AIG installs forced-ranking incentives

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  KipEsquire said,

  The Wall Street version of this is the gobbledygook “rank” system. If there is little or no substantive (i.e., $$) difference between an “Executive Director,” “Director” or “Associate Director,” then promoting one peer but not another (often necessary due to management-imposed quotas, etc.) accomplishes nothing but to humiliate the not-promoted and foster bitterness.

  See also, “Who gets the three-windowed office?”

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  Jeffrey Deutsch said,

  Hello,

  I’ve sat on all sides of the desk. I’ve been let go from more than one job due to underperformance, and have also taught Managerial Economics on the MBA level. Now I’m a career coach.

  I understand your complaints regarding forced ranking; unfortunately I do not believe that substituting objective goals solves these problems.

  First off, in a competitive economy we may be able to avoid the name of forced ranking, but never the reality.

  Suppose we ditch forced ranking and use fixed performance standards. Where do you think these standards come from? Competition. Any firm – at least in a free market – needs to keep up with its competitors to survive. So competitors’ employees performance necessarily serves as a benchmark.

  And how does the firm elicit the best performance from its own teams to keep up – or even discover
  what its people are capable of? Competition (either individual- or team-based).

  So if a firm decides to ditch (explicit) forced ranking, it’s going to need to rely on “fixed” performance goals. They’re going to be set as high as they need to be in order for the firm to survive, and in all probability that’s going to be too high for a significant number of employees.

  Even if everyone in the firm happens to reach the goal set by competitors, maybe the firm might like to be a little bit ahead of the competition. It kind of helps to have an extra margin in a competitive market – especially when the economy is this bad (and not expected to get better anytime soon). If everyone can met the standard, I’d say at least maybe three out of four could meet a significantly higher standard.

  So, either way, instead of being told “Eight out of ten people here do better than you, so you’ve got to go,” people will be told “You failed to meet this goal – which is driven as high as it is by seven or eight out of ten people here, not to mention perhaps seven out of ten of our competitors – so you’ve got to go.”

  To-MAY-to, To-MAH-to. So-called objective standards are driven by competition.

  You mentioned destructive office politics. Unfortunately, supposedly objective standards are political battlegrounds…and always will be. People manipulate standards to promote those they like and discredit those they hate. People also can just as easily manipulate the facts about performance under objective goals as under forced ranking.

  Reducing destructive office politics (not a redundancy, as I’m sure you know) can take place under forced ranking just as well as under fixed goals.

  You can, up to a point, reduce the influence of office politics on performance (though it takes a bit more than phrases like “rewards for teamwork”). Trust me, people have plenty of occasions for destructive competition under any kind of evaluation system, and always will until scarcity itself is abolished. “Table for two, Mr. Wolf and Ms. Lamb? Right this way.”

  Not to mention that many firms have forced ranking for just the reason you have pointed out: bosses don’t have the guts to give some people the unfavorable evaluations they deserve. All too often, they give everyone “satisfactory” scores, and maybe a couple of stars get “excellent” scores. Sometimes forcing bosses to mark some people “unsatisfactory” is the only way to smoke out the underperformers – especially in larg organizations where top management has to rely on managers’ evaluations for personnel decisions.

  In competitive markets – let alone when the economy is like this – letting everybody slide is a luxury organizations can’t afford. Bosses who lack the guts to give people honest feedback need to be shown the door right alongside the underperformers they’d been shielding.

  The operant term here is honest feedback. Some bosses just do it dishonestly, by waiting for layoffs and then just tossing the underperformers out. Then (1) they don’t have a fair chance to see what’s wrong and improve and (2) they lose their jobs at the worst time…when so many other people are losing theirs and fewer businesses are hiring.

  (It could be argued that at least they can tell prospective employers that their jobs were eliminated. However, savvy HR people and hiring managers understand that layoffs and restructurings are favored ways of getting rid of hiring mistakes. If the company or jobsite itself isn’t being shut down, and the process isn’t strictly driven by seniority, a smart interviewer will wonder “Why were you laid off and not others?”)

  Or bosses use political games that destroy the underperformers’ and possibly other people’s morale in their secret efforts to do what they need to do in any case.

  Or of course the underperformers can stay no matter what…and then they’ll have plenty of company pounding the pavement when the firm folds.

  Now, there are better and worse forced ranking systems. You have a good point about keeping teams together, and maybe forced ranking can apply to teams, not individuals.

  Individuals can then be ranked by the ranks accruing to the various teams to which s/he belonged. Also, teams themselves can come up with collective evaluations of each member’s performance, by giving each member a percentage share of the whole team’s performance – and those shares can all be equal if the team feels that way.

  Also, Jack Welch (GE’s longtime CEO)’s original standard – 20% stars, 70% good workers and 10% shape up or ship outs – seems to me much better than placing 70% of workers in the lower two out of four categories, as in AIG’s case. Unless your hiring and retention have gone seriously wrong, the large majority of workers should have no more categories above them than below them.

  What do you think?

  Jeff Deutsch

  PS: KipEsquire pointed me to your piece.

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  Scranton Joe said,

  Ah, organizational politics. I remember it well. I don’t know that anything can get rid of it, but it sounds like a forced ranking system, if it’s not communicated (and maybe if it is) doesn’t help.

  Disclosure: I was in a system that could be called “soft forced ranking.” We spent as much time trying to look good as we did trying to be good.

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  Marc Hodak said,

  Jeff,

  Thanks for your thoughtful comments.

  I have nothing against high standards, standards that I know not everyone will be able to meet, or letting people know that they are failing to meet them. I just don’t think it’s productive to tell people: “you’re in a zero-sum game with your peers.” It’s hard enough to get people working as a team without throwing artificial divisions in the way. Maybe it’s a product of the smaller organizations I’ve been a part of for most of my career.

  Welch probably believed that a lot of deadwood had accumulated at GE, and needed a mechanism to insure that they had adequate turnover in getting rid of them. Maybe AIG does, too.

  But I’d rather tell them that our competitors will set the standards (which we’ll exceed, or else), and signal that if everyone is great, they will be rewarded with the rest of the team. I can usually make that offer honestly. And when economic conditions have forced me to let someone go, I was usually able to honestly explain my choice in terms of the particular mix of talent I need to keep, rather than that person being a lesser performer.

  Thanks again for dropping by. If you know Kip, say Hi for me.

  Marc

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  Jeffrey Deutsch said,

  Hello Marc,

  I appreciate your wanting to avoid destructive competition. Indeed, after reading your story about Red Auerbach, I can definitely understand your taking a dim view of using metrics to pit team members against each other.

  My point is that while destructive competition is not an oxymoron, as I’m sure you’ll agree it’s not a redundancy either. And if people don’t spur each other to higher achievement, the firm is likely to wither and die.

  When you talk about letting your competitors set the standard and being willing to reward all workers who meet it: Keep in mind that your competitors are probably much less charitable than you at least claim to be. In other words, the smart money is that those standards are set high enough that a significant portion of their workers don’t meet them.

  How sure are you that your workers (1) on average are better than any of your competitors’ and (2) will stay that way even without serious internal competition (read: without their jobs on the line if they let most of their co-workers outperform them)?

  You yourself said that you have no problem setting standards that you know not everyone can meet. How exactly is setting a standard which you figure at most 90% can meet different in principle from forced ranking where the lowest rank comprises 10% of the workers? Either way the bottom 10% get the boot.

  In any case, even switching to objective goals won’t eliminate destructive peer-peer competition or destructive supervisor-worker games, as I mentioned. Workers will always compete to overfulfill the quota, and bosses (and co-workers too) will resort to various means to bring into line or get rid of workers who bring the team average down.

  My point about evaluation standards still holds true: In many firms the managers have a bad habit of giving everyone “satisfactory” ratings (and maybe a couple of stars “excellent” ones), so that if they’re not forced to rate a given percentage lower than others the underperformers will drone on?

  Whatever GE’s own experience may have been, it bears noting that I learned of Jack Welch’s plan from his book Winning. He obviously thinks managers everywhere should seriously consider it, and I greatly respect his credentials.

  All this having been said, far be it from me to argue with your experience. You obviously have been able to run a successful business without pitting employees against each other, and I congratulate you. I ask that you in turn please understand that many other managements don’t have that luxury, for reasons I explained in my previous comment.

  Keep up the good work, Marc!

  Cheers,

  Jeff Deutsch

  PS: I do indeed know Kip – in fact, he was my Economics TA – and I’ll give him your regards.

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