Sitting down to conduct performance reviews for a department is an exhausting affair. Sitting down to rank employees against each other and label them either as stars or poor performers in order to maintain a quality workforce takes even more out of managers. Forced ranking as part of a robust performance management system (PMS) is nothing new, even though the very idea of this management philosophy can split HR into two camps.
Supporters of this practice believe forced ranking improves the organisation’s performance, distributes rewards fairly and helps improve low performers’ contributions. Famous corporate fans include Yahoo! and of course, General Electric.
Detractors, on the other hand, say evaluating performance against strict yardsticks can sometimes be brutal or cause employee disgruntlement, which derails motivation. A quick informal poll of local HR practitioners on forced ranking further reveals that most of them are reluctant to talk about its effectiveness. Those who were willing to speak say it does appear harsh and almost devoid of human emotions, especially when managers have to fire people who might be their friends.
So is forced ranking simply a misunderstood but good performance management tool or just a plain cruel way of weeding out unwanted employees while coddling over the elite ones?
The staunch believer
NatSteel Holding’s president and CEO, TV Narendran, is a staunch believer in forced ranking. In fact, he even wrote about it to employees in his personal blog recently. To Narendran, it is important to review everyone relative to others in their levels but it shouldn’t demotivate those who are ranked low. He advocates forced ranking because “employees can gauge their own performance and keep improving themselves”, which brings the company to the next level.
Having completed the entire NatSteel employees’ performance reviews just few weeks ago, senior vice president of group human resource and corporate communications Liu Fang Joo takes pride in the fact her top management stands by it. After all, she only implemented forced ranking into its performance management system eight years ago. But revamping the culture of a company with over 40 years of history took plenty of flak from everyone, including the senior leaders themselves.
“Originally when we first started, it was a cultural change for people to adapt to these changes,” Liu says. “Because when a company is an old company, it was not easy to tell people this sort of thing.”
Nobody, even senior management, likes to be told they aren’t performing, she explains. It’s “a lot of talking to change people’s hearts and their feelings” towards forced ranking. That’s why it’s important the senior management stands by it so middle managers can explain to employees that the whole company, from top down, believes in it. Over time with the influx of newer blood and such constant communication, Liu is seeing more managers walking the same talk and employees now understand this is how the company can progress. “If not, we would be stagnating there.”
The sceptic
But the argument is whether forced ranking is objective enough when it comes to separating the stars from the low performers. Even though UOB Group encourages forced ranking as a tool, head of rewards management Alan Lee thinks it is still a subjective exercise. “What HR departments try to do is put in place tools and processes to make sure the outcomes come out as objective as possible.”
This is simply because managers are still afraid to make the tough calls of telling their employees they are substandard performers even if forced ranking had sorted them in a fair and logical process, which is strange since most companies are savvy enough these days to send their bottom 5% to 10% for improvement programmes instead of kicking them straight out of the door. No one wants to be perceived as a harsh manager, explains Lee. “It’s human nature to shy away from that.”
Not that he feels forced ranking is a necessary component in PMS. His alternative suggestion? Regular dialogue between both manager and employee and not just twice a year during performance reviews. Talk quarterly if not more on purely performance issues. “If the employee performs not so well or well, you tell them. There is no need to do any forced ranking.”
While Lee isn’t disputing the fact that forced ranking drives a very competitive performance environment which benefits the business, he has his reservations. Especially since research has shown only one third of Fortune 500 companies practice forced ranking in its various forms. He questions, “If it’s such a great thing, then why is the bulk of companies not practicing it?”
One criticism forced ranking attracts is it creates a highly individualistic atmosphere which could very well impede teamwork. Lee calls it the “why should I help you?” syndrome. The process is also more time-consuming than the usual performance review. “When you compare one [organisation] that does not do forced ranking and one that does,” says Lee. “The one that does forced ranking actually uses up three to four times more man hours than one that is not doing it.”
The key to objective performance outcomes, whether a company uses ranking or not, is making sure managers are properly trained on the importance of managing their team. “I see managers as the lynchpins in the performance management process if they want to raise the performance bar in the company,” says Lee.
The distribution process
In a normal forced ranking exercise, employees are divided into groups and their performances are evaluated relative to others in the same group. The famed General Electric version requires managers to divide talent into three groups – top 20%, middle 70% and a bottom 10% who are forced out. NatSteel, however, demonstrates more flexibility in its system.
It divides talent into four categories using a bell curve distribution to sieve out high potentials who are put through talent management programmes. Poor performers, on the other hand, are given guidance to improve. Instead of a regular distribution curve of 20-60-20, NatSteel skews it such that the top two groups take up more than one third of the total staff strength. “This stems from the belief that [there are more good performers] and staff want to achieve their targets and do well,” says Liu.
Lee adds the bell curve distribution will be unique to each company’s culture, even for UOB, “so it really varies”. Whether it’s a fixed 15% or 25% for top performers, it is still based on “human judgement” when sorting employees into categories. The percentages are just a guide for managers conducting performance reviews, admits Liu, and managers have to use their judgement still. “We don’t want to strictly adhere to that percentage and in a lot of circumstances, you’d listen to what the supervisor has to say.”
Lee concurs. “You can’t prescribe every step [of the evaluation process] because then you would be spoon feeding and things would become too rigid and judgement goes out of the door.”
The sorting criteria
So how does one get on the A-list? Besides performing well and achieving targets, NatSteel leaders are evaluated by its executive committee on how he or she performs vis-à-vis the way he or she manages the team. That means fulfilling all key performance objectives (KPIs) only takes up 60% of their evaluation with competency objectives – corporate values, skills and knowledge – rounding up the 40%.
Ultimately, the company wants to build the person’s ability to do the job properly when completing the KPIs. “It’s not just achieving targets without looking at the means of achieving it,” says Liu. “He may have achieved his targets but did he do it in the right way?”
The PMS is built in such a way that both reviewer and reviewee would never interpret the competency model differently. For example, employees are evaluated on “drive”, one of the traits an ideal NatSteel person should possess. Instead of rating the competency as 1-2-3-4-5, it is calibrated with a specific definition of what entails “drive” so “things can’t go wrong”.
There are, of course, managers who have different standards from one another. One manager might set simpler and less stretched goals for his or her direct reports while a more task-driven manager for a similar function would set higher targets. This would result in similarly graded employees from different teams achieving similar ratings, meaning a “softer” manager’s strongest might only match the middle performers of a results-oriented manager’s group.
“If you want to make sure people coming out of it [forced ranking] feeling it’s fair and objective, it starts right from the beginning of the year,” says Lee. First, the manager has to set consistent expectations for the direct report. Next, ensure the job size and objectives set for each employee should be of a certain complexity which commensurate with their job level. Then define the criteria needed to gauge the employee objectively. This allows the ranking panel of different managers to assess the employee with consistent yardsticks.
That would lessen the accusations of discrimination and even biases that a manager is “more relaxed” than another manager when it comes to ranking employees of a similar job and seniority grade, says Liu. She believes these guidelines create a more open process because supervisors are not the only ones ranking their direct reports now.
But that doesn’t mean complaints from employees have ceased. “I’ll be lying if I say there isn’t,” says Liu. “No matter how, there will be people who will never be happy because they will tell you why it’s not fair.”
The aftermath
To better motivate bottom-ranking employees and to help managers cope with the unpleasant dialogue, HR would sit with both manager and affected employee to provide counselling. If employees remain disgruntled with the outcome, there’s usually a review panel for them to redress the issue.
As for underperforming employees, Liu says they should see this as “a test of their will to succeed and continually strive to keep up with market and organisational changes”. Sometimes being ranked at the bottom does inspire some employees to aim for the stars next year and that’s a good sign. But the appraisal focus is never on past performances. “Whatever your ranking is for this year, we want to help you – the staff – to improve so you will go up in the rankings next year.”
While the top performers are lavished with significant variable bonuses, rewards and development opportunities, the middle tier remain relatively unscathed as they are the stable cogs in the organisational machinery. Liu still makes it a point to ease her solid citizens’ anxiety though. “It doesn’t mean you are not ranked in the top 1%, you are out. We are fair.”
Suffice to say, forced ranking has been a resounding success for NatSteel. From an initial desire to overcome complacency and stagnation in the company, having a differentiated performance evaluation now has helped retain its highest-performing talent pool, which includes its future successors. The system also attracts like-minded individuals who thrive in this sort of work environment. Otherwise, if top talent realise the company doesn’t recognise and reward their contributions accordingly, they become disillusioned. Liu says, “I will be losing that person at the end of the day.”
The tough decision
But is forced ranking for all companies? While it has its fair share of critics, forced ranking does drive managers to retain and develop the best talent for the organisation. Advocates say managers who lack the courage to force the hard truths about substandard performance can always undergo performance management training.
But at the end of the day, it’s all dependent on the company’s culture. For those who try to push forced ranking when the company’s culture isn’t ready for it, Lee says the system might backfire.
The challenge for HR is to first understand the company’s culture enough before implementing any PMS tool. It has to complement the company’s environment, culture and strategy. There is no such thing as adopting the best HR practices, says Lee, only “suitable practices” which works for your company.
HR, be warned. Evaluation no longer means using only the performance appraisal form. Like what Liu says, “A true PMS system is really multi-faceted.” It’s time to see if your performance management system measures up against the best.
