Thursday, July 12, 2012

Forced-Ranking: Does It Hurt the Company?

It doesn't matter the level of experience--analyst, associate, vice president or managing director.  Finance professionals everywhere are haunted when they must schedule performance reviews. They endure them twice a year.  First, a mid-year review takes place in mid-July. It sets the stage for the rest of the year, since year-end reviews flow from the tone set at the July session. In late December and early January, everybody--unless time mismanagement permits some employees to be overlooked or unless the employee has just joined the company--goes through the end-of-year review. The second-year associate has an appraisal session, as well as the experienced sector head. The frenetic, marathon efforts of an entire calendar year are capsulized in one rambling meeting that often peters out after about 45 minutes.

In financial services (at banks, boutiques, insurance companies, asset managers, trading firms, hedge funds and small broker/dealers), it's a way of life.

CFN last year addressed the flaws of performance reviews, the way they are conventionally conducted today. See CFN: The Dreaded Peformance Review, March, 2011. The posting highlighted one expert who called for the end of reviews that rely on rankings and ratings and recommends  different, more meaningful, more frequent evaluations. He criticized harshly the prevalence of the current ranking process--something finance professionals everywhere know well, where senior managers in evaluation committees sit cloistered for a day or two to rank employees (at the same level) from no. 1 to perhaps no. 100. A laborious, exhausting exercise, sometimes marked by bickering, emotions and fatigue. Often a political exercise, but essential, say senior managers, if bonuses will be disbursed on time and promotions granted.

Cut to summer, 2012.  Kurt Eichenwald, a business journalist formerly of The New York Times and now a contributor at Vanity Fair, proposes that it has been the "stack ranking" performance-appraisal system that is one factor that has tarnished the glow at Microsoft.  In the latest issue of Vanity Fair, Eichenwald analyzes why Microsoft, untouchable and revered in the 1990s and 2000s, might have lost its luster in the 2010s.  Its system of evaluating managers is one reason, he writes after a series of interviews with former senior managers.

Just as financial institutions and hedge funds rank bankers and traders from top to bottom twice a year and pay and promote people accordingly, Microsoft insisted employee-managers be rated and ranked annually.  Eichenwald describes excruciating sessions at Microsoft where managers shut doors and battle over who will reside in the top rungs and who will be shoved down to the bottom. Long, heated discussions occur, where managers sometimes make deals with each other about how to shuffle and re-shuffle the rankings. The scenes he describes are replicated all over Wall Street.

That system rewards outstanding performance at elite levels. But what is the lingering, lasting impact of such system on a business' culture? Eichenwald draws a few conclusions:

1.  The process "cripples innovation."  Employees, including senior business managers responsible for large business groups, suffer from having short-term views, a six-months approach to business, since every six months, they worry they will slide up or down the ranking ladder and, in an even shorter term, must do something about it. They manage their rankings ardently, and that effort takes precedent over managing the business through an economic cycle or in the face of tough competition.

2.  The process encourages a culture of "schmoozing and brown-nosing," he is told. Employee-managers are advised to "increase their visibility" among other senior managers (managers who rank) in order to become better known during ranking sessions. Employee-managers spend more time shaping the "buzz" about themselves.

3.  The process encourages employees to avoid working closely with talented people, where their weaknesses are easily exposed.  Often people who work with experts or experienced colleagues learn new skills and material and understand better a process, product, client or marketplace. With mentors working beside them, they have a chance to polish lagging skills and make progress. The system, Eichenwald was told, discourages working with experts, as weaknesses flare and can be readily identified.  Glaring, noticeable weaknesses, in this process, send employees down a shute toward the bottom of rankings.

4.  The process undermines efforts by all to meet corporate, group and personal objectives. Most professionals and employee-managers are asked to perform (or manage) to meet specific objectives. Those who meet objectives--even after encountering obstacles, unforeseen economic events, or other challenges--must still undergo forced rankings. An employee can meet all objectives, but still be ranked in the bottom tier and be subject to, possibly, to no bonus, no raise or even no job. Meeting objectives, Eisenwald says, then becomes "nonsense."

5.  Employees are sometimes not good-faith contributors to teamwork. They are "courteous," he reports what one manager tells him, "while withholding just enough information from colleagues to ensure they didn't get ahead of me in rankings."

He provides a startling example for how a ranking system can be flawed.  Suppose there exists a business-unit team including the following:  Steve Jobs (Apple), Mark Zuckerberg (Facebook), Larry Page (Google), Larry Ellison (Oracle), and Jeff Bezos (Amazon).

In July, each will be reviewed for mid-year appraisals. In December, they will be reviewed and rated for the entire year. But they must be ranked into three categories, regardless of performance, accomplishments, potential, vision, or innovation: one at the top rank, two in the middle, and one at the bottom. The one at the bottom receives no bonus and will be encouraged to leave the company within the next year. Into these buckets, from the list above, who goes where?

How then can the company endorse the process, if ranking forces the company to ask, say, Jeff Bezos to leave--regardless of his accomplishments or the revolutionary visions he may have in product innovation?  Does the company enforce the ranking policy? Or does it revise the system to permit five experts, visionaries, or potent performers to be rated on personal objectives and rewarded appropriately?

Eisenwald concludes from interviews that employees and managers worry less about the next generation of products; they take fewer risks with creative ideas, as they worry more about whether appraisal-committee managers will know them well enough to give them a boost up the ranks.

Microsoft, in the article, acknowledged it is finding ways to revise the flaws in the system.  In financial services, the system is still widespread.

Ideally, the mid-year or year-end review should be about recognizing achievement, highlighting development and articulating clear next steps. And it should be a futuristic discussion about the directions of both the employee and the firm and about what the employee can do to maximize performance, exploit his or her talents and contribute to the firm's long-term strategy.

Some companies and financial institutions argue the current system works, if it permits them to retain top talent.  Some argue they haven't found a better, more efficient way. The system is an easy way to appraise hundreds (or thousands?) of employees. Yet others will say it's plain inertia. Until companies find a better way, employees will often ponder obsessively what they can do in the last quarter of the year to out-shine others who they fear will climb above them in rankings.

And for some, these aren't idle thoughts.

Tracy Williams

See also:
CFN:  What Have You Done For Me Lately? Sept-2011

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