In the ongoing battle to improve performance management effectiveness, more and more companies are turning to forced ranking. A recent Fortune article, for example, indicated that 25 percent of the Fortune 500 use some form of forced ranking (Matthew Boyle, Performance Reviews: Perilous Curves Ahead. Fortune Magazine, May 15, 2001). Different from absolute rating approaches, where employees are assessed against defined standards and typically rated as “meets, below, or exceeds” expectations, a forced ranking process assesses employee performance relative to a peer group and often includes quotas or forced distributions of ratings (e.g., 10% low, 70% middle, 20% high). Why has forced ranking become so popular? What do we know about its impact? Perhaps most importantly, what should companies be watching out for in considering this controversial approach?

In our view, many organizations today are jumping on the forced ranking bandwagon too quickly and carelessly, allowing the practice to hijack their performance management system. Forced ranking—a process that has been around for years—has seen new life in the era of tight labor markets and a struggling economy, with companies such as GE touting great success with their “take no prisoners” approach to differentiating their A, B, and C players. These companies have described their ranking processes as critical to achieving a high performance culture and driving enterprise results.

A new crop of top companies, looking for ways to drive improved business results, have adopted forced ranking with a noble purpose in mind: to take a more rigorous approach to managing talent and weed out poor performers. However, somewhere along the way, many of these organizations have allowed the forced ranking process to become a central pillar of their performance management efforts, placing too much emphasis on quick assessments and too little emphasis on the other aspects of good performance management, such as expectations setting, ongoing sharing of performance information and meaningful development. The result is an assessment tool that wields considerable power over other tools in the performance management system, overshadowing the business need for and stated purpose of performance management as a key business process.

Organizations, especially those with rich histories and strong cultures, cannot realistically expect to achieve a cultural change in performance orientation overnight, especially through a highly uncomfortable process such as forced ranking. Imagine thousands of highly tenured employees finding out that after 20 or 30 years of being assessed as good, hard workers, they are now just “B” players, or even worse, “C” players. Imagine managers who have been providing less than robust evaluations through a somewhat rote process suddenly being asked, with very little training, to rigorously assess and rank employee performance. The implications of this shock are very clear in terms of morale, productivity and loyalty.

In addition to the employee relations, risks are the potential legal ramifications. Indeed, Ford, Microsoft and Conoco have felt the legal pain from ranking processes gone awry, while others, such as Capital One, have just recently entered legal battles over forced ranking. In these class action lawsuits, employees have alleged that the forced ranking methods used in their organizations had a disparate impact upon particular groups of employees. These employees have not been limited to the protected classes that typically file employee discrimination cases. And much to the dismay of the executives who have championed forced ranking, their intentions while implementing the process have provided little legal comfort. Both in and out of the courts, the effect of forced ranking on employees is what matters most.

Are we suggesting that organizations not use forced ranking? Not at all. Admired and successful companies—GE, Intel, Cisco, Pepsi—have used forced ranking for years, with success. What appears to set these organizations’ application of forced ranking apart from the others is that either it is one tool in an integrated toolbox utilized by the organization to gain another perspective into performance management or, it is a separate process that is used in concert with performance management. In these organizations, forced ranking is not a tool used to mask a broken performance management system, spineless managers or managers who “grade” too hard.

So how can an organization avoid the pitfalls of forced ranking and at the same time make it a useful tool?

1. First, assess the performance orientation of the culture. While forced ranking can be useful in some organizations, the very nature of the process generally leads to greater degrees of success in organizations with a high-performance culture. A high-performance culture can be defined as one where employees are engaged in the business; required results are clearly defined; employees demand and have access to performance information; and rewards and consequences are aligned with performance results. But be careful here to avoid the “silver bullet” trap. Too many companies today use forced ranking as a means to becoming a high performance culture. The echo in the hallways is: “Let’s raise the bar and knock out the bottom 5 percent.” However, a strategy for driving a high-performance culture needs more than just “rank and yank” assessments. Forced ranking has not been proven on its own to drive enterprise performance, while other, more constructive strategies have.

Consider a recent study by the Corporate Leadership Council that found among the 13 drivers in a performance management system, use of employee ranking scored next to last in direct impact on employee performance (Corporate Leadership Council/Corporate Executive Board. Building The High-Performance Workforce: A Quantitative Analysis Of The Effectiveness Of Performance Management Systems, 2002). The research also suggested this “D Level Performance Driver” actually decreases employee performance. Regardless of the performance orientation of the organization’s culture, the use of forced ranking exercises should be eased into and monitored carefully.

2. Be clear on intent. Clarify the purpose of forced ranking within the context of the company's broader human capital and talent management strategies. For example, forced ranking can be used to determine the top 5 percent of employees based on performance and potential, to pay out a higher percentage bonus to the top 20 percent of contributors, or to identify the bottom 8 percent for wanted turnover. As these examples indicate, forced ranking is more often than not used to determine some sort of consequence, positive or negative. Also consider whether the exercise will be used as a one-time event or become a “way of life.” Defining and communicating intent can lead to tough questions, the answers to which are critical to the success of forced ranking.

3. Integrate forced ranking into other talent management processes. The forced ranking process and its outcomes should be well integrated into/aligned with other people processes. The data received from the exercise should supplement and provide additional perspectives to the other areas of talent and performance management. All people-related systems—performance evaluations, development activity, high-potential identification, salary planning, succession planning, advancement discussions and managed attrition—should place people in roughly the same position as would a forced ranking exercise. In other words, consistent performance messages run throughout the various people-related systems. If forced ranking is being used solely as a means to understand which employees fit into which performance buckets, and it is the only tool to do this, then its use is simply a band-aid put in place to correct other deficiencies in the performance management system. The implicit messages from the results of the process should not contradict the explicit performance messages employees are receiving via other channels. Likewise, there should be clear alignment between the outcome of the forced ranking process and consequences received through other performance management means.

4. Develop an appropriate methodology. The type of forced ranking methodology adopted should match the needs of the organization. The first step is to determine the criteria that will be used and the strategy for segmentation, including the employee population, the number of groups, the type of groups, and rating types (e.g., potential, performance, readiness). The second step is to develop the appropriate ranking process and distribution. The outcome of this step could be, for example, a decision to include only middle and senior management in the process.

By its very nature, forced ranking means that individuals are forced into specific placement categories. Regardless of the methodology, emotions will run high and haggling will occur during the process. The exercise is usually straight forward within a specific department or functional area. However, the roll-up across the organization is where discussions become challenging. “My top performer is a higher caliber performer than yours and shouldn’t be placed lower.” As you choose or develop a methodology, test it against the original intent of the ranking exercise and the organization’s overall purpose for performance management.

5. Monitor activity and results. Measure the investment levels in the different activities and practices associated with the performance management system, at the unit and enterprise levels of the organization. Re-visit the goals established for using forced ranking and test the outcomes. Ask how the forced ranking process has added value to the organization’s overall talent and performance management system, and if the organization is better off with it or without it. Assess the tool against others in the suite of performance management tools and question the amount of weight forced ranking carries in comparison. Pay close attention to the desired and actual balance between assessment and development activities and raise the red flag when imbalances begin to emerge. Lastly, assess potential legal implications and risks by auditing the forced ranking exercises and outcomes with other performance management tools and messages.

In the end, organizations need to be careful that they do not let forced ranking hijack their performance management efforts. It is often true that segmenting the workforce based on criteria such as performance, capability and/or experience is important for talent management and investment decisions, but in most cases allowing this practice to become central to performance management will undermine other activities the company is taking to achieve increased levels of employee performance. Organizations that use the tool successfully have developed clear intent, integrated/aligned the tool with other performance management tools and developed a methodology that works for them. Blindly following another company’s success with forced ranking without careful consideration of the unique factors that might be critical to your company’s success is a costly proposition in terms of dollars, goodwill and time that may take years to undo.