What are reasons that the forced ranking approach to performance appraisal is falling out of favor?

Forced ranking, the performance appraisal system championed by Jack Welch in the 1980s, has long sparked controversy. Even as many large companies began adopting the practice of using a bell curve to rank employees against each other, critics maintained forced ranking crushed morale, stifled innovation, and led to unscrupulous competition among workers.

Despite the criticism and the fact that several high-profile companies including GE and Microsoft abandoned the practice over the years, many still employ some form of forced ranking. But at what cost?

Lisa Barry, the global Talent, Performance, and Rewards leader for Deloitte Touche Tohmatsu Ltd. (DTTL), believes forced ranking no longer suits today’s increasingly knowledge-driven workforce. She notes that “forced curve” evaluations were originally conceived at the turn of the 20th century to measure the performance of factory workers and manual laborers. Today, more than 70 percent of employees work in service or knowledge-intensive jobs, and their performance is largely driven by their skills, attitude, and ability to relate to others¹—qualities that are difficult to objectively compare and evaluate along a bell curve, she adds.

Forced ranking can be particularly damaging inside corporate IT organizations and at talent-intensive companies—whether tech startups or tech stalwarts—that thrive on specialized skills and innovation. “Regardless of whether they work for banks or software companies, technology professionals are expected to innovate, work effectively in teams, and adapt to an ever-accelerating rate of change,” says Barry. “They need incentives to collaborate and be creative, yet forced ranking typically produces the opposite behavior.”

Moreover, by requiring managers to divide staff year after year into fixed percentages of underperformers, average performers, and high performers, forced ranking may eventually move high performers into lower rankings and push many solid performers into the bottom, according to Stacia Sherman Garr, vice president of Talent Management Research for Bersin by Deloitte, Deloitte Consulting LLP. In the process, forced ranking ends up inadequately rewarding high performers while neglecting to motivate average workers, which can lead both groups to look elsewhere for work, she adds.

“Forced ranking may help companies weed out underperformers during a restructuring but, if implemented each year, organizations risk demotivating essential staff and cutting too deep,” says Garr. “The practice seems particularly shortsighted during a global talent shortage, when companies are fighting to recruit and retain professionals with specialized technical skills.”

A New Model for Performance Management

In light of competition for scarce talent, practitioners from some Deloitte member firms suggest companies implement performance management practices that help them build required capabilities internally. That means replacing annual performance appraisal processes that revolve around competitive forced ranking with regular feedback and continuous coaching and development.

The goal of the feedback-and-development approach is to reward high performers accordingly while encouraging the large swathe of average employees to improve. “With resources like feedback, training, and on-the-job aids targeted at improving performance, average workers can increase their level of achievement,” says Garr. “Organizations should strive to shift the performance of as many people as possible, so that what was once considered above average becomes the new norm.”

Performance management practices that focus on routine feedback and development can be particularly beneficial to IT organizations, where professionals frequently need to learn new skills and expand their capabilities, according to Andy Liakopoulos, Deloitte Consulting LLP’s Talent Strategies leader. “Given that technology workers cultivate technical and soft skills over time, performance management systems for them should focus on continuously developing those capabilities, rather than stacking IT professionals against each other or relegating performance discussions to an annual event,” he says.

Replacing yearly “rank and yank” performance evaluations with continuous feedback and development requires some significant changes. For one, some managers may need to shift from a command-and-control, ratings and ranking mindset to a coaching mentality. “They’ll have to find ways to make average workers see themselves as valued contributors to organizational success, and they’ll need to learn to conduct more informal conversations about performance that lead to improvement rather than drive employees away,” says Liakopoulos.

Companies may also need to separate conversations about compensation from performance feedback, according to Garr. Neuroscience research shows that conversations about compensation provoke a “fight or flight” reaction among employees, making them much less receptive and responsive to coaching. “Rather than linking salary increases and bonuses only to ratings, companies may opt to include other factors in compensation decisions, such as the critical nature of an employee’s skills, the cost of replacing the employee, the employee’s value to customers, and the external labor market,” says Garr.

Act Now

Many employers realize they need to reassess their performance appraisal processes. In fact, 58 percent of business and HR leaders surveyed by Deloitte Consulting LLP say their current performance appraisal process does little to drive high performance or engagement among employees and is an ineffective use of company time. Even more respondents (70 percent) are either in the process of evaluating their performance appraisal systems or have recently reviewed and updated them.²

“Organizations that have dropped annual performance ratings in favor of regular feedback and development have seen improvements in employee engagement and performance,” says Barry. “Given that business is in a constant state of flux—with goals shifting, strategies evolving, and employees moving among different projects with different leaders—regular performance feedback seems to make much more sense.”

What are the reasons for failure of performance appraisal?

These failures of performance appraisal can be attributed to ambiguous performance standards, rater bias, lengthy process of form filling and documenting, and wrong selection of performance criteria. At times, the appraisal process itself may be conflicting.

What is the major downside of using the ranking method as part of a performance appraisal method?

Rank judgements are subjective. Since there is no standard used for comparison, new jobs would have to be compared with the existing jobs to determine its appropriate rank. In essence, the ranking process would have to be repeated each time a new job is added to the organization.

What are some of the unintended consequences of a forced ranking system?

Competitive sabotage and undermining of peers. Focus on short-term results that coincide with twice-yearly rankings. Undermined intrinsic motivation in face of “impossible”-seeming odds. Reduced innovation.

What is the intended benefit of the force ranking approach to performance appraisal?

Proponents say that forced ranking is the best way to identify the high-potential employees who should be given training, promotions and financial incentives. In addition, they claim it's a vital tool to identify the bottom performers who should be helped up or out.