Forced ranking, as most of you know, is the performance management process where everyone in a company, division or department, is ranked "best to worst" in an effort to determine how to allocate pay and/or the implementation of a reduction of force. It is easy to rationalize forced ranking when the economy is down, when your industry is hurting, and/or when your company has had a bad year.
However, when a company is expected to do well, how does it explain a process whereby it is admitting that some of the people it hires "aren't up to snuff"? Would it not be better simply to attack hiring on the premise of only hiring "A" players thereby eliminating the need to ever force rank?
Merit pay, as it was meant to be, is the concept that employees should be paid different rates for various levels of competence and performance. The underlying criteria of a merit pay system can be summarized as (1) the employee's performance in relation to pre-established, understandable job responsibilities and (2) the employer's financial ability to pay.
In the 1980s, it was much easier to differentiate performance when merit budgets averaged 8 percent to 10 percent. In the '90s, however, we have seen the merit budget erode by as much as 3 percent to 4 percent, making it much more difficult for companies to distinguish exceptional work using performance-based merit increases. When this occurs, it is difficult to truly link an individual's compensation and benefits to his or her efforts to improve the company's bottom line.
Does forced ranking really reward merit?
Today, forced ranking can actually encourage average or mediocre performance. Once performance evaluation time rolls around, over half of the workforce typically will be force-ranked as average (or very close), while remaining employees will be ranked below and above this standard.
In order to stay on track with the merit budget, employers, who force-rank, generally align employees in accordance with the pre-assigned performance distribution percentages. As you can imagine, this scenario results in intense internal conflict and can destroy any resemblance of employee teamwork and cooperation. Consider the employee who improves his or her performance; presumably, someone else will, in turn, be "squeezed down" to maintain a balance "fit" within the guidelines.
Forced ranking forces evaluators to make determinations on a person-versus-person basis rather than a person-to-established-standards basis. In my opinion, this also causes management to move away from focusing on pre-established, objective job standards, and toward evaluations based on personal attributes. A Pandora's Box subsequently opens to all sorts of problems, including corporate infighting, person-rater bias, management subjectivity, and even lawsuits (all demotivating factors), which negatively impact the overall productivity of the organization. In the final analysis, "merit pay" is oftentimes only a catchy cliché.
I like what Herb Kelleher and Don Murray (CEOs of Southwest Airlines and Resources Connection, respectively) have done. They propose, from the outset, to hire the very best and train all hires to the fullest extent possible. Both believe they hire only on the "right-side" of the curve, so there is never a need to force rank. It is actually part of the cultures these two companies have developed, and as a result, the motivation of their workforces are higher than most other employers.
Based on the company's performance of both companies, they may be on to something. As opposed to "rank and yank" they appear to "bank" on hiring the right people. And hiring and retaining the right, quality people is a lot more efficient than hiring a large quantity of people to be laid off in slow times, based on ranking systems. Corporations ultimately can increase productivity by following this smart hiring philosophy: Hire and keep the best in order to reap the best performance.