The Good, the Bad and the Ugly: Forced Distribution in Performance Reviews

The Good, the Bad, and the Ugly: Forced Distribution in Performance Reviews
By Cary Silverstein

The practice of forced distribution systems (FDS) in performance reviews, which gained fame and popularity based on the endorsement of former General Electric CEO Jack Welch in the late 20th century, is back. The latest estimate is that up to 20 percent of all U.S. business organizations and up to 25 percent of Fortune 500 firms use some type of FDS.1 This type of performance appraisal has evolved from the original 10 percent “C,” 70 percent “B,” and 20 percent “A” to a system at GE where a set of guidelines determine the curve. This permits a greater number of “A” individuals and fewer “C” individuals.2 At Yahoo, they were looking for a better dialogue and less-demoralizing labels; they have made substantial changes to their rating system, which compared employees’ performance to an absolute standard rather than to each other. In 2002, Yahoo stripped away its performance labels in hopes that reviews would center more on substance and less on explaining away a grade. The company also instituted a “stack-ranking” system to determine how compensation increases are distributed. It asks managers to rank employees within each unit, with raises and bonuses distributed accordingly.

This structured approach to the performance appraisal process had good, bad, and ugly aspects and consequences. Let’s take a look at each of these aspects and their short- and long-term impacts on both employees and the company.

The Good
The use of FDS eliminates a great number of average ratings by supervisors who do not want to confront poorly performing employees and above-average ratings to motivate solid performers, which resulted in “rating inflation” that delayed taking a necessary corrective action. Two other biases are eliminated by the use of FDS: leniency bias and centrality bias. Leniency bias, which is similar to rating inflation, tends to distort an individual’s performance. Centrality bias results from a high number of “average” ratings provided to marginal performers.

FDS reduces the impact of both these biases on performance appraisals. Its use has demonstrated increased productivity, profitability, and shareholder value for those companies that used it. Many feel that it reduced favoritism and nepotism and provided a justifiable way to identify and lose workers. It was found that about 40 percent of the employees designated a “C” would voluntarily resign. Many companies felt that FDS was the right thing to do in order to strengthen work areas with large numbers of poor performers by replacing them. Where companies are large and have hundreds or thousands of employees, FDS systematizes the performance review process. Finally, FDS drives truth into a process that is frequently eroded by grade inflation and helps leaders identify managers who are good at finding top talent.3

The Bad
There are many downsides to using FDS. For instance, in a small group, one or more employees who are performing above average could be rated low or below average. The process ignores the reality that in some small work groups there are nopoor performers and in others there are no good performers. Replacing lower-rung employees each year can be costly and can lower productivity. A study performed by Drake University professor Steve Scullen showed that forced ranking loses its effectiveness after a couple of years, as there are fewer “C” employees to identify.4

Forcing managers to cut a certain percentage of employees does not often reveal the root of the problem. Since not all companies fall into a normal distribution curve, identifying poor performers with a forced ranking system is fraught with difficulties. Constant turnover is expensive, as much as one year’s salary, not including the cost of lawsuits. Courts have said that legal challenges to dismissals that are justified by allegations of poor performance will likely be accepted if deficiencies in that person’s work cannot be established. If a company cannot prove that its performance appraisal system identifies poor performers accurately, it will likely lose its case in court.5 These systems also overlook a major leadership issue—“effective leadership” on the part of the manager or supervisor. They beg the question, why didn’t the manager or supervisor provide the needed coaching or training to improve the affected employee’s performance? This is a question that many times ends up being considered by the courts. Another identified negative impact of FDS is a shift in culture, creating a more competitive atmosphere and a decrease in morale and a perception of fairness.6

The Ugly
Well-known authors, including Jeffrey Pfeffer and Malcom Gladwell, condemn FDS as dysfunctional and suggest that such systems are hazardous to an organization’s culture and performance.7 In many cases, managers disown the appraisal event. They claim they were “just following the rules.” The potential for lawsuits led Ford and Goodyear to abandon these types of systems.8 A number of discrimination lawsuits have been filed by former employees against Microsoft, 3M, and Capital One claiming that the use of forced ranking systems negatively impacted them.9 These are the types of lawsuits that led Ford and Goodyear to abandon their forced distribution systems.10

It has also been found that forced ranking systems influence how managers develop their employees. In many cases, they determine that it does not make sense to invest in developing individuals who are marginal performers, when they believe that in a short time they will have to terminate them.11 Forced distribution also creates unhealthy competition among peers. Knowing that there is always a percentage at the bottom who will be forced out, the competition for ratings causes fear and selfishness among the workforce. In addition, fellow workers are less likely to help, train, or share information with one another. This type of behavior will eventually break down an effective team. In today’s knowledge-driven, flatter, and team-based organizations, it can negatively affect an organization’s performance.12 Such behavior among members of the workforce will eventually erode the corporate culture and cohesiveness that is needed to produce a consistent unified effort and a quality product.

Options to FDS
Managers should be evaluated on how well they measure the performance of their subordinates. Their bonuses and career advancement need to be tied to the quality of their appraisals and how well they develop their employees. One company has added to its annual leadership assessment of top-level executives “effectively dealing with problem performers” as a critical characteristic. This aids in determining who is given the highest performance rating.13 Performance needs to be rigorously assessed against clearly defined goals with input from peers and customers. Managers must be able to defend these assessments in meetings with their peer managers and executives. This process is one way to avoid the “good group/bad group” problem that exists with forced distribution systems.14 Libby Sartin, Yahoo’s senior vice president for human resources, says “whether a company calls it stack ranking, forced ranking, or differentiation, there is no magic process.”15 Based on my review of current research, forced distribution and ranking systems begin to lose their effectiveness after the fourth year of implementation. Based on the research by Steve Scullen at Drake University in Des Moines, there was a 16 percent productivity improvement in the first couple of years. After that, the gains drop off from 6 percent improvement to basically zero by year 10.16

There needs to be a better way to evaluate employees and weed out nonperformers without the costs of constant turnover between 5 and 19 percent, loss of morale that will damage the corporate culture, and attorney fees for defending your decisions.17 The answer may lie in improved interviewing and screening of candidates for open positions, coupled with better training, coaching, and mentoring of new hires. Earlier identification and intervention with employees who are having performance problems will prevent them from getting lost in the system. Finally, a well-designed and goal-based performance appraisal system will help identify employees in need of additional assistance and retraining. If they continue to fail, the organization has not failed them; they have failed themselves. Documentation of performance will support the exiting of an employee, not some structured, forced system of appraisal.

I recognize that there are flaws inherent in other performance appraisal systems, and they can result in loss of capable employees, legal actions, and problems with morale. After reviewing the current research by experts in the field, I am of the opinion that FDS is not the best option when it comes to evaluating employees on an annual basis. There are many options to FDS that result in improved performance. The available research indicates that the key component in a successful program is the immediate supervisor. Supervisors need to be properly trained to eliminate any leniency or centrality bias that would compromise the ethics in performance appraisals.

Notes
1. Stewart, S.M., M.L. Gruys, and M. Storm. 2010. Journal of Management and Organization, Vol. 16, no. 1 (March), pp. 173–84.
2. McGregor, J.. 2006. “The Struggle to Measure Performance,” BusinessWeek, January 9. http://www.businessweek.com/magazine/content/06_02/b3966060.htm.
3. McGregor 2006.
4. McGregor 2006.
5. Lawler, E. III. 2002. “The Folly of Forced Ranking,” Strategy and Business, July 15, issue 28, p. 2. http://www.strategy-business.com/article/20290?gko=f880e.
6. Alsever, J. 2007. “What Is Forced Ranking?” bNET, March 20. http://www.bnet.com/2403-13056_23_59306html.
7. Blume, B.D., T.T. Baldwin, and R.S. Rubin. 2009. “Reactions to Different Types of Forced Distribution Performance Evaluation Systems,” Journal of Business Psychology, Vol. 24, no. 1 (March 5), p. 79. http://www.springerlink.com/content/436189658786327p/.
8. Bares, A. 2008. “Forced Performance Distribution: A Failure of Leadership,” Workforce Management/Compensation Force, April. http://www.compforce.typepad.com/compensation_force/2008/04.
9. Alsever 2007.
10. Bares 2008.
11. Lawler 2002, p. 4.
12. Lawler 2002, p. 4.
13. Lawler 2002, p .5.
14. Lawler 2002, p. 5.
15. McGregor 2006.
16. McGregor 2006.
17. Scullen, S.E., P.K. Bergey, and L. Aiman-Smith. 2005. “Forced Distribution Rating Systems and the Improvement of Workforce Potential: A Baseline Simulation.” Personnel Psychology, March 22. http://www.accessmylibrary.com/article-1G1-130971029/forced-distribution-rating-systems.html.


 

 

Cary Silverstein is the president and chief executive officer of Strategic Management Associates, LLC