Rank And Fire

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June is nail-biting time at Enron Corp., a Texas energy and trading giant, at which managers assemble twice a year to evaluate and cull employees as if they were head of cattle. Wrangling behind closed doors for up to two days at a time, the bosses compare and contrast the performance of workers over the prior six months and rate them on a five-point scale, with the top 5% designated "superior" and the bottom 15% labeled "needs improvement." In between are "excellent" (30%), "strong" (30%) and "satisfactory" (20%). You don't want to be in the cellar: anyone described as needing improvement has six months to either get up to standard or scram.

Evaluations have always been one of the more conflicted aspects of organizational behavior. Employees fear getting bad ones, and many managers have a hard time handing out negative news, which deprives the subjects of a candid appraisal. Best-to-worst forced-ranking systems are the latest attempts by corporations to take a systematic, long-term approach to evaluations. The goal: a continually improving workforce.

Critics protest that forced ranking can be harsh and arbitrary. But that hasn't kept a growing number of companies from joining such firms as Enron, Ford Motor and Microsoft in adopting them. "What it all boils down to is who is in the room fighting for you," says an Enron worker who was cut from the herd. "I didn't have people there to talk for me, and I felt like I got screwed." Counters Craig Taylor, a manager in Enron's commodity-trading department: "You have to know where you stand, and I believe the system does an excellent job of doing that."

Whether they're fair or not, bell curve-like rating systems--which many employees now call rank and yank--have spread in recent years to some 20% of U.S. companies, and the trend is growing. They're particularly handy during periods of economic slowdown like the present one, when employees tend to cling to their jobs rather than retire or change positions. That lowers the normal rate of departures through attrition--which can run as high as 20% of a corporate work force when people feel like job hopping--just when companies are seeking to cut their costs to satisfy Wall Street. "People are hearing about friends who have been let go," says John Challenger, CEO of the Challenger, Gray & Christmas outplacement firm. "And they say, 'This is not the time to take a risk.'" So they stay.

Many companies were just as fond of ranking and yanking when times were good, since the threat of poor ratings and their consequences help concentrate the minds of workers. Or as Michael Loeb, a San Francisco expert in employment law, puts it, "You don't want companies where everyone's completely comfortable."

Perhaps not, but the forced-ranking systems have ignited legal firestorms. Recent lawsuits brought by past and present employees have charged Microsoft, Ford and Conoco with using the systems to favor some groups of workers over others--such as white males over blacks or women and younger managers over older ones.

Of course, top-to-bottom rankings also provide a method for identifying and rewarding strong performers and encouraging everyone to work harder and smarter. "Management has to lift everyone up, not just use the process to brand and target people," says Edward Jensen, a partner in the Atlanta office of Accenture, formerly Andersen Consulting.

Ranking and yanking is nothing new at Enron, which launched the system among its fiercely competitive wholesale-energy traders a decade ago and has since expanded it to cover all the Houston-based company's 18,000 employees. In a typically intense session, as many as 25 managers may gather around a conference table in a windowless room with a computer screen filled with employee rankings projected on one wall. Each participant comes armed with notebooks bulging with job reviews. As the discussion proceeds, the managers may shift people from one ranking to another, deciding their fate with the click of a computer mouse.

What makes this process less Star Chamber-like is that workers can turn in self-assessments and choose up to seven colleagues and clients to write evaluations on their behalf. Moreover, anyone in the company can voluntarily submit a review of anyone else's performance. All this makes Enron's approach "a lot less subjective and a lot less random," says Steve Kean, an executive vice president, because "it doesn't depend on the views of any individual supervisor."

What it does depend on is the willingness of managers to fight for valued employees during what can swiftly become a brutal horse-trading session. "Even if everyone did great," says the former Enron employee, "someone has to fall into the 'needs improvement' category."

Those who do fall into that category do not get bonuses and must sit down with a supervisor to draft a plan for performing better. Salvaging such workers is only prudent, Accenture's Jensen notes, because "it is the 25th man off the bench who may win the baseball game for you." For bench warmers who can't sweeten their swings or improve their fielding, though, the next steps are a severance package and a swift exit from the roster.

At Sun Microsystems, which ranks its 43,000 employees in three groups (20% are "superior"; 70% are "Sun Standard"; 10% are "underperforming"), the company alerts weak links to their tenuous status and provides one-on-one coaching to help redeem their performance. Sun CEO Scott McNealy is known around the company for saying the bottom 10% is where you "love them to death." But any workers who don't respond to McNealy's love are offered death in the form of "prompt exit" severance, which they turn down at their peril, since those who continue to be found wanting face dismissal without compensation.

Surprisingly, it's the employees in the middle rather than at the bottom of the scale who may feel the most demoralized by the forced-evaluation rankings. "People don't like to be considered average," Jensen says. To boost their sagging morale, he adds, management must reassure those in the middle group that they meet the high standards that the company expects.

For those who ace their evaluations, the rankings can swell their self-esteem and wallets, a prospect that makes Enron a hotbed of overachievers. (And profitable too: Enron has reported increased earnings in each of the past four years.) The ranking system "attracts hard drivers," Kean says. "The proof is in the pudding. Our employees are very talented, and they're glad to be working here." In its latest ranking of the world's most admired companies, FORTUNE rated Enron No. 1 in innovativeness and No. 2 in getting and keeping talent.

If competitive systems like Enron's have a weakness, it's that they can stir suspicion and discourage teamwork. If I help you, you'll get a better rank than I will. Challenger tells of a manager who recently had to rank all his people in preparation for a 10% work-force reduction. "It was agonizing," Challenger says, "because everyone in his department played a unique role." When such choices arise, he adds, "all the relationships instantly become strained."

In the same way, it makes little sense for managers to simply get rid of the lowest-ranking people in small groups of workers, since some groups can be much more productive than others. Even the bottom dwellers in a strong outfit may contribute more to a company than the top people in a weak one. Moreover, statistical rankings have little meaning within groups that are too small to generate a valid bell curve. If you have a group of five people, Jensen notes, "you have to take those five and put them into a larger pool" and compare all the workers to one another.

Penalizing the weakest member of a small group can be dangerous to a company's legal health. "If you do not have clear-cut differences, it is very difficult to justify laying off that person," says Paul Gregory, a Houston attorney who specializes in employment law. That's particularly true if the person had been told for years that his or her work was fine. "Part of the problem with rank and yank," Gregory says, "is that most managers were not trained to give honest evaluations, so no honest, critical history exists."

Ranking systems won't withstand much scrutiny if they reflect a manager's personal preferences rather than how well a worker has met company standards. Gregory calls it absurd for executives to tell middle managers to "choose those whom you would like to be on a desert island with"--a popular strategy at some companies--because the manager may promptly bestow a high ranking on friends, creating grounds for discrimination complaints. Indeed, if ranking and yanking is to have lasting value, employees from the mail room on up to the executive suite must be seen to be getting what truly is coming to them.