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The rank-and-yank appraisal system
Shyamal Majumdar |
April 25, 2003
Economic reform and the entry of multinationals in new industries brought with them new forms of employee performance appraisals. Many of them -- including the 360-degree evaluations -- have lost their novelty.
Recently, however, a new and controversial appraisal system is being discussed in HR circles. This involves replacing 10 per cent of the employees in your organisation every year as a matter of course. Believe it or not, around 20 per cent of the companies in India -- mostly multinationals -- have already put such a ranking system in place.
The leading practitioners of this kind of ranking abroad include Microsoft, Ford, GE, PepsiCo, Coke, Cisco and Sun Microsystems, but few companies in India are willing to talk about it openly since the forced removal of a substantial number of employees as an annual exercise is still a highly sensitive issue in a country where retrenchment is still to find full acceptance.
Some call it the 'rank and yank' strategy, others term it an 'up or out' policy while Jack Welch of GE has termed it the 'vitality curve'.
Here's how it works. Senior managers of every department have to compulsorily rank employees in a 20:70:10 ratio.
While the top 20 per cent are the high fliers who must be retained at all costs, the middle 70 per cent are the standard performers who are critical to the company's operational success and should get handsome rewards. At the bottom is a 10 per cent band of under-performers who are asked to leave.
This exercise must be followed every year. For example, even if a manager finds that all employees in his department have performed above par, he has to still follow the 20:70:10 ratio so that 10 per cent of the total staff can be asked to quit.
The chief of a human resource consultancy firm, which advises at least two multinationals in India on this policy, says this kind of annual ranking system produces a hotbed of over-achievers who increase the overall calibre of an organisation. "Ultimately, a company prospers only if there is a Darwinian struggle where only the toughest individuals survive," he says.
An HRD manager of a company that has implemented the model feels it's a great churn management concept and ensures that the organisation has fresh ideas and fresh faces. The older an organisation becomes, the greater is the need for retaining a fresh mindset, he adds.
The most high-profile support for the system came from Welch. Talking about how to jolt a business to life, Welch said year after year, forcing managers to weed out their worst performers was the best antidote for bureaucracy.
One of the biggest stumbling blocks for a smooth implementation of the system, however, is the reluctance of managers to play God year after year specially if it leads to job losses.
In fact, under this system, any manager who fails to identify people in the under-performing category will find himself identified as a prime candidate for the axe.
Detractors say it is a difficult system to follow, specially in the Indian context. For multinationals operating in India, it's different. They have the wherewithal to follow the statistical rigours that this system requires. But for Indian companies, a blanket shape up or ship out policy will not work.
The other line of argument against it is as long as there is a status quo, things are fine, but once new technology or competition emerges and there is a serious crisis, such companies are overwhelmed by the turn of events with few committed employees around to handle the situation.
Also, the criteria for rating can range from specific and objective to fuzzy and subjective. Many Indian companies feel that a ranking such as this can be devastating to the morale and trust of an organisation.
Amid all this confusion, what should Indian companies do? A leading HR consultant says corporations willing to adopt an annual exercise must ask the following questions that have been suggested by AHI's Employment
Law Centre in the US: Do you have sufficient evidence and is it well documented? Is your action fair? Have you asked any objective third party for their views on whether your action is fair and reasonable?If your answers are yes, go ahead. The vitality curve or the rank-and-yank method may just be the right fit for you. But if the answers are in the negative, you are advised to stick to your old-fashioned performance ranking system to avoid ending up in a messy situation later.