Forced Rankings of Employees Bad for Business

Forced-ranking systems that require managers to evaluate the performance of an employee against other employees can hurt productivity, says a researcher at the University of Michigan's Ross School of Business.

"The use of rankings to scale employee performance relative to that of their peers, instead of using predetermined goals, may negatively affect employees' willingness to maximize joint gains that will benefit the organization," said Stephen Garcia, adjunct assistant professor of management and organizations at the Ross School and assistant professor at the Ford School of Public Policy.

"Individuals will care less about performing better on a given task and will, instead, shift their focus to performing relatively better on a scale comparison—in other words, being surpassed in rank."

General Electric is the most famous proponent of the forced-ranking model, but other companies have used it in some form at one time or another, including Cisco Systems, EDS, Hewlett-Packard, Microsoft, Pepsi, Caterpillar, Sun Microsystems, Goodyear, Ford and Capital One.

In a new study in the current issue of Organizational Behavior and Human Decision Processes, Garcia and colleague Avishalom Tor of the University of Haifa examine the forced-ranking system by conducting a series of studies of task comparisons vs. scale comparisons.

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Rebalancing the System to Reduce Production Disruptions

Reconfigurable manufacturing systems have given companies the ability to respond more quickly to changing market and regulatory conditions. However, firms still must perform preventive maintenance on their equipment to replace or repair machinery that may fail due to aging or wear and tear. Typically, these maintenance and reconfiguration problems have been treated separately.

In a new University of Michigan study forthcoming in IIE Transactions, a team of researchers at the Ross School of Business and College of Engineering suggests that by incorporating reconfiguration operations into preventive maintenance actions, manufacturers can actually improve system performance by reducing total cost.

"Since both preventive maintenance and reconfiguration can be used to protect the production operation against machine degradation and failures, there is potential benefit in combining them for a less costly and more reliable production system," said Julie Simmons Ivy, assistant professor of operations and management science at the Ross School of Business.

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Firms with Poor Accounting Quality Get Worse Lending Terms

Sreedhar Bharath

Companies are well-advised to beef up their accounting practices before they seek to raise new capital, says a professor at the University of Michigan's Ross School of Business.

A new study by the Ross School's Sreedhar Bharath shows that firms with poorer accounting quality are more likely to choose private lenders (bank loans) than public lenders (bonds) because the impact of accounting quality on interest rates in the public market is 2.5 times greater than in the private market.

Poorer accounting-quality borrowers not only face significantly higher interest costs, but lower maturities and a greater likelihood of posting collateral when they obtain bank loans, Bharath says. The effects of poor accounting quality also show up in bonds in the form of higher interest rates.

"Accounting quality has a significant impact on the choice of bank loans versus bonds," said Bharath, assistant professor of finance at the Ross School. "It also affects debt-contract design in systematically different ways. The quality of accounting information affects lenders' estimates of future cash flows from which debt repayments will be serviced."

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