Many middle market companies struggle to find the perfect formula for employee evaluation and motivation. However, it's important that you both attract and retain top employees and encourage underperformers to improve their work — your company's health depends on it.
Some organizations sort employees into categories based on performance (aka stack ranking) and allocate resources accordingly. In doing so, management and HR can quickly identify which employees to reward with raises, bonuses and additional projects, and which might need mentoring or focused attention to bring them to the next level. It also pinpoints low-performing employees who are not a good fit for the company.
Many Names, One System
Stack ranking is also known as a vitality curve, forced ranking, forced distribution, rank and yank, and quota-based differentiation, and it's rather controversial in modern business.
Developed in the 1980s by Jack Welch, then-CEO of General Electric, stack ranking follows a "20-70-10" system. The top 20 percent of a company's employees are identified as the most productive. The middle 70 percent aren't quite as productive, but their work is essential and makes up the bulk of what the company creates. The remaining 10 percent are considered the lowest performers. When the company fires or lays off staff, people at this bottom level are the first to go.
Although this system has dropped in popularity in recent years, many well-known companies, such as Amazon, Yahoo and Microsoft, have used variations. Experts argue that while stack racking hasn't been a good fit for these Fortune 500 companies, it is much needed in the middle market. Forbes contributor Robert Sher said, "Employees (including management) aren't evaluated with sufficient rigor, and low performers are tolerated. These low performers destroy the performance environment by encouraging average performers to slack off. The high performers either leave — they prefer working with other high performers — or become arrogant and hard to manage."
But Does It Do More Harm Than Good?
Many companies have done away with stack ranking because it can bring down company morale. It relies on a set number of employees fitting into each of the three categories, so managers are forced to push good employees into lower ranks in order to get the numbers right. Rather than fostering collaboration, this created a dog-eat-dog atmosphere that left employees fearing for their jobs and sabotaging co-workers' efforts in order to get ahead.
Alternatives to Try
There are ways to evaluate your employees that won't hurt morale and drive down creativity and teamwork. You can still have categories, but why set limits on how many people can be in each category? How much more amazing would your company be if 50 percent, or even 80 percent, of your staff were high performers? How much more motivated would employees be to improve their job performance if they knew they couldn't get shut out of a category because it was already full? How much more empowered would managers be if they could honestly assess their direct reports, instead of unhappily knocking someone down a rung because of a quota?
It's also worth rethinking your views on low performers. Stack ranking insists that at any give time, 10 percent of your staff isn't pulling their weight. If you run a 500-employee company, that means you must have 50 problem employees. If they each receive a salary and benefits package worth $60,000, then your company is spending $3 million a year on poor performers. That's just bad for business.
While no company will ever be without a problem employee or two, it's a waste of management's time and resources to push so many people into the lowest category — especially if it's not true. It's more beneficial to spend more time rewarding top performers while empowering and challenging middle-of-the-road employees to improve. Remember, top performers want to work with other top performers. If there are employees who aren't doing well, managers need to address those issues and, if needed, let those workers go.
Replace Power Plays with Empowerment
No limits on the number of high performers means that your employees will collaborate more freely, operate more honestly and help boost colleagues up rather than push them down. Think carefully about the kind of culture you want to create and avoid doing anything that would be toxic to your company.
Sophia Bera, CFP, is an NCMM contributor and a financial planner, writer, speaker and entrepreneur who has been featured in the New York Times, Forbes, Yahoo Finance, Money Magazine and more. While her primary focus is on millennials and money, she is passionate about helping companies attract and retain next-generation talent. Follow her on Twitter or sign up for the free Gen Y Planning newsletter.