Forced Ranking Good, Bad or Both? Presented by: Sue Todd, President & CEO Raj Ramachandran, Performance Management Research Lead

Transcription

1 Corporate rate University Xchange Forced Ranking Good, Bad or Both? Presented by: Sue Todd, President & CEO Raj Ramachandran, Performance Management Research Lead

2 The Presenters Sue Todd - President and CEO of Corporate University Xchange Sue has more than 20 years of experience consulting with corporate universities and learning and development groups on performance management, e-learning, learning content, program measurement and other HR and training-related topics. She has taken the lead on corporate university design projects with companies like Air Products, M&M Mars, Rio Tinto and others. Sue has presented at ASTD and Training events and been an invited speaker at other industry events. Raj Ramachandran - Performance Management Research Practice Leader for Corporate University Xchange Raj has over 10 years experience in learning and performance management, studying strategies and best practices in Global 2000 organizations including American Airlines, International Paper, Raytheon, Washington Mutual, and others. Prior to joining CUX, Raj was the learning and performance management practice lead for TPI, a global sourcing advisory firm. He has also served as a business process consultant for Accenture, IBM and PricewaterhouseCoopers.

3 Agenda The challenge of high performance How forced ranking systems work What the research shows as pros & cons of forced ranking systems FAQ s analyzing the controversy

4 The High Performance Challenge Constant drive to create highperformance within organizations Talent (human capital) is a critical lever for driving performance How do you build differentiation into the organization to identify and reward top talent?

5 What are Forced Ranking Systems Definition: any system or procedure in which individuals or groups are ranked against one another into a specific scheme Defining Characteristics: Performance review mechanism Individuals are ranked in comparison to one another Introduces employee differentiation into the organization Based on some sort of distribution curve (e.g. A, B and C players) Also referred to as: Forced ranking distribution systems (FRDS) Topgrading

6 Poll Question #1 Which of the following is true of your organization? We currently use a forced ranking process We are thinking of using a forced ranking process in the near future We have no immediate plans to implement forced ranking but have discussed it many times We have no intention of using forced ranking

7 The Controversy Many corporations today are exploring the possibility of enhancing their current performance management system by including a forced ranking protocol Advocates - raise the talent quality bar and motivate employees to be successful Critics - jeopardizes employee morale and potentially spawns a host of legal issues

8 Strict forced distribution model: Bell curve (top 20%, vital 70% and bottom 10%) to slot the employees A, B or C players or A, A potential or not A s Loose distribution model: Slot employees in either 3 or 5 buckets but percentages per bucket not assigned (A, A-, B+, B and C) Forced Ranking Schemas Quartile model: Four cells are defined and people forced ranked into one of the four cells and then within each cell Source: Forced Ranking. Making Performance Management Work. Grote, Dick Totem pole approach: Individuals are ranked from one downward to include all people within that group (e.g., 1, 2, 3, 4 )

9 Poll Question #2 If were going to introduce forced ranking system in your organization, which of the following schemas are you more likely to use? Strict forced distribution model Loose distribution model Quartile model Totem-pole approach None of the above

10 Top 10 Reasons for Forced Ranking 10. Gets the right people on the bus Use of forced ranking process during the interview process can ensure that only the right people are hired 9. Promotes a culture based on achievement Shows a commitment to helping those that achieve, and promote the development of an organizational culture that does the same 8. A players are talent magnets Top performers are more likely to attract other top performers to the organization

11 Top 10 Reasons for Forced Ranking 7. The organization knows where the critical talent is The real pay off comes from knowing who the top talent is, and that they are being retained. Companies can use this information for making good development decisions 6. Promotes organization candor & honesty Employees know where they stand in the organization and team members are already well aware of who the low performers are and therefore should not be surprised by the ranking results 5. Rewards your top performers better Reward your star performers handsomely, offering them greater financial incentives, special coaching and choice of assignments.

12 Top 10 Reasons for Forced Ranking 4. Provides a clear succession planning mechanism Allows the organization to replenish the supply of qualified talent by identifying the best potential candidates for the succession pipeline 3. Increases overall leadership caliber in the company This starts with the leadership of the company. A disciplined, structured review process using forced ranking systems aggressively develops top leadership talent, and in some cases deselects others 2. Holds the leadership to higher standards Ensures that the leadership stays sharp, is of the highest caliber, does not become satisfied with mediocrity and continues to move forward and grow the company

13 Top 10 Reasons for Forced Ranking 1. Give the organization the opportunity to be the best in class The team with the best players wins! Research indicates that one of the key elements separating businesses that perform on average versus those who perform at the top is the organization s ability to bring on and retain the best people while moving low performers out - Jim Collins, Good to Great

14 Poll Question #3 Which of the following reasons do you believe is the best reason to include Forced Ranking as a performance management mechanism in your organization? Gives the organization the opportunity to be best in class Increases overall leadership caliber in the company Rewards your top performers better Attracts A player talent to your organization

15 The Reversal Against Forced Ranking Some research indicates that pay-forperformance programs produce negative side effects Pushing quantity for quality People begin to sacrifice long-term success for shortterm financial gains Process focuses people on reward-oriented tasks and not the bigger picture to do what is right for the organization overall Forced Ranking is the equivalent of grading students on a curve Curves are used to make up for bad tests Teachers curve when they haven t done a good job teaching the material

16 Top 10 Reasons against Forced Ranking 10. Gives HR and Management a Pass In the Recruiting and Hiring Process A rigorous process for recruiting and selecting people should ensure that the organization is hiring top performers and are a good fit with the organization culture. No need to be so careful if poor performers can be easily weeded out 9. Drives significant replacement costs Some research put replacement costs as high as 15X the salary of the vacant job John Deere noted that they would not arbitrarily eliminate people they work so hard to recruit 8. Continual Flow of New Hires Put a Drag on Organization Performance Replacing people continually puts a drag on organization performance as new people come up to speed and managers and others continually use precious time training new people.

17 Poll Question #4 What impact would a forced ranking program have on your recruiting and hiring practices if you had to replace up to 10 percent of the workforce annually? No significant additional burden to hire replacements Minimal additional work to find replacements Significant additional challenges recruiting and hiring replacements

18 Top 10 Reasons against Forced Ranking 7. People Seek Out Managers Who Write Good Appraisals A major manufacturing company said employees learned how to game the system Some managers get good at writing appraisals indicating high performance 6. Lazy Way to Administer Pay for Performance Program Arbitrary percentages offer a convenient way to dole out raises and requires little effort to really identify great or poor performance Anecdotes about HR reading performance reviews and being unable to determine which people were 3s, 2s and 1s based on manager appraisals 5. Can create culture of fear and mistrust Too easy for to be done poorly because most jobs don t lend themselves to objective measurements Quantitative measures for sales roles, call centers, software programmers but others are not clear cut

19 Poll Question #5 How would you rate your current performance appraisal processes in their ability to rank people fairly into performance buckets such as top 20%, middle 70% and bottom 10%? Exceptional Good Barely satisfactory Unsatisfactory We don t do performance appraisals

20 Top 10 Reasons Against Forced Ranking 4. No fair way to really compare people Compared against themselves, we don t see how they stack up against others performing the same job Compared to others doing same job influenced by each manager s ability to do appraisals More work will be performed within teams no good mechanisms to isolate individual contributions within the team 3. People reach peak performance at different times in their lives Hardware companies shifting to services businesses those who perform well under one set of conditions may not excel under new conditions Qualcomm says they believe every employee has potential 2. Some companies justify the process because it worked well in lab simulations Can t control for manager s influence on goal-setting and assessment processes

21 Top 10 Reasons against Forced Ranking 1. Symbolizes a weak leadership team Represents a stop-gap method to eliminate poor performers when the organization believes managers don t have what it takes to hold courageous conversations about performance or to coach people who need help. Reduces the need for managers to really work with people to tap their strengths, coach and motivate them to high levels of performance

22 Poll Question #6 How would you rate the current ability of your managers to provide fair, high caliber performance reviews? Exceptional Good Barely satisfactory Unsatisfactory We don t do performance appraisals

23 Recap of Cons Forced ranking might have been an okay concept during a downsizing period as a consistent approach to eliminating large numbers of jobs But impending talent wars will require leveraging what people bring to the job. Companies that can tap people s greatest potential; allowing them to innovate, add value and stretch their knowledge and skills will win the game. Companies are probably kidding themselves if they believe there s always a stable of better people waiting at their door. Organizations would do far better to shift their focus on improving the capacity of their leaders to develop, coach and inspire people and when necessary -- to identify poor performers as soon as possible and take appropriate action.

24 Poll Question #7 Which of the following might be the worst possible side effect of forced ranking? Higher replacement costs Lack of trust Reduced teamwork Some employees seeing the system as unfair There are none

25 FAQs - Analyzing the Controversy Is it fair to compare employees with one another? If you are planning to use forced ranking systems, how do you make them fair? Is there evidence that forced ranking systems are a good way to raise the performance bar and increase your organization s competitiveness in the marketplace? What are the legal implications of implementing a forced ranking system and how can you overcome them? Do you have to use a normal distribution curve approach or a quota system to rank employees? What other mechanisms that can be used to differentiate employee performance? And can you use them with forced ranking systems?

26 Poll Question #8 In the final analysis, how would you characterize your opinion of forced ranking? It is an important tool that organizes should use to create a high performing organization It had its place but is no longer a good idea Forced ranking never was and still is not a good idea for corporations

27 Questions and Concluding Remarks Companies will need to consider a host of issues in deciding whether or not to adopt a forced ranking process Evaluate your overall business strategy, current performance management & leadership development process first CUX Forced Ranking Study send an to rajr@corpu.com Mark your calendars, our next webinar will be on August 22, 2007 Performance Management: Keys to Making it Work

28 References Grote, Dick. Forced Ranking. Making Performance Management Work. Harvard Business School Publishing Lawler III, Edward. The Folly of Forced Ranking. C/net News.com. Robinson, Diana. The Top 10 Reasons Why 'Forced ranking' Quota Systems Don't Work. Coachville Coach Training.

29 Thank You Sue Todd Raj Ramachandran Corporate University Xchange