The Surprising Benefits (and Dangers) of Performance Ranking Your Employees

Imagine you’re sitting in a dark room with the shades drawn.

No, you’re not about to turn on Netflix or take a nap. You’re at work—and you’re not alone. You, as an HR professional, and several managers in your organization are participating in your annual tradition:

Performance Ranking.

You’re determining every employee’s value relative to their performance and relative to their coworkers.

I must tell you: having been in rooms like that—with employee names on the projector screen, the room dark, and the blinds drawn so employees can’t sneak a preview of their fate—it’s a brutal process.

But it’s enticing to people. It gives the illusion of objectivity and order. As a form of rewarding employees, performance ranking is more of a curse than a blessing…

Here’s why.

Separating the Wheat from the Chaff

Approximately 25% of Fortune 500 companies sit in that dark room and are required to utilize relative performance ranking. The other 75% use the traditional approach to performance management: comparing employee performance to the agreed-upon goals and objectives of the job.

Relative performance ranking systems tend to become popular when the economy is down and organizations are looking to identify lower performers for reductions in force and when they must reward and retain top performers.

I believe the 75% of companies who use the traditional approach are better off than the rank ordering companies.

Simply put, relative performance ranking is a process by which employees in similar jobs (or in the same department) are compared against each other to determine their individual performance ratings.

Organizations looking to improve business results through a more rigorous performance management process may consider whether they should implement relative performance ranking. But in order to choose wisely, we must discuss the three different types of relative performance rankings:

  • Forced Performance Distribution
  • Stack Ranking
  • Quartile Ranking

Forced Performance Distribution

This is a ranking approach where managers must meet pre-determined percentages of employee ratings. For example, 10% of employees must be rated as top performers, 80% need to be rated as meeting expectations, and 10% need improvement.

For this system to work, managers in a ranking group are held accountable for achieving this forced distribution. In order to meet the pre-established distribution, the department or business unit must be large enough, so the employee sample size is significant (in the range of 50-100 employees).

Stack Ranking

In this process employees are ranked from highest to lowest performer and are stacked on top of each other to determine a distribution of ratings across the organization. An organization with 3 ratings might then rate the top third in the stack as Exceeds Expectations, the middle third as Meets Expectations, and the bottom third as Needs Improvement.

Quartile Ranking

This system works in a similar manner to the Forced Performance Distribution however it requires placing 25% of employees into one of 4 ratings. The top quarter of employees would be rated as Outstanding, the next quarter rated as Above Expectations, the following 25% as Meeting Expectations, and the lowest rating would be Needs Improvement or Requires Development.

The Blessings of Relative Ranking

Despite the points against relative ranking systems, there are perfectly valid reasons why some companies my use it:

  • Raising the Bar—One of the biggest advantages of any relative ranking process is that managers have the opportunity to meet and discuss the performance of their top employees on topics such as rewards, retention, career development, and succession planning. As such, ranking works best in a high-performance organizational culture that raises the bar for performance each year and expects constantly improving results.
  • Feedback—The honest feedback managers give to employees regarding their performance as a result of ranking meetings can be motivating, and it tends to reinforce an organization’s results-oriented culture.
  • Little Inflation—A forced distribution approach eliminates the tendency of managers to inflate ratings because they must have a pre-determined percentage of employees at each performance level. Lenient managers (the ones who tend to give high ratings) are brought in line with a normal performance distribution and managers that are hard graders are encouraged to recognize the top performers in their group.
  • Consistency—The ranking meeting helps managers to be more consistent across the organization in identifying and dealing with top performers and poor performers alike.
  • Fair Pay—In a pay for performance culture, the ranking system helps managers distribute pay increases, bonuses, and stock options more fairly based on a thorough evaluation method.

The Curses of Relative Ranking

  • Infighting—The most significant negative aspect of performance ranking is that it breaks down teamwork and morale. In this system, the performance of the individual is more important than the team. Employees know they’ll be compared to one another in ranking sessions, so the workplace can become very competitive. If that environment doesn’t fit your culture, that may spell trouble for your company.
  • Legal Ramifications—Not surprisingly, some organizations that have implemented relative ranking have faced legal ramifications. After giving inflated ratings to employees for many years, they’ve had discrimination lawsuits filed against them. These lawsuits were primarily from long-term employees who had been given above average or average performance reviews in the past and, due to a new ranking system, have received lower ratings.
  • Feeling the Churn—Some organizations use forced distribution of performance as a lifeboat drill to constantly drive out low performers. The constant churn of employees being driven out of the organization leads to high involuntary turnover and a higher cost of hiring and training new employees.

In the final analysis, you may not want to implement relative performance ranking if the organization does taut a high-performance culture already. And before you get any wise ideas, adding ranking to the performance management process won’t necessarily make your organization a high-performance company. In fact, it may undermine the performance tools you currently have in place.

However, if you’re interested in integrating performance ranking with other existing processes, such as identifying high potential employees, training and development opportunities, succession planning, and total rewards determination, then the blessings may outweigh the curses.

Note: If you enjoyed this article, check out my new bestselling HR book Pay Matters: The Art and Science of Employee Compensation.

© 2021 David Weaver. All rights reserved.