Forced Ranking in Performance management System: A hindrance for Employees

IIM Ranchi

6/21/2013

Submitted by:- Vishwesh Koundilya PGEXP/004/2012-14

Forced Ranking in Performance management System: A hindrance for Employees

Introduction Accuracy in appraising employee performance is a major concern organizations face in their desire to improve their performance management systems. Any attempt to increase accuracy cannot ignore assessors, both from their ability and intention perspectives with respect to appraisals. DeCotiis and Petit (1978) proposed that performance appraisal accuracy is a function of: assessors intention to appraise accurately, assessors ability to evaluate assessees job behaviour, and the rating standards. There exists great deal of research on improving assessors ability and rating standards, but its impact on improving appraisal accuracy in practice has been dismal . Also, it has been witnessed that politics is a bane of administrative systems such as performance appraisals. It not only debilitates the systems credibility in the eyes of various stakeholders, but also adversely affects the employees morale and the organizational effectiveness. While admitting that rooting it out completely is impossible, it is in the organizational interest that it is mitigated to a large extent.In case of performance appraisals, assessees and assessors, both try to influence the assessees performance rating to advance self-interests. The former typically aims at higher ratings/ rewards, and uses informal influence means such as upward connections, ingratiation, etc., to achieve it. The latter may use appraisals to fulfil their vested interests like building ingroups by rewarding certain favoured assessees, and projecting good departmental performance, by manipulating assessees ratings (inflation or deflation). Some managers consider these actions legitimate because it helps them manage effectively. While these manipulations may fulfil the assessors short-term goals, it hurts the organization in the long run by compromising performance culture, demoralizing genuine performers, discrediting pay for performance policies, etc.There has been a realization that performance appraisals are going to be subjective no matter how much we try to make them objective. This is because the appraisers are always varied in their standards, judgments, information assimilation, and processing abilities with respect to their appraisees, and many other parameters. Thinking about it, one will realize that evaluating an employees performance on the basis of numbers assigned by another appraiser without an awareness of the context in which the ratings are assigned could inflict serious injustice to the performer. The outlook has to shift from an annual exercise to the on-going activities. Appraisal focuses on ratings while improvements focus on work, stakeholders, service levels, productivity, motivation effort and all such performance-related variables.

The ratings depend on so many factors: the supervisor or the rater, his previous background, his personality, expectations, the performer (assessee) and his own background, the way the goals are set, the level of the goals, expectations of the assessor from the performer, the culture of the organization, etc. No two numbers are comparable. We cannot say that a person who gets a 68 rating on a 100 point system is definitely superior to another who gets a rating of 64, and specially if the 64 is from a setting where the performer had a lot of odds to face (including perhaps that of his supervisor himself?). Yet we treat them as sacred and use them to fit into normal probability, add, subtract, multiply, and calculate incentives, etc. I think this is a fundamentally wrong attempt to fit qualities into quantities and use them for anything beyond a discussion or analysis. Objective of PMS Performance management systems can have multiple objectives. These include: Implementing continuous performance improvements among each of the employees Developing a discipline of planning work and managing ones time and talent Ensuring role clarity Recognizing strengths and areas needing performance enhancements and identifying the development needs for the same Building competence among individuals, teams, and the organization as a whole Preparing database for rewards, promotions, recognition, and motivation Developing insights into self as high self-awareness is essential for better leadership and managerial effectiveness Developing mutuality and respect for each other among each senior-junior or bosssubordinate pair Developing problem solving capabilities among employees Inculcating a learning culture Enabling seniors to learn from juniors and vice versa Providing mentoring and coaching support to employees and effecting performance improvements Preparing employees for competition and continuous change Arriving at an objective assessment of performance by each employee and generating data about employees for various HR decisions like rewards, rotation, recognition, higher responsibilities, etc. Integrating and aligning the work of individuals and their teams with the organizational goals and tasks.

Forced raking in PMS With the economic downturn over the past year and a half, performance review systems have come under greater scrutiny as businesses review their workforce to find greater efficiencies. During periods of robust economic growth, as was experienced in the mid to late nineties, organizations tend to be less concerned about performance efficiencies and more likely to tolerate the under performing elements of a workforce. As the economy turns and there is less tolerance for bloat and inefficiencies, it becomes critical for organizations to simultaneously identify, retain and get the most from their top performers, while identifying and either developing or removing low performers. Forced ranking is neither a new nor a conceptually complex formula for managing performance within organizations. Companies that use a forced ranking system require their managers to assign employees into different categories based on both past performance and leadership potential. Currently some form of forced ranking is practiced in almost 20% of businesses, including some of Americas most respected corporations. General Electric, the company best known for the procedure, sorts employees into three groups: a top 20% on whom rewards, promotions and stock options are showered, a high performing middle 70% with good futures, and a bottom 10%. The bottom 10 % are not likely to stay. A company that bets its future on its people, GEs former CEO Jack Welch wrote in his final stockholders letter, must remove that lower 10 percent, and keep removing it every year always raising the bar of performance and increasing the quality of its leadership. GEs not alone. Ranking employees is everyday practice at highly admired companies like Microsoft, Cisco Systems, Hewlett Packard, and Sun Microsystems. Suns system parallels GE: 20% are superior, 70% are Sun Standard and 10% are under performing. Hewlett-Packard uses a 1-5 scale with 15% receiving the best grade of 5 and 5% receiving 1s. Microsoft uses a 2.5-5 scale. PepsiCo uses a quartiling approach where managers allocate their troops into one of four quartiles; EDS uses quintiling. The problem is Managers must place each person into one of a limited number of categories with a fixed percentage assigned to each bin i.e. with a forced-ranking system, managers are required to bell curve the troops. Forced-ranking systems, established years ago at companies such as GE, are increasingly being reassessed. In a nutshell, these systems typically either align people in preset "buckets" (such as the top 20 percent, the middle 70 percent, and the low-performing 10 percent -- the system used at GE) or rank them by performance from best to worst. Critics of the procedure argue that forced ranking is discriminatory, subjective, divisive, arbitrary, and unfair. A companys performance appraisal rules may provide that only a certain percentage of people can be assigned into the various final rating categories. If they do, thats an example of forced distribution. Its a person-to-standard comparison. Forced ranking is a different kettle of fish. Instead of a person-to-standard comparison, its person-to-person.

Furthermore, the dramatic number of reductions in force over the past year has also pointed out a need. The leadership of many businesses found that as they initiated significant workforce reductions in 2001 and 2002, they were not armed with the appropriate data by which to make decisions about layoffs. Specifically, their performance review systems had not been appropriately practiced and inflated scores left little means by which to systematically identify the lowest performers. Human resource and legal staff have spent a great deal of valuable time trying to consolidate criteria on which to base their layoff decisions, when this data should have been readily available. The inflated scores were a byproduct of a) cultures that were overly polite and avoidant of the potential conflict incurred from a manager giving a low score; b) managers and supervisors who were inadequately trained on delivering performance management feedback and scoring systems; and c) managers and supervisors who discounted the performance management systems because of their belief that the systems were overly abstract and too distant from the business goals. Schemes used for forced Ranking The schemes used for forced ranking are diverse and include, but are not limited to: A totem pole approach in which individuals are ranked from one downward to include all people within that group. Quartiles, in which four cells are defined and people are force ranked (25% per cell) into cells one through four and then ranked further within each cell. Normal distributions in which people are forced into the bell curve of a normal distribution and designated by the percentage group that they represent, e.g. top 10%. Effect of forced ranking Forced ranking alone only designates that one person has been rated better at something than another person. In order to be effective, forced ranking must be based on criteria that are proven to contribute to the corporation. For this reason it is important that the principle of performance management, recognizing those things that contribute to the growth of the business, not be lost in the efforts of forced ranking. For instance, it is possible for the members of a group to be ranked against one another so that there is appropriate distinction between top, middle and bottom, but to have all members of the group performing at unsatisfactory levels as per the performance review criteria. Forced ranking on its own will not assess value and contribution to the organization. If a high ranking ends up measuring an employee vs ability to score well on abstract criteria or doing poorly, but better than his peers at pleasing his supervisor without contributing directly to the success of the organization, then the forced ranking scheme will contribute little to the benefit of a company.

Along with the greater application of forced ranking in the corporate workplace, cultural, performance and legal problems have emerged. Critics have countered the popularity of forced ranking by suggesting that it is a system that may help with some problems, but which creates many others. Forced ranking can: Be detrimental to morale. We want high-performing workplaces, yet we also want people to enjoy coming to work. The process may impact morale by generating an every man for himself organizational culture made up of a bunch of self-centered individualists who scorn team play Emphasize individual performance at the expense of team performance. Employees will be less willing to "pitch in" and help others. Completing individual assignments becomes more important. Promote competition. If employees are ranked, there is more of competition and less of cooperation. Invite litigation: An important concern is the legal issues have taken the forefront of concern for most businesses and clearly it has been the reaction in the form of class action suits that has predominated in the press. Difficulty in adoption: Companies that adopt forced ranking often underestimate the difficulty of fitting this system into their corporate culture. There is a belief that because this system has worked well at other top performing companies, applying the same program to their organization will cause their workforce to rise to the challenge. In fact, the opposite effect can occur when employees feel that they are being subjected to a system that is intended to increase competition among them, as well as demand a greater level of performance often with the assumed threat that they will be laid off if they rank poorly. Diminish employee performance: If forced ranking is seen as arbitrary or overly political, it is likely to diminish employee performance. Conclusion Thus, in a way forced ranking in PMS is a hindrance for the employees. Even at companies that have employed forced rankings for years, there can often be significant problems with this ranking method. One HR professional at a major financial services company noted, 99.9% of our people hate our forced ranking program, including the leaders. They dont understand it. They feel cheated. It destroys the whole performance management process of setting expectations, development planning, coaching, and ongoing assessment. Now when people think of performance management they only think of the forced ranking performance distribution and where they are going to end up. Its akin to them studying to how to do well on the standardized test as opposed to how to actually learn the material. To a degree , we can say there is reason to believe that the corporation is less well off than it would be were it to investigate the causes of this cultural phenomenon and address them before or instead of using forced ranking.