Can a change in how Microsoft ranks its employees' work performance improve its ability to innovate and compete? That question will take awhile to answer, but it's a valid one after news on Tuesday that the technology giant is dropping its "stack ranking" employee review system.
Stack ranking is a much-reviled Microsoft system where managers rank employees on a bell curve, creating winners and losers in every department. Employees have reported that the result was a cutthroat and highly politicized environment, where some workers learned how to best game the system -- and thus get the largest bonuses. Product innovation and quality, however, were not at the top of employees' minds.
Instead of stack ranking, Microsoft managers will now give feedback to employees on a more frequent basis. Additionally, managers will have more discretion to hand out bonuses, rather than be tied to a numerical system.
An e-mail was sent out Tuesday to all employees at the company from Lisa Brummel, executive vice president for human resources.
It said that the changed performance review program is better aligned "with the goals of our One Microsoft strategy," a unified, teamwork-based approach that has been touted by outgoing CEO Steve Ballmer. She said that this "fundamentally new approach to performance and development" is intended to promote "new levels of teamwork and agility for breakthrough business impact," and is the result of feedback from employees and reviews of "numerous external programs and practices."
Brummel said that the new approach emphasizes three elements -- not only one's own work, but "also how you leverage input and ideas from others, and what you contribute to others' success." Additionally, she said there is now more emphasis on employee growth and development at Microsoft, and the rewards budget will no longer be based on a "predetermined targeted distribution."
Interestingly, just as Microsoft is abandoning its bell-curve ranking of its employees, Yahoo has just adopted a new policy requiring managers to bell-curve-rank employees, and then dismissing those caught on the lower end of the curve. Reportedly, Yahoo has fired more than 600 workers in the last few weeks.
Job = Keep Job
Bell-curve ranking was popularized in the 1980s by the likes of GE's Jack Welch. According to the Institute for Corporate Productivity, it has fallen out of favor in recent years, with only 5 percent of high-performing companies using this approach in 2011, compared with 20 percent two years before that.
Additionally, a Massachusetts Institute of Technology study in 2006 found that forced ranking de-motivates even high performers who, because someone has to be in the middle or the bottom, sometimes get forced into that part of the curve. Among other things, this kind of looking-over-your-shoulder compels employees to take fewer risks, which leads to less innovation -- and appears to be antithetical to the cooperative, flattened hierarchy that characterizes most nimble dotcoms.
Brad Shimmin, an analyst with industry research firm Current Analysis, said that stacked ranking tries "to emulate a meritocracy," where there are winners and losers based on an assessment of ability, but it "fails to capture the value of an employee."
Such an employee performance system, he added, could have been a factor in why Microsoft "had been behind" in reacting to three of the biggest changes in computing -- Web browsers, mobility and clouds. In such an environment, Shimmin said, an employee's "job is to preserve your job," not to innovate or take risks.