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Forced Rankings of Employees Bad for Business

3/28/2007 --

Use of rankings-based performance evaluation discourages cooperation among workers and hurts productivity.

ANN ARBOR, Mich.—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.

Task comparisons concern relative outcomes or standing in specific tasks (e.g., anticipated earnings of one's company vs. a partner company in a joint venture), while comparisons on the scale---the metric that defines a standard---occur at a more general level (e.g., those concerning a company's standing on annual earnings).

The researchers found that rivals ranked near the top of a standard are more competitive and less cooperative than those far from a standard. Only 25 percent of the study participants were willing to maximize joint gains when they and their rivals were ranked Nos. 1 and 2, compared to 79 percent when ranked Nos. 101 and 102. However, when the rivals' relative standing on the scale was not in jeopardy, participants uniformly behaved more cooperatively---74 percent for Nos. 1 and 2 and 77 percent for Nos. 101 and 102.

Similar results were found in a second study that manipulated the threat of an upward comparison on the scale in the business context of the Fortune 500. However, competitive behavior was not only more prevalent among the highly ranked, but also among those at the bottom---those vying to just make it in to the Fortune 500.

Likewise, a third study using real-world data from Major League Baseball showed that highly ranked teams are less likely to trade those players who pose a threat to their standing on the ranking scale with other highly ranked teams.

"Diehard baseball fans, of course, would not be surprised by our results," Garcia said. "Many Red Sox fans still lament the trading of Babe Ruth to the Yankees soon after the team's fifth World Series title in 1918."

However, another in the series revealed that nearly 80 percent of the rivals would maximize joint gains if their collaborative effort catapulted them to the top or very near the top of the rankings---even if it meant falling behind their rival.

"Even a painful upward comparison on the scale may be tolerable if it simultaneously brings one absolutely closer to the standard," said Tor, assistant professor at the University of Haifa Faculty of Law.

Although their findings suggest that forced ranking does not always diminish the likelihood of maximizing joint gains within an organization, they do reveal a significant and overlooked weakness of this new and increasingly popular management system, the researchers say.

"While highly ranked employees may be more competitive and productive through simple self-selection, the championing of forced rankings fails to anticipate how competitive forces may ultimately inhibit the profit-maximizing exchange or pooling of information and resources among those 'star' employees," Garcia said.



For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
E-mail: bernied@umich.edu