Why Employee Ranking Systems
Lead To Disaster
What is more perplexing is the continued use of ranking methods
to evaluate employees. Ranking employees, particularly for
determining promotion, and pay, or even for providing developmental
feedback simply makes no sense. It is not a neutral process, or just
a costly process--it is a recipe for disaster. This month we look at
why this is so. (Next month we will take on the use of rating systems).
Rankings In Appraisal
The core element of the use of rankings is that employees are
compared to each other, and given some number that supposedly
indicates whether they are better than, about the same, or less
effective than their colleagues. That ranking is often used to
determine who will receive pay raises from a limited pool of money,
or for other decision-making processes.
The criteria for ranking can range from specific and objective to
totally fuzzy and subjective. For example, it is possible to rank
sales staff objectively, in terms of the sales generated in a year,
and identify the top salesperson, the next best, down to the
bottom based on some reasonably meaningful numbers.
Or, one can rank people on a set of fuzzy criteria such as
"gets along well with team members".
The Arguments In Favour
There are only a few arguments to support the use of rankings
in any plausible way. The major argument appears to be
that ranking employees versus each other creates a situation
where competition can be encouraged--the assumption being
that if staff compete with each other they will push each other
to greater productivity.
The second argument is more administrative. Organizations
that rely on merit assessments for decision-making on
pay levels and promotions need to decide who will get what.
Proponents of ranking systems suggest that rewards for
productivity should go to the top performers as defined by
comparison with their peers. So a ranking system allows
organizations to decide to reward the "top 25%" or the
"top 10%". On the surface this makes some sense.
Given a limited pool of rewards, shouldn't the rewards
go to the top performers in the organization? We'll see.
The Arguments Against
Let's counter the administrative argument first. We want
to reward people for the value they contribute to the organization
(however that might be defined). The catch is that a ranking
system doesn't do that. It rewards for being better than
one's peers, and that's a very different thing. The easiest
way to show this is to look at an example. We are going
to use a sales example with rankings by total yearly sales,
because that's a best case scenario, since we can measure
sales objectively. If ranking systems don't make sense there
when we have good data to guide the rankings, they aren't
going to work with more fuzzy ranking criteria.
Let's take a small group of five people with sales figures
as follows:
Bob $25,001
Ken $25,000
Mary $24,000
Barb $23,000
Fred $20,000
Our system calls for rewarding the top 20% (one of the staff)
with a significant pay raise, while giving a small "average"
reward to the middle 60%, and giving no reward at all for the
person at the bottom.
Bob gets a big raise while Ken, Mary and Barb get a little,
and Fred receives nothing. Does this make sense? No.
If we look at the figures, we see that we are rewarding Bob
for his ability to be one dollar better than Ken. In fact the
difference among all of the salespeople is small...and this isn't
surprising since we assume a reasonable job selection process
where only the best are hired and retained. So what we are
doing here is making important decisions based on almost no
differences in production because our "system" specifies that
we must reward the top 20% with no room to evaluate the
absolute contributions.
Apart from the fairness of this, what effect might it have on the
performance of Ken and the others?
But here's the real kicker. Let's look at the value that each of
these people contribute to the organization. Let's assume that
each of the sales staff draws a base salary of $30,000 a year.
When we look at the absolute value of each staff member,
we see that NONE of them are adding value. They are costing
the company more than they are earning. Under a strict ranking
system we would still be obligated to pay that top performer his
raise, even though Ken is simply the best of the really lousy!
Ranking systems don't assess value and contribution, even in
a best case scenario.
The other argument put forth is that ranking systems encourage
competition, and that is probably true. The error with this
argument is that it assumes that competition will lead to increased
productivity, and increased success for the larger organization.
This is rarely the case. Why?
Quite simply, we tend to get the kinds of behaviour we reward.
We can set up a system with good intentions, but unintentionally
encourage behaviour and actions we don't want. Ranking systems
(and related reward systems) allow for two ways to "win" extra rewards.
The first, and the one we would like to see most is for people to
work harder, better and smarter and become more productive.
By being more productive they can vault over their lesser performing
colleagues to receive additional rewards. The second possibility is
to contribute to degrading the performance of those competing
for the same reward. An employee can vault into the upper echelons
of ranked performance by helping others do worse.
This is certainly NOT what we want.
While it is only the most cut-throat employees who will deliberately
attempt to reduce the effectiveness of colleagues, the use of
ranking and related rewards does push even "nice" people
into doing things damaging to the organization.
If you reward based on relative ranks, you encourage:
- hoarding of resources so they are "there when needed"
- with-holding of information
- reduction of team-work and helping others
- and generally self-centred and self-serving actions.
Other Considerations
1) While ranking may seem to provide an objective means of
evaluating (since it can be used to assign numbers to people),
the rankings themselves are only as good as the criteria used
for ranking. They can be extremely deceptive, making it appear
that there is an objective valid evaluation process going on when,
in fact, there isn't.
2) The value of an employee RELATIVE TO PEERS, is irrelevant to
the success of any organization. It matters not a bit whether a
person is the best or the worst. What does matter is their absolute
contribution to the goals of the organization. Ranking doesn't
improve organizations. It only classifies people and does not
reflect the actual value of employees.
3) As a form of feedback ranking is virtually useless. If our goal
is to develop people, we need to provide specific concrete feedback.
Informing someone that they ranked in the top (or bottom)
twenty-five percent on something may send some sort of message,
but tells the recipient virtually nothing about how to improve.
4) Ranking can be devastating to the morale and trust of an
organization. Because it is difficult to rank objectively, employees
will almost always disagree with a ranking that places them
anywhere but in the top percent in the organization. Employees
often perceive the process as unfair and arbitrary. Research has
shown that the large majority of people believe they are above
average in job performance. Ranking guarantees disagreement.
5) Finally there is the issue of comparisons. In today's work world,
even people with the same job titles in the same "shop" may be
doing very different jobs and contributing in very different ways.
How is it possible to compare someone who functions as an
informal workplace leader to someone who is technically talented
but interpersonally unskilled? Both contribute in their own way.
It really is like comparing apples and oranges.
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