Managing the C Performer: an Alternative to Forced Ranking

whitepaper

Managing the “C” We contend that there is a better way to get managers to manage all employees, high and low performers Performer: An Alternative alike, than to resort to organizationwide forced to Forced Ranking distribution or forced ranking systems. The solution is a performance management system that supports By Patty Davis and Bob Rogers the organization’s strategic priorities by promoting Downsizing, cost cutting, and a perception among constant open and honest feedback between leader senior executives that managers fail to adequately and employee and by building managers’ competence deal with substandard and mediocre employees have and confidence in how to conduct these most difficult led to the rising use of various techniques to address discussions. these issues. These controversial management tools target the “C” performers, those who, through their Forced Ranking Evaluated lack of productivity and effectiveness, contribute the But, first, let’s review forced ranking and why more least to the organization’s bottom line. and more organizations are adopting it even while As strong proponents of performance management, others are sweeping the program into the dustbin of we clearly support the need for managers to do a failed evaluation systems. better job of filtering out their lower-performing Former General Electric chief Jack Welch, an employees. We also clearly understand that managers enthusiastic supporter of forced ranking, called the are reluctant to address substandard performance, practice “the vitality curve.” Other names applied to either through a lack of competence or confidence. it include “top grading,” “forced distribution,” and After all, most of us are not thrilled when we have to “cut to build strategies.” Whatever name it goes by, deliver less-than-favorable news to an employee. forced ranking is seen by leaders in a growing number Consequently, senior leaders have embraced various of organizations as a handy grading tool for creating a techniques to force managers to differentiate among high-performing culture. In their view, forced ranking employees based on performance and to take action enables managers to better manage low performers. on the lower-rated employees. We wholeheartedly GE’s success in implementing a forced ranking support this approach—the need for organizations to system is cited as the model by many of the 20 do this is clearly evident. Not doing so results in percent of U.S. companies that have adopted it in “mediocrity creep” and a loss of faith and trust by an recent years. (At General Electric, each year 10 organization’s top performers in their senior percent of managers are assigned the bottom grade; if executives. they don’t improve they are asked to move on.)

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What’s behind this popularity? Generally, forced One Manager’s Experience ranking is being adopted because senior leaders For some companies the perceived benefits of forced believe managers have not addressed performance ranking are far outweighed by its drawbacks. It often problems or adequately developed their staffs’ talent. results in low morale, caused when employees These leaders believe that forced ranking will help compete against each other instead of work with each managers who are not doing their jobs raise the level other. Furthermore, many employees believe that of performance in their organizations. their continued employment rests not on what they do Its proponents maintain that forced ranking addresses but on who supports them. The belief that your two issues that are key to building a high-performing survival in a forced ranking system boils down to your organizational culture. First, it encourages managers leader’s effectiveness as an advocate for his or her to identify and remove poor performers. Second, it employees can undermine the entire organization. forces a predetermined compensation distribution This point is illustrated by the following account curve, which allows managers to handsomely reward provided by a leader who has managed in a forced top performers while encouraging weak performers to distribution system. leave the organization. My experience as a manager (in a forced ranking Philosophically, DDI supports the desired results, but system) revealed that a leader’s communication not the process. Even Jack Welch is aware of the skills and credibility have more to do with an need to be sensitive to cultural issues. He recently employee’s rank than does the employee’s stated that the GE vitality curve can’t simply be performance. For instance, we had one manager dropped into an organization if that organization isn’t who was trained in behaviorally based assessment set up culturally for the implementation. W. James skills. These skills made it possible for him to be McNerney, Jr., one of Welch’s senior executives at more convincing when advocating for his GE, found this to be all too true when at 3M. He’d employees than other managers who lacked the been 3M’s chief executive for 18 months before he same skill set. In three years of observing this was able to convince senior leaders to start using the manager, I never saw him lower a ranking for one GE system. of his employees. If all managers were trained as this manager was, then forced ranking would Success at GE and 3M can’t mask the fact that the provide a level playing field in which employees adoption of forced ranking has not been without its could be placed in the right categories of problems. A rash of lawsuits has forced many performance. But this requires a culture that is organizations to reconsider using forced ranking. prepped for the implementation of a forced Take, for example, the Ford Motor Company’s ranking system. The organization I worked for did experience. Its system graded employees “A,” “B,” or not have such a system in place, so adopting “C,” with an initial requirement that 10 percent of the forced ranking resulted in dramatic culture shock. population be graded a “C.” The intent was simple: People were less willing to help others who they remove poor performers. Instead, the automaker would be ranked against. Employees were more landed in court. Eventually, after six lawsuits were eager to pass on to senior executives negative filed against Ford by disgruntled workers, former information about others. And people lobbied for CEO Jacques Nasser announced that the unpopular assignments to corporate headquarters because grading system was being modified.

they saw that those who worked closely with • Features a compensation process that is based on senior executives received consistently higher performance and pays the high performers more rankings. Within one year this worldwide than it pays substandard performers. organization changed the system as Ford did to It’s not unreasonable for organizations to want their take the onus off the ten percent at the bottom. managers to handle performance problems, develop This account echoes Jack Welch’s comments, that the talent, make tough decisions about removing poor missing key in this and other failed examples is a performers, and distribute pay equitably. All this can corporate culture that can successfully absorb a forced be done without implementing a controversial ranking ranking system. GE had such a culture, one based on system. So, why aren’t managers managing their honest feedback supported by a performance staffs? Most likely, it’s because they face one or management system. more of these four barriers: The value that Welch placed on open and honest 1. The organization does not have a good feedback at GE is illustrated in this question he asked performance management system in place. one conference audience. “How many of you work 2. Managers lack the competence or confidence for a company with integrity?” A sea of raised hands needed to set performance expectations, provide indicated that almost all thought they did. He then feedback, and deal with performance problems. asked, “How many of you get straight-between-the- 3. Managers are not held accountable for eyes honest feedback about your performance?” Very substandard performance or for dealing with few hands went up. That response, he said, supported substandard performers. his conclusion that unless an organization promotes the giving of feedback at every level, then that 4. The organization’s compensation system does not company does not have integrity. require that managers make tough decisions.

A Prescription to Cure the Problem The “Good” in Good Performance The lesson to be learned from Welch’s argument is Management that forced ranking as a management tool will not Let’s address the first barrier. By “good performance necessarily lead to success alone. In fact, in most management system,” we mean one that: cases, the “cure” of forced ranking may be worse than • Establishes clearly defined but individual the “illness” of weak performers. The alternative is performance objectives for all employees. These one that should have been prescribed in the first objectives should support the organization’s efforts place: a performance management system that: to achieve higher levels of performance from one • Holds employees accountable for results. year to the next. • • Encourages and supports open, honest feedback Includes competencies (knowledge, skills, and between employees at all levels. behaviors) needed to achieve the organization’s business results in every employee’s performance • Provides a convenient mechanism for developing plan, and defines those competencies behaviorally. talent.

For example, every manager’s plan should include discussions that encourage employees to sustain good the competency, Coaching. In turn, the behavioral performance and improve where needed. The absence expectations for Coaching should include of these interaction skills can be disastrous. continuously developing associates, setting challenging performance expectations for staff, We studied a large division of a company that was monitoring progress against expectations, and successfully using a ranking system. We found addressing performance gaps. To be evaluated employee dissatisfaction, managers who simply went “effective” in coaching, a manager must “through the motions,” and a human resources successfully demonstrate each of these behaviors. department flooded with complaints from employees that they weren’t getting the coaching and feedback • Features an individual development plan for every employee. The development plan should identify they needed to improve performance. Our diagnosis competencies the employee needs to improve in his revealed that, although all managers were trained in the or her current role or for a future role. The plan system, they were not trained in the interaction skills also should include specific development objectives they needed for conducting performance discussions. that will enhance performance in the assigned At GE, on the other hand, where the forced ranking competencies. system works, the program’s success rests on managers who have been thoroughly trained in coaching and Improving Managers’ Competence and feedback skills. Confidence As for the second barrier, even the best-designed Top Leaders Have a Role Too performance management system won’t be effective if The third barrier—managers not being held managers lack the competence and confidence to use it. accountable for substandard performance—is an issue Training is essential if all employees—but especially for the organization’s top leaders. Senior executives managers—are to understand and use a performance must hold managers accountable for substandard management program or system. Generally, performance and for improving or removing poor organizations understand this truism. But all too many performers. In performance discussions with direct of them focus their training on the mechanics of the reports, senior executives should identify the weaker process such as completing the appraisal document. performers, analyze the cause of poor performance While this kind of training is necessary, managers (lack of motivation, lack of skill, poor job fit, etc.), would be better served if their training focused on and reach agreement with the direct report on writing measurable objectives, assessing and evaluating improvement goals or redeployment options. If an competencies, and interacting effectively with peers, employee must be removed, managers need the direct reports, and others. organization’s support as they counsel the employee These interaction skills enable managers to effectively to leave the company or help him/her find a more reach agreement on performance expectations, provide suitable position within the organization. In short, it honest feedback, coach employees not performing at is critical that senior executives use the performance expected levels, communicate the consequences of not management system to hold managers accountable for improving poor performance, and conduct review carrying out the necessary employment actions.

Alternatives to Forced Ranking These methods show that it is possible to bring the The fourth and final barrier—lacking a compensation same rigor and discipline to managing the “C” system that requires managers to allocate more to high performers without the downsides found in a forced performers and less to substandard performers—may distribution system. They all require that leaders lead be the toughest problem to cure. Although and managers manage, which brings us full circle to challenging, there are ways to manage compensation the crux of the issue. besides resorting to a forced ranking system. When an effective performance management system We have observed or helped clients with these is combined with a compensation management alternatives to forced distribution systems: process, the results can be the same as those sought in a forced distribution system, but without the negative • A compensation/HR committee reviews merit pay effects. Instead of looking for a crutch, organizations raises and bonuses against unit and individual need to set clear expectations and hold managers performance. accountable for achieving them in addition to tracking • Line managers are held accountable for distributing performance and providing coaching and honest a pool of funds based on performance as well as feedback. tracking all managers’ pay decisions to identify problems (e.g., central tendency, favoritism, By doing so, the organization’s human resources discrimination). management processes will have integrity. After all, wasn’t that the objective all the time? • A senior line manager reviews all pay decisions in his/her department to ensure alignment with this pay-for-performance approach. • Senior line managers randomly examine performance reviews and associated pay increases. Patty Davis, the performance management leader for The senior line managers at LaSalle Bank in Development Dimensions International, helps DDI’s Chicago look at up to 160 performance reviews a clients worldwide implement effective performance year to ensure that they are completed and that the management systems. quality of the reviews and pay increases are aligned Bob Rogers, president of DDI, works with senior with the record of individual performance. executives around the world to help them implement • Internal and external third parties evaluate performance management system best practices that performance and alignment to pay. positively impact their organizations’ results.