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What Is ‘Stack Ranking’ and Why Is It a Problem?

October 30, 2020
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Pioneered by General Electric’s CEO Jack Welch in the 1980s, stack ranking, also known as forced distribution, is an approach to talent management where employees are ranked on a bell curve as exemplary, meeting expectations, or in need of improvement.

“Typical distribution is 15/70/15% but can vary,” explained Tim Toterhi, CHRO at interactive response systems company Cenduit, TEDx speaker, and author of The HR Guide to Getting and Crushing Your Dream Job.

Since only a fixed number of employees can be considered high-performing — or exemplary — in this system, Welch saw stack ranking as a way to galvanize worker productivity and create a more competitive culture. Because a designation to the bottom 15% meant being slated for layoffs, employees were motivated to do better than their peers.

Today, the controversial approach to talent management is more infamous than famous, and companies like Microsoft, Amazon, Adobe, and Accenture have publicly parted ways with what’s commonly been dubbed the “rank-and-yank” approach. This came after these companies experienced a slew of issues like stalled innovation and toxic workplace cultures which they attributed, in part, to stack ranking.

The Problem With Stack Ranking

These days, the talent market favors flexibility, professional development, and a supportive but challenging workplace. But stack ranking encourages traits seemingly antithetical to these: lack of innovation, increased turnover, and problematic workplace culture. Here’s a closer look at some of the main problems with the stack ranking system.

1. It hinders innovation and teamwork.

When Microsoft began using stack ranking, it was still one of the most powerful technology companies in the world. But then something strange happened: As companies like Apple and Google continued their meteoric rise toward innovation, Microsoft failed to join them.

A widely circulated 2012 Vanity Fair article by Kurt Earticle pinned Microsoft’s “lost decade” to stack ranking. In the piece, a former Microsoft employee had this to say about the stack ranking approach to talent management:

“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review. It leads to employees focusing on competing with each other rather than competing with other companies.”

High-performing teams have long been an important differentiator of the most successful companies. When smart people come together to form diverse teams that approach problems creatively, it leads to great strides in innovation.

“On many teams, it's the very combinations of skills together that make the team more effective,” said Mark A. Herschberg, MIT instructor and author of The Career Toolkit: Essential Skills for Success That No One Taught You.

Conversely, on a team where only 15% will be viewed as exemplary, the focus becomes personal differentiation rather than teamwork, and the impetus becomes to be the smartest, rather than work with the smartest. “It's especially hard to promote teamwork when you know you're competing against your teammates every year to survive,” Herschberg said.

2. It leads to high turnover, which can be costly.

In stack ranking, employees landing in the bottom 10-15% of the workforce are placed on performance improvement plans, or terminated entirely.

“Removing the bottom 10-15% of your workforce may sound reasonable, but the process does not account for the cost of rehiring and retraining,” Toherhi said. “Also, there’s no guarantee that you’ll replace them with better performers.”

And the cost associated with high turnover can be significant. According to a report put out by the Society for Human Resource Management (SHRM), the direct cost of replacing the departing worker is between 50-60% of their annual salary, but the “total costs associated with turnover [range] from 90-200% of annual salary.” That’s because the total costs include hiring, onboarding and training, learning and development, and cost of time the role remains unfilled.

Increased turnover is costly financially, but it has other implications, too. With the departing employee goes the individual needed to complete the work of that role, but also a holder of institutional knowledge and a carrier of company culture, which is difficult to quantify but still experienced as a loss.

3. It promotes a toxic company culture.

Stack ranking creates an individualistic culture and mindset, rather than one geared toward teamwork and cooperation. Employees fear feedback from managers, loathe performance reviews, and feel distrustful of their organization. “When employees are hyper-focused on staying out of the bottom, it leads to a culture of distrust and manipulation,” Toherti said.

Conversely, trust in the workplace, both between the organization and an individual, and among employees, leads to happier, more productive workplaces. The 2019 Edelman Trust Barometer, an annual global study on trust in institutions across geographies and demographics, showed that in organizations with a high degree of trust between employers and employees, employers benefit from increased advocacy, loyalty, engagement, and commitment from their workers.

Business development consultant Carol Tompkins called out the subjective nature of the ranking system as a point of pain for company culture. “Stack ranking relies heavily on the managers' perceptions about the contributions of each employee. These perceptions are often biased, which makes the performance reviews skewed and ineffective,” she said. “Such reviews contribute negatively toward employee morale, motivation, and productivity.”

Take a Modern Approach to Performance Management

When Amazon dropped stack ranking as part of their performance review system in 2016, a company spokesperson told Geekwire, “We’re launching a new annual review process next year that is radically simplified and focuses on our employees’ strengths, not the absence of weaknesses.”

A simple mindset shift such as this is key to implementing a more equitable and effective performance management system. The workplace has evolved tremendously since stack ranking’s debut in the 1980s, and today, there’s a need for a more modern approach; one in which performance reviews can be used to promote employee productivity, combat workplace bias, and nurture company growth.

“When you focus on helping everyone get a little better each year, you build a culture of coaching and feedback,” said Toherhi. By creating a workplace where feedback is a helpful tool — delivered with context, examples, and recommendations — you aid employees in coming closer to their professional goals, while providing the organization with the skills and people it needs for success.