Advantages & Disadvantages of Employee Ranking Tools

Ranking, also known as forced ranking or stacking is a type of performance evaluation that sorts set percentages of employees into specific categories based on how well they are performing compared with their peers. The idea is to discover the top performers, who are then rewarded, and weed out the bottom performers, who are put on performance improvement plans or fired.

What Is the Force Ranking Tool?

As far as workforce management tools go, forced ranking is one of the most controversial. With this type of performance appraisal, managers pit similar employees against one another using person-to-person comparisons. The result, at least in theory, is a list or hierarchy of employees in ranked order from the best-performing to the worst-performing employees. This tells managers how employees are performing relative to their peers.

How Does the Ranking System Work?

With a traditional ranking system, an employee's performance is compared with that of other employees against whatever criteria the organization chooses. Ideally, these criteria are specific and quantifiable. For example, a company may rank its sales employees based on new clients signed up or sales per quarter.

Sometimes, a company uses multiple measures of performance – number of hours billed or number of appeals won, for example. With this method, the ranking system adds the numbers to give an overall rating that then serves as the basis for ranking the employee.

Ultimately, employees are sorted into one of three categories.

  • The A players: The top 20 percent of employees are the stars who will lead the company in the future. The company rewards them with raises, promotions and development training.
  • The B players: The middle 70 percent are the sure-and-steady workers who turn up and do a good job but are not regarded as future leaders. They may receive smaller pay raises and strategies to improve in weak areas.
  • The C players: The bottom 10 percent are the worst performers. They may be performing badly in a team of competent people, or they may be performing competently in a team of excellent people. Either way, they usually are given no rewards or pay raises and may be put on performance-improvement plans, managed out of the organization, or fired.

Who Uses Forced Ranking Performance Evaluation?

Many companies use ranking systems, partly due to Jack Welch, the General Electric CEO, who wholeheartedly encouraged the practice of ranking employees each year and then firing the bottom 10 percent. In the 1980s, Welch suggested that forced ranking was a key part of GE's exponential growth.

More recently, Yahoo used forced ranking as an alternative to mass layoffs, and Uber famously built a culture on a forced ranking system that favored achieving revenue targets over everything else.

These headline-grabbing examples aside, there is evidence to suggest that ranking is falling out of favor. A study by the Institute for Corporate Productivity found that the number of organizations using forced ranking fell from 49 percent in 2009 to 14 percent in 2011. More recent figures are hard to come by, but a sizable chunk of businesses seem to be moving away from forced ranking, and the practice is slowly moving toward obsolescence.

There are both advantages and disadvantages of using forced ranking as a performance measure.

Advantage: Identifies the Top Performers

The main advantage of the ranking appraisal method – and the reason it was developed in the first place – is to quickly identify who is top of the class in terms of meeting the company's key goals. This allows managers to focus their development efforts on the people who have the most potential and to develop incentive programs that motivate these star performers to stay with the organization.

Advantage: Improves Productivity and Profitability

If, like Jack Welch, you get rid of the bottom 10 percent of workers who aren't contributing much, over time the quality of the workforce improves. You're getting rid of the people who don't add value, which frees up space for talented junior staff members to rise through the ranks.

For the top performers, being recognized and rewarded for having a fabulously productive year encourages them to repeat that performance over and over again. This results in high productivity and profitability for the organization.

Advantage: Forces Managers to Think About Their Own Behavior

The act of having to rank employees forces managers to think hard about the contributions that each individual makes. However, the exercise should go much further and force managers to reflect on their own role in the employee's performance by answering specific questions, such as:

  • Did the manager provide training to one employee but not another?
  • Did someone start with better qualifications and experience and then perform better as a result?
  • Has someone been given the benefit of the doubt?
  • Does the ranking reflect or reinforce existing biases or have personality clashes impacted the results?
  • Has the manager been complacent or nepotistic?
  • Was there a level playing field?

These reflections are not going to help an underperforming employee who is forced out or neglected as a result of his low ranking. However, if the exercise uncovers uncomfortable truths about the way that performance is managed and the organization takes steps to eradicate its biases, then arguably the ranking system has served a valid purpose.

Disadvantage: Thrive or Die

Almost by definition, the ranking system creates a cutthroat work environment that favors competition over teamwork. This is not good news. When employees know they're pitted against one another, they may engage in risky or unethical behavior to beat out the competition. For example, employees may refuse to collaborate, share ideas, or help their colleagues. They might cheat, sabotage co-workers, hoard resources, or steal another's ideas and pass them off as their own.

For the business, there's a fair chance that this heads-down, narrow focus will hurt the bottom line. Competition makes people focus absolutely on the tasks they're being assessed on. Workers may be too worried to ask for help in case they are identified as low performers. As a result, they stop improving, innovating and collaborating, and they also stop bringing their best selves to the job. The business suffers as a result.

Disadvantage: High Stress and High Turnover

Living with the sword of Damocles over your head is stressful, and the business could end up sleepwalking into a situation of burnout, absenteeism and high staff turnover. It's demoralizing to see a percentage of your colleagues miss out on a pay raise each year and even more demoralizing to know that next year, it could be you. Employees are unlikely to perform their best in this type of environment. Many will leave and look for positive work experiences elsewhere.

Disadvantage: May Not Improve Performance

By definition, ranking people from top to bottom means that 50 percent of your workforce is always rated as below average. That's the fatal flaw with ranking systems: Someone has to sit at the bottom of the tree even if they're pretty good at their job.

For a ranking system to work, you need to ask the question, "If I got rid of the worst performer, would her replacement be any better?" In other words, are the weakest performers holding the business back? Is there a pool of talented job seekers or are there any up-and-coming junior employees who would do a better job?

If the answer to that question is yes, then there may be a benefit in ranking your employees. If the answer is no, such that even your lowest-ranked employee is performing better than all the other candidates out there, then there is no business case for ranking your people.

Disadvantage: Doesn't Unleash the Talent in People

Good human resources practices focus on attracting the best people and then getting the best effort from the people you hire. Businesses must play their part in nurturing talent, and there's plenty of evidence to suggest that businesses who train and develop their people unleash the potential within them and reap the productivity rewards.

Ranking systems do not allow for human development. Rather, they are static appraisals that judge people on how they are performing now based on specific criteria and not on how they could perform with the proper mentoring and guidance. This attitude is potentially corrosive. It ignores the existence of transferable skills, and you might end up firing a raw talent who could, in time, go on to be a superstar when given the right development.

Disadvantage: Loses Effectiveness Over Time

You cannot go on cutting the bottom 10 percent of performers year after year because, at some point, you have cut enough staff. Ranking may be useful as a one-time exercise to separate the wheat from the chaff, but eventually, the ranking system loses its effectiveness as the poor performers go and all that is left is an organization full of A and B players, relative to the rest of the market.

Should You Adopt a Ranking System?

There are more cons than pros associated with a ranking system, but that doesn't mean you shouldn't adopt one. It depends on the type of organization you run, how competitive the culture is, and whether you have measurable and objective criteria on which to base your rankings. Typically, for a ranking system to work, you must have the following in place:

  • Precise criteria to compare employees: Ranking criteria should be objective and measurable, such as money earned or clients referred, not subjective like is good with clients or is a team player
  • A second pair of eyes: There's no point having a ranking system if your top-ranked performer got there by sabotaging her colleagues and generally having a negative effect on those around her. There needs to be a check in the system that combines the ranking system with other performance measures to get a more holistic view.
  • Narrow job descriptions: Ranking works if nothing else is expected of the employee other than to perform the narrow criteria you use to assess them. If they have other duties, such as keeping customers happy or supervising junior staff members, then it is grossly unfair to rank the employee on only one, narrow aspect of his job.
  • A cutthroat environment: If you want to create an environment of competition inside the workplace, then ranking should work just fine. However, if the aim is to have your employees work together and help one another, then another method for measuring performance is preferable.