The ABCs of Rank and Fire Management

By Mark Edmondson

I wish Jack Welch had met my high school buddy Neil who sat in front of me in chemistry class. On the first day of the semester, our teacher Mr. Sproul explained that we would be graded "on a curve". "The top 10% of you will receive an A, and the bottom 10% will get a D or F. This will preserve the integrity of the grading system and prevent grade inflation."

Neil raised his hand. "But Mr. Sproul, what if you do a good job as our teacher, and more than 10% of us learn from your lectures and ace every exam? How will you choose who receives an A and who doesn't?"

"It's an objective process of ranking by points earned." Mr. Sproul explained. He then briefly introduced the concept of the normal distribution, and how it applies to the physical sciences, human intelligence- and our grades.

"But Mr. Sproul, what if you do a poor job as our teacher and few of us learn very much, resulting in no one earning many points? Will 1 in 10 of us still receive an A?" Neil asked naively.

Now visibly annoyed, Mr. Sproul went on the offensive. "That's the beauty of ranking you on a curve, Neil. No matter how poorly you learn in my class, all I have to do is award an A to the other 10% with the most points. It's really simple."

"Mr. Sproul," Neil then asked wryly, "it may be simple for you, but does grading on a curve fairly represent how much the class learns from you?" I finally thumped Neil on the back of the head to save him from himself, but the damage was done. (Remember, this was high school. As adult consultants, we have developed more sophisticated ways of gaining our clients' attention.)

Poor Neil- in spite of being one of the brightest students, he talked his way out of an A on that first day. Neil and I learned about the sting of performance ranking at an early age.

Performance ranking may not always work in high school, but is it a useful tool for motivating your employees? In search of answers, and with help from some of our Affiliates, let's explore the value of employee performance ranking: How widespread is it? How does it work? Who's using it? Is it consistent with Lean thinking principles? What do we recommend to our clients?

How widespread is employee ranking?

Employee ranking systems have been around for decades, and are known by a variety of monikers including "performance review ranking", "employee ranking", "employee grading", the "ABC system", the "20/70/10 system", the "forced-ranking process" and "rank and yank management". Due in part to the influence of GE, employee ranking has become more widely adopted over the past 20 years. According to a 2004 study, currently about 34 percent of firms rank employees.¹

How are leading companies using employee performance ranking?

GE is perhaps the most high-profile company using employee ranking. 20% of salaried, managerial and executive employees are rated "outstanding" each year, 70% "high-performance middle" and 10% "in need of improvement". Then-CEO Jack Welch, in the 2000 annual report, wrote: "GE leaders must not only understand the necessity to encourage, inspire and reward that top 20 percent ... they must develop the determination to change out, always humanely, that bottom 10 percent, and do it every year."

Many other high-profile companies have also adopted employee ranking, for example:

• Enron (before they imploded) put employees in one of five categories: 5% were identified as "superior", 30% "excellent", 30% "strong", 20% "satisfactory" and 15% "needs improvement".
• Ford once dictated that 10% of their managers will get A grades, 85% Bs and 5% Cs. Those who receive a second consecutive C can be fired.² (Recently, Ford eliminated its employee ranking system.)
• IBM ended their 60-year "full employment practice" in the early 90s when they adopted an employee ranking process. Management was directed to classify 10% of employees as "needing improvement". These employees were later targeted during IBM's first-ever involuntary layoffs.

Is employee ranking consistent with Lean thinking principles?

Here's the opinion of some experts:

• Nina Atwood, Executive Coach, TEC Chair³, and LEAN Affiliate:
  "Consider the impact to morale and trust. Employees often become suspicious of management's motive - is it about improving performance or downsizing the organization? This suspicion can create unhealthy competition among employees, and rapidly erode the trust employees have with management."⁴
• Lee Colan, President of The L Group, a management consulting firm in Dallas, Texas:
  "Forced ranking systems do just that - they force your management to make arbitrary decisions about their people. Instead of ranking, focus on mutual goal setting, employee involvement, and ongoing coaching with feedback and measurement of progress."⁵
• W. Edwards Deming, educator and author:
  Deming lists "evaluation by performance, merit rating, or annual review of performance" as one of businesses' "7 Deadly Diseases": "Performance ratings build fear, and leave people bitter, despondent, and beaten. The effects of these are devastating- teamwork is destroyed, rivalry is nurtured."⁶
• Robert Hall, Professor Emeritus of Operations Management, Indiana University:
  "Just having this arbitrary rule of letting go the lower 10% at the end of every year doesn't really accomplish that much. It mostly stirs up a lot of fear, and a lot of managers working under fear."⁷
• Bill Conaty, GE Senior Vice President of human relations:
  When asked why GE recently reevaluated its ranking process, Conaty commented: "We had a system where 90% of employees felt demoralized."⁸

My recommendations for you:

1. Hire correctly to avoid low performers. The best companies recruit the cream of the crop. To then say that every year a targeted percentage of them are poor performers doesn't make a lot of sense.
2. Avoid employee ranking systems that have quotas for each level of performance. Don't create an environment where the success of one employee is a lost opportunity for others. This destroys teamwork, trust, and morale.
3. Direct your management team to work with each employee individually. Make training of employees a priority, set improvement goals for them, and then motivate them to achieve those goals. You can then identify individually which employees are exceptional, which are performing satisfactorily, and which are under-performing.
4. Understand whether a performance issue stems from a poor process, poor leadership, or a few poorly performing individuals. Know the difference. If you recruit quality people (see #1), the cause is rarely individual performance.

As a lean leader, what does this mean for you? Gary Convis, President of Toyota Motor Manufacturing, Kentucky states it powerfully: "The human side of lean is understated and probably underestimated. [A] pillar of the Toyota Way is respect for people... if you don't have respect for the people that work for the company, you are in the wrong business."⁹

Our clients have learned that a performance management system that reinforces a culture of engaged employees can be at tremendous competitive advantage. While at least one-third of your competitors are alienating employees with some sort of dysfunctional ranking practice, you're creating a high-performance culture by leveraging your most valuable asset- the minds and hearts of your people.

Mark Edmondson is President of LEAN Affiliates, a network of leading Lean Enterprise Transformation consultants across North America. His perspective is drawn from working with over 50 companies as an operations executive, business process consultant, consulting principal, global alliance executive, and change agent. He earned an MS and BS in Management and Industrial Engineering from Stanford University and a BA in Management and Economics from Claremont McKenna College.

1. A June 2004 study by HR consulting firm Development Dimensions International.
2. "Can Ranking Employees Do More Harm Than Good?", Carol Hymowitz, The Wall Street Journal Online.
3. TEC is an international community of Chief Executives. See www.TEConline.com.
4. Quotes from an interview conducted by the author, November 2004. See www.NinaAtwood.com.
5. Quotes conducted from an interview by the author, November 2004. See www.theLgroup.com.
6. The Deming Management Method, Mary Walton, Putnam Publishing, 1986.
7. From an interview published in Kaikaku, The Power and the Magic of Lean, Normal Bodek, PCS Press, 2004. See www.leanaffiliates.com/idea_generation.htm.
8. Ibid., Hymowitz.
9. Ibid., Bodek.