Stack Ranking: Brilliant Management or Inherent Absurdity

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Stack Ranking: Brilliant Management or Inherent Absurdity

Abstract

Employee stack ranking is a performance measurement system that requires every manager to rank its employees from excellent to poor. Stack ranking was popularized by Jack Welch at General Electric in the 1980’s. Since that time it has become a popular management technique. The use of stack ranking has many demonstrated successes, but many managers and business analysts are beginning to questions its value to an organization. In this paper I will examine from a critical perspective both the good and bad aspects of stack ranking in an attempt to determine its long term viability as an organization behavior.

Stack Ranking: Brilliant Management or Inherent Absurdity

Introduction

Stack ranking, sometimes referred to as forced distribution, is a popular performance measurement (appraisal) tool. The concept behind stack ranking is to rank all employees within a given statistical set, all first line supervisors for example, from best to worst. In its most common iterations managers rank, or stack, workers into one of the three groups. The highest performing 20% (sometimes 10%) are ranked as top performers. This top tier group of employees is considered to be the future leaders of the company. They are rewarded with bonuses, raises, promotions stock options and other perks. The middle 70% of the group are considered to be “solid” or steady but average performers. The rewards provided to the middle are often limited to cost of living raises, training opportunities and encouragement to improve for the top tier. The bottom 10% contribute the least amount to the team and are considered to be the lowest performing employees in their statistical set. They are given no bonuses and in many corporations, this group is terminated.

Popularity

Stack ranking is being used in as many as two-third of all Fortune 500 companies (Grote, 2005). 75% of US corporations utilize a formal performance appraisal system, of those, one-fourth use stack ranking as the primary appraisal tool (Oberg, 2005).

Stacking was popularized and gained wide spread fame after being endorsed by Jack Welch, then CEO of General Electric, in the 1980’s. Welch has suggested the stacking helped grow GE revenues from $26.8 billion in 1980 to $130 billion in 2000. He is quoted as saying “if you want a high performing company, you should fire the bottom 10 percent of your employees each year come performance appraisal time (Daniels, 2001).

GE is not alone in the use of stacking as it primary performance appraisal tool. The list of companies that utilize stack ranking or forced distribution systems reads like a who’s who of Wall Street. Yahoo, Microsoft, Cisco, American International Group, Ford Motor Company, Motorola, Dell, Lending Tree, Glaxo-Smith Kline, Sun Microsystems, EDS, Conoco, Accenture, and Deloitte are just a few of the companies using stack ranking.

Stack Ranking Advantages

Increased Corporate Performance

One needs to look no further than the corporate performance of the companies using stack ranking to verify the basic intrinsic value in the process. As stated earlier Jack Welch attributes the improvement in revenue at General Electric to his use of stack ranking. In 1980, the year before Welch became CEO, GE recorded revenues of roughly $26.8 billion. In 2000, the year before he left, the revenues had increased more than 500%. When Jack Welch left GE, the company had gone from a market value of $14 billion to one worth more than $410 billion at the end of 2004, making it the most valuable and largest company in the world (Welch, 2001).

Improved Management Performance

Stack ranking eliminates the disproportionately large percentage of average performers that most performance appraisal systems produce. These inherent errors occur by supervisors who are unwilling or unable to confront poorly performing employees. Stack ranking forces...
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