing Pfeffer, J., & Sutton, R. I. (2006). Evidence-based management. Harvard Business Review, 84, 62–74.
  17. ↑ New rule: Hire passionate people. Old rule: Rank your players; go with the A's. FORTUNE Magazine By Betsy Morris, Fortune senior writer July 11 2006: 10:13 AM EDT CNN Money - July 10, 2006
  18. ↑ http://www.slate.com/blogs/future_tense/2013/08/23/stack_ranking_steve_ballmer_s_employee_evaluation_system_and_microsoft_s.html
  19. ↑ "Endicott Alliance".
  20. ↑ "Forced Ranking in Performance Management". Unite.
  21. ↑ "IBM Human Resources Webcast, March 2006".
  22. ↑ http://online.wsj.com/news/articles/SB10001424052970203363504577186970064375222
  23. ↑ http://online.wsj.com/news/articles/SB10001424052970203363504577186970064375222
  24. ↑ http://online.wsj.com/news/articles/SB10001424052970203363504577186970064375222
  25. ↑ Swisher, Kara (8 November 2013). "Because Marissa Said So — Yahoos Bristle at Mayer’s QPR Ranking System and Silent Layoffs". All Things D. Retrieved 13 November 2013.
  26. ↑ Stewart, S. M., Gruys, M. L. & Storm, M. (2010). Forced distribution performance evaluation Systems: Advantages, disadvantages, and keys to implementation. Journal of Management and Organization, 16: 168-179.
  27. ↑ http://www.nytimes.com/2001/03/19/business/companies-turn-to-grades-and-employees-go-to-court.html
  28. ↑ http://www.nytimes.com/2001/03/19/business/companies-turn-to-grades-and-employees-go-to-court.html?src=pm&pagewanted=2
  29. ↑ Eichenwald, Kurt (July 3, 2012). "Microsoft’s Downfall: Inside the Executive E-mails and Cannibalistic Culture That Felled a Tech Giant". Vanity Fair.
  30. ↑ http://www.businessweek.com/stories/2005-09-25/online-extra-a-rendezvous-with-microsofts-deep-throat
  31. ↑ http://www.networkworld.com/article/2222736/microsoft-subneticrosoft-has-become-everything-it-/microsoft-subnet/microsoft-has-become-everything-it--despised---insiders-tell-vanity-fair.html
  32. ↑ Microsoft increasing employees' pay. Seattle Times, April 21, 2011. Retrieved 2011-04-25
  33. ↑ Ovide, Shira (12 November 2013). "Microsoft Abandons 'Stack Ranking' of Employees". The Wall Street Journal. Retrieved 13 November 2013.
  34. ↑ 34.0 34.1 Wingfield, Nick (13 November 2013). "Microsoft Abolishes Employee Evaluation System". The The New York Times. Retrieved 13 November 2013.
  35. ↑ http://www.zdnet.com/microsoft-does-away-with-stack-ranking-7000023103
  36. ↑ http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer
  37. ↑ http://www.slate.com/articles/business/moneybox/2013/08/microsoft_ceo_steve_ballmer_retires_a_firsthand_account_of_the_company_s.2.html
  38. ↑ http://www.theverge.com/2012/7/3/3134719/microsoft-windows-office-loyalty-lost-decade
  39. ↑ http://abcnews.go.com/Business/microsoft-abolishes-stack-ranking-employees/story?id=20877556
  40. ↑ http://www.slate.com/blogs/future_tense/2013/08/23/stack_ranking_steve_ballmer_s_employee_evaluation_system_and_microsoft_s.html
  41. ↑ http://www.pcmag.com/article2/0,2817,2406673,00.asp
  42. ↑ http://www.hreonline.com/HRE/view/story.jhtml?id=534355695
  43. ↑ http://www.forbes.com/sites/petercohan/2013/11/29/adobes-stock-up-68-since-it-dumped-stack-ranking-will-microsofts-follow/
  44. ↑ http://www.nytimes.com/2001/03/19/business/companies-turn-to-grades-and-employees-go-to-court.html?src=pm&pagewanted=2
  45. ↑ Shirouzu, N. Ford Stops Using Letter Rankings To Rate White-Collar Employees. Wall Street Journal, B.1 (July 11).
  46. ↑ Jeffrey Mello (2014). Strategic Human Resource Management. Cengage Learning. p. 447. ISBN 978-1-285-96978-7.

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