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employee performanceIs your performance review process stifling creativity and collaboration while driving away some of your best people? If you employ a forced ranking scale, what’s often referred to as a “rank and yank” model, you may very well be doing just that.

Retaining top performers is always an important business objective, something good managers are always striving to do. In the technology industry it’s especially critical and getting harder to accomplish since the competition for talent is fierce. Anything and everything should be under scrutiny to ensure that it helps, not hurts, your retention efforts. In our recent eBook, The 3 Critical Things You Must Do to Attract the Very Best IT Talent, we discuss how fair and transparent performance evaluations are something employees mention as very important in surveys.

This type of evaluation process was popularized by Jack Welch, the former CEO of GE, and widely adopted for a time. It’s always had its critics and problems though, and many companies that once enthusiastically embraced it have now replaced it, most recently Microsoft, as Microsoft, GE, and the Futility of Ranking Employees, on Fortune/CNNMoney.com reports. It does accomplish certain things. Professor Brooks Holtom, of Georgetown’s McDonough School of Business says, “The ratings can be arbitrary, and…have serious effects on creativity and team-sharing, but they can have the benefit of helping cut the deadwood.” However he also points out that they usually work most effectively as a short-term strategy. Once the underperformers have been weeded out, the negative aspects in terms of teamwork and innovation become a serious consequence.

I think there is another reason why a process like this seems like a good idea – because it seems impartial and brings a scientific feel to the process. The underpinning of this type of ranking system is the Bell Curve, or normal distribution. The desire to replace our human bias with something quantifiable and neutral is a good instinct, or at least an understandable one. Author Josh Bersin explains in his article on Forbes.com, The Myth of the Bell Curve: Look for the HyperPerformers, “There is a long standing belief in business that people performance follows the Bell Curve. [It’s] been embedded in many business practices: performance appraisals, and compensation models.”

The problem with this is that “Research shows that this statistical model, while easy to understand, does not accurately reflect the way people perform. As a result, HR departments and business leaders inadvertently create agonizing problems with employee performance and happiness.” Bersin does a great job of explaining how it all works and why the Power Law or “long-tail” distribution model is better. I encourage you to read his full piece but in short, the forced ranking model creates competition among employees since no matter how high performing everyone in a department or company is, someone must be ranked on the bottom, a “loser.” It means that only so many people can be ranked a 1, again, regardless of actual performance.

This can result in high performers who leave, both because they may be under-ranked (given a 2 or 3 simply because there were no more 1 spots) or because they end up undercompensated since in this model compensation is inefficiently distributed and more money goes to the middle average performers who are the largest group rather than truly rewarding the best performers who drive most of the results. Pitting employees against each other also creates a competitive situation that doesn’t foster collaboration and teamwork. Bersin provides links to the research behind these new insights and models for looking at human performance.

There’s a lot to digest here but between the two articles, the potential problems with compensation models predicated on Bell Curve distribution become apparent. That is not to say that there may not be reasons why they may work for your company. Each company is unique and knows what’s best for them. But if you’ve been struggling with retention issues and are looking for answers and solutions, this certainly bears consideration. Given how important we know proper evaluations are for everyone, information that shows the flaws in popular performance models, and suggests a better way, should be of interest to us all.

When it comes to business imperatives like attracting and retaining top performers, no stone should be unturned in the quest to do the right things. Don’t underestimate how each piece of the work environment puzzle matters. As some of the world’s biggest companies have found out, free food, laundry, and foosball tables don’t necessarily make up for shortcomings in your performance evaluation system. If yours is outdated or broken – fix it and see how things change.

Sincerely,
Jerry Brenholz
CEO and President
ATR International, Inc.

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