Vitality curve

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A vitality curve is a leadership construct whereby a workforce is graded in accordance with the individual productivity of its members. It is also known as forced ranking, forced distribution, rank and yank, quota-based differentiation, and stack ranking.

For example, there is an often cited "80-20 rule" — also known as the "Pareto principle" or the "Law of the Vital Few" — whereby 80% of crimes are committed by 20% of criminals, or 80% of useful research results are produced by 20% of the academics, and so forth. In some cases such "80-20" tendencies do emerge, and a Pareto distribution curve is a fuller representation.

Rank-based employment evaluation[edit]

Jack Welch's vitality model has been described as a "20-70-10" system. The "top 20" percent of the workforce is most productive, and 70% (the "vital 70") work adequately. The other 10% ("bottom 10") are nonproducers and should be fired.[1][2] Rank-and-yank advocates credit Welch's rank-and-yank system with a 28-fold increase in earnings (and a 5-fold increase in revenue) at GE between 1981 and 2001.[citation needed]

Straight from the Gut[edit]

In Straight from the Gut, Welch says that he asked "each of the GE's businesses to rank all of their top executives". Specifically (in accordance with the 20-70-10 model) the top executives were divided into "A", "B", and "C" players. Welch admitted that the judgments were "not always precise".

"A" players[edit]

"A" players, Welch claimed, are

  • filled with passion
  • committed to "making things happen"
  • open to ideas from anywhere
  • and blessed with lots of "runway" ahead of them,
  • have charisma, the ability to energize themselves and others,
  • can make business productive and enjoyable at the same time.
  • and exhibit the "four E's" of leadership:
    • very high Energy levels
    • can Energize others around common goals
    • the "Edge" to make difficult decisions,
    • the ability to consistently Execute, or deliver on their promises

"B" players[edit]

The vital "B" players may not be visionary or the most driven, but are "vital" because they make up the majority of the group.

"C" players[edit]

"C" players are nonproducers. They are likely to "enervate" rather than "energize", according to Serge Hovnanian's model. Procrastination is a common trait of "C" players, as well as failure to deliver on promises.

Consequences[edit]

Welch advises firing "C" players, while encouraging "A" players with rewards such as promotions, bonuses, and stock options. However, if such rewards become a meaningful portion of “A” player's overall compensation, it can lead to perverse incentives. This is especially true when the rewards of being an “A” player are predictable and recurring (such as a normal part of the annual review process). When broad based stock compensation is the norm, like in high-tech,[3] avoiding perverse incentives can be difficult.

Turning promotions into pay cuts[edit]

When the rewards given to "A" players are significant, accepting a promotion has added risk. For example, consider an employee who is “A” rated at a their current job level. When promoted to the next level, they continue to perform at their exemplary level. But due to higher expectations, the employee may become “B” rated. If the performance based rewards prior to promotion exceed the raise accompanying the promotion, the promotion is an overall reduction in compensation. This creates an incentive for the employee to refuse promotions.

Encouraging sabotage[edit]

The vitality curve creates incentive for employees involved in hiring of peers to avoid the best candidates. The personal impact of adding excellent coworkers is more competition at the “A” end of the curve. It is in the individual's personal interest to seek out candidates skilled enough to retain their job, but not skilled enough to excel. This helps to fill the quota of “C” rankings, and makes themselves rank better. This incentive grows over time as sub-par talent is removed, since it becomes increasingly difficult for good employees to obtain good ratings. Simply “working harder” is an unreliable strategy for obtaining good ratings if everyone is doing it.

Criticisms of rank-and-yank[edit]

The model assumes that the players do not change their rating. In practice even the fear of being selected as a "C" player may result in an employee working harder, reducing the number of "C" players.

Some critics believe that the 20-70-10 model fails to reflect actual human behavior.[4][5] Among randomly selected people assigned to a task, such a model may be accurate. They contend, however, that at each iteration, the average quality of employees will increase, making for more "A" players and fewer "C" players. Eventually, the "C" players comprise less than 10% of the workforce.

The style may make it more difficult for employees to cross rate from one division to another. For example, a "C" employee in a company's Customer Service division would be at a disadvantage applying for a job in Marketing, even though he or she may have talents consistent with an "A" rating in the other division.

This is a competitive model of organization. The criticisms of both the morality and actual effectiveness of such a dog-eat-dog method of social cohesion apply. Challenges to the model include: "C" player selection methods; the effect of office politics and lowered morale on productivity, communication, interoffice relations; and cheating. Rank-based performance evaluations (in education and employment) are said to foster cut-throat and unethical behavior.[6] University of Virginia business professor Bruner wrote: As Enron internally realized it was entering troubled times, rank-and-yank turned into a more political and crony-based system.[7]

Rank-and-yank contrasts with the management philosophies of W. Edwards Deming, whose broad influence in Japan has been credited with Japan's world leadership in many industries, particularly the automotive industry. "Evaluation by performance, merit rating, or annual review of performance" is listed among Deming's Seven Deadly Diseases. It may be said that rank-and-yank puts success or failure of the organization on the shoulders of the individual worker. Deming stresses the need to understand organizational performance as fundamentally a function of the corporate systems and processes created by management in which workers find themselves embedded. He sees so-called merit-based evaluation as misguided and destructive.

Companies utilizing this management philosophy[edit]

Management consulting[edit]

Rank-and-yank-like models are common amongst management consulting firms, including public accounting firms (e.g., the "Big Four"), often referred to as an 'up or out' approach to evaluations. Specifically, McKinsey, BCG, and Bain use an 'up-or-out' model with their staff: if employees are not promoted after a certain length of time at their existing career level (usually no more than 2–3 years), they are 'counselled out' of the firm (shorthand for being fired—but on generous terms).[8]

Once a year (twice a year in the UK), Accenture consulting employees are rated based on their performance into one of five rankings at their career level.

This system promotes vitality in the firm, theoretically allowing only the strongest performers to reach leadership positions. In practice, however, this system has a tendency to dilute leadership, as individuals who may be better oriented toward upper management and executive positions leave the firm before promotion to those levels is possible. Additionally, due to extraordinarily high levels of employee attrition, Accenture is built on the need for enormous recruitment, particularly at the entry level. If, for some reason, the firm was no longer able to recruit the enormous number of graduates it requires each year—or was unable to attract a high quality of graduate—this model would falter.[citation needed]

General Electric[edit]

GE is by far the most famous company to utilize this form of corporate management. However, since Jack Welch's departure from the company, less emphasis has been placed on eliminating the bottom 10% and more emphasis placed on team-building.[9]

Enron[edit]

Enron traders also commonly were under the threat of being fired if they did not produce the desired results. Though the accounting scandals are most credited with the demise of the company, it has later come out that part of the downfall was attributed to employees inflating results in part to help protect their jobs. More about this can be seen in the movie Enron: The Smartest Guys in the Room.

Motorola[edit]

Motorola instituted a Vitality Curve plan in the mid-90's under the name IDE (Individual Dignity Entitlement). First six, then nine metrics questions were used to rank employees' perception at the corporation. In 2000-2002, the plan was changed to the PM (Performance Management) program, which was a direct 10-80-10 philosophy and used to "weed out" the lowest producers and reward the highest producers, while offering little to no rewards compensation to the mid-level producers. Some 50,000 employees globally were cut from the Motorola global workforce between 1995 and 2005, and many of these can be attributed to the Vitality Curve. Economics also played a major role, as the stock suffered major losses in the same period.

Dow Chemical[edit]

Dow Chemical uses a Vitality Curve program as part of its Performance Management. The program started in 2005 with mixed results.

IBM[edit]

IBM has used a Vitality Curve program (known as "PBC", or Personal Business Commitments) since before 2006. While often used to shift workforce to geographical areas with the lowest compensation, its main purpose is to provide the appearance of objective performance-related reasons for eliminating staff, when the real motivation is cutting expenses. The PBC process starts with a corporate distribution target which is applied at the lowest levels of the hierarchy and then iteratively applied through the higher levels. The process involves meetings where managers compete for a limited number of favorable rankings for their employees. An employee's rating is thus dependent not only on the manager's opinion, but also on the ability of the manager at “selling” and how much influence the 1st line manager has on the 2nd line manager (for example, if the 1st line manager is rated highly, that manager's employees are more likely to be ranked highly).[10][11][12]

Yahoo[edit]

Yahoo CEO Marissa Mayer instituted its "QPR" (quarterly performance review) system in 2012, using the rankings: Greatly Exceeds (10 percent) Exceeds (25 percent), Achieves (the largest pool at 50 percent), Occasionally Misses (10 percent) and Misses (five percent).

In a new version for the fourth quarter 2013, sources said, those percentages are changing, but only at the discretion of leadership within the units: Greatly Exceeds (10 percent), Exceeds (35 percent), Achieves (50 percent), Occasionally Misses (five percent) and Misses (zero percent).

This new evaluation system has resulted in 600 layoffs in the fourth quarter of 2013. [13]

Companies utilizing but later abandoning this technique[edit]

Microsoft[edit]

Starting in 2006, Microsoft began to use a Vitality Curve despite intense internal criticism.[14] Who da'Punk an anonymous blogger internal to the company, made "the curve" a frequent topic on his blog Mini-Microsoft.[citation needed]

In a memo to all Microsoft employees dated April 21, 2011, chief executive Steve Ballmer announced the company would make explicit the Vitality Curve model of performance evaluation: "We are making this change so all employees see a clear, simple, and predictable link between their performance, their rating, and their compensation." [15] The new model had 5 buckets, each of a predefined size (20%, 20%, 40%, 13%, and 7%), which management used to rank their reports. All compensation adjustments were predefined based on the bucket, and employees in the bottom bucket were ineligible to change positions, since they would have the understanding that they might soon be yanked.[citation needed]

On November 12, 2013, Microsoft announced it was abandoning the practice.[16][17]

Since the 2000s, Microsoft used a stack ranking similar to the vitality curve. Many Microsoft executives noted that company "superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings". It has been said that this stack ranking stifled innovation, as employees were more concerned about making sure that their peers or rival projects failed instead of proposing new inventions, overall turning the company into a collection of non-cooperating fiefdoms which was unable to catch onto many technology trends.[18]

See also[edit]

References[edit]

  1. ^ Jones, Del (April 18, 2005). "Let people know where they stand, Welch says Ranking workers pays, former GE chief says". USA Today (5B). Retrieved 2009-09-09. 
  2. ^ Murray, Alan. "Should I Rank My Employees?". Wall Street Journal. Retrieved 2009-09-09. 
  3. ^ http://www.nceo.org/articles/employee-stock-options-factsheet
  4. ^ Sedam, Scott (June 1, 2005). "Rank and Yank: The curious legacy of Jack Welch". Retrieved 2009-09-09. 
  5. ^ Johnson, Gail (May 1, 2004). "Forced Ranking: The Good, the Bad and the Ugly". Retrieved 2009-09-09. [dead link]
  6. ^ Callahan, David (2004). The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead. Harvest Books. p. 384. ISBN 0-15-603005-5. 
  7. ^ Streitfeld, David; Romney, Lee (January 27, 2002). "Enron's Run Tripped by Arrogance, Greed". Los Angeles Times. Retrieved 2009-09-09. 
  8. ^ http://financecareers.about.com/od/consultants/a/Up-Or-Out-Policy.htm
  9. ^ New rule: Hire passionate people. Old rule: Rank your players; go with the A's. FORTUNE Magazine By Betsy Morris, Fortune senior writer July 11 2006: 10:13 AM EDT CNN Money - July 10, 2006
  10. ^ "Endicott Alliance". 
  11. ^ "Forced Ranking in Performance Management". Unite. 
  12. ^ "IBM Human Resources Webcast, March 2006". 
  13. ^ Swisher, Kara (8 November 2013). "Because Marissa Said So — Yahoos Bristle at Mayer’s QPR Ranking System and Silent Layoffs". All Things D. Retrieved 13 November 2013. 
  14. ^ Eichenwald, Kurt (July 3, 2012). "Microsoft’s Downfall: Inside the Executive E-mails and Cannibalistic Culture That Felled a Tech Giant". Vanity Fair. 
  15. ^ Microsoft increasing employees' pay. Seattle Times, April 21, 2011. Retrieved 2011-04-25
  16. ^ Ovide, Shira (12 November 2013). "Microsoft Abandons 'Stack Ranking' of Employees". The Wall Street Journal. Retrieved 13 November 2013. 
  17. ^ Wingfield, Nick (13 November 2013). "Microsoft Abolishes Employee Evaluation System". The The New York Times. Retrieved 13 November 2013. 
  18. ^ http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer

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