Why ranking employees by performance backfires

Grading employees by performances creates unintended consequences. Photo / Getty Images

When Bill Michael, the former chair of KPMG, told staff to "stop moaning" in a virtual meeting in February, one of the issues they were complaining about was the "forced distribution" model used to assess their performance. This way of appraising people is a zombie idea. No matter how many times it proves disastrous for a company's culture or morale, it refuses to die.

Generally speaking, "forced distribution", or "stack ranking", methods divide employees each year into a certain percentage of top performers, average performers and underperformers. In the UK's senior civil service, for example, the proportions were fixed at 25, 65 and 10 per cent respectively, until the system was reformed in 2019.

The idea is to avoid "grade inflation" and force managers to have honest conversations with people who are sub-par. Jack Welch, former chief executive of General Electric, said in 2013 he couldn't understand why people thought this cruel. "We grade children in school, often as young as nine or 10, and no one calls that cruel. But somehow adults can't take it? Explain that one to me."

There are circumstances where it works. One former accountancy trainee said he had only been willing to tolerate the long hours and grinding work if he was likely to be promoted. "In that context you really need to know if you're in the 25th percentile or 75th percentile," he told me.

But there are many more examples where the method fails, even on its own terms. The big problem is that it mixes up someone's absolute performance with their relative performance against their peers. You might be meeting all your objectives, for example, yet still be ranked bottom and labelled "underperforming" in a strong team. Sarah Nickson, a researcher at the Institute of Government think-tank, said the UK government's "deep dive" into the forced distribution system for civil servants found that "a lot of the people in the bottom 10 per cent were not underperforming".

This not only feels unfair for the employee, it is deeply uncomfortable for the line manager. "What was difficult was when you had people meeting expectations, graded 3, but because there were so many 1s, 2s and 3s, there was pressure to give them a 4 and put them on an improvement plan," one former manager in a big accountancy firm told me.

In many organisations, line managers assign provisional grades then thrash out the overall distribution in "moderation" meetings with other managers. But it is hard to objectively rank people in white-collar jobs doing different things. "You'd have people sat in a room who barely knew each other, comparing apples with pears," said a second manager at a different firm.

A number of line managers told me they gamed the system. They would put people who had just joined the team in the bottom bracket, because they were easier to sacrifice. Or, perversely, they tried to hang on to poor performers so they could put them at the bottom and protect everyone else.

The system can also disincentivise teamwork. Microsoft's forced distribution ranking system (since scrapped) was blamed for creating a toxic culture in the early 2000s that stifled innovation. Good performers reportedly avoided working together for fear of suffering in the rankings. People would quietly sabotage their colleagues.

Finally, these systems are often corrosive for morale, which damages the very performance levels they aim to improve. Research shows that feedback has a moderately positive effect on performance on average, but in a third of cases it decreases performance. What is key is whether people feel the feedback is fair.

Employees who express positive emotions after feedback tend to perform better in the future, while those who express negative feelings go on to perform worse. In a forced distribution, only those ranked better than average are likely to feel particularly pleased. As Nickson points out, that is by definition only a minority. "It's nice for your ego when you're told you're a high performer, [but] I think the question is, does that benefit outweigh the downsides for potentially everyone else?"

Microsoft scrapped forced distribution in 2013. The UK's senior civil service followed suit in 2019. KPMG told me it planned to "move away" from the system to "allow much greater flexibility" too.

Human resources departments have had to rethink plenty of old notions since the pandemic hit. The counterproductive pseudoscience of forced distribution ought to be one idea that finally stays dead.

- Financial Times