Human Resources Development Performance Reviews

Stack ranking for performance management: Does it have merit?

August 20, 2024

Stack ranking is probably the most controversial among the many ways to ensure high-performing employees.

Why’s that?

It’s because stack ranking measures an employee’s performance against your entire workforce, not individual performance standards. As a result, stack ranking rewards top performers and punishes low-performing employees through termination or retraining.

Due to the sometimes cutthroat nature of stack ranking, it has developed the unflattering nicknames rank and yank.

The name stems from the fact that stack ranking rewards the top 20% and fires the bottom 10%.

Stack ranking started in the 1980s when General Electric (GE) CEO Jack Welch coined his ‘vitality curve,’ a forced ranking system that ‘stacked’ employees against one another regarding performance evaluation.

Despite the controversy surrounding the practice, many companies still use stack ranking. According to research, 30% of Fortune 500 companies use the stack ranking evaluation system today.

Juggernauts like Microsoft and Amazon dipped their toes into stack ranking but have since distanced themselves from the practice.

Other companies, like IBM and Meta, are still using the evaluation method, as it’s seen a resurgence in recent years.

So, is stack ranking all bad, or are there some redeeming factors? Is there a way to use stack ranking without negatively impacting employee morale and engagement?

These are the questions I’ll answer today, so stay tuned.

What is stack ranking?

A stack ranking system evaluates the performance of your entire workforce on a bell curve.

Since you’re measuring the performance of everyone as a whole, your workforce will inevitably separate into three groups:

Group A (the top 20%): Group A employees are top-tier performers who stand head and shoulders above the rest. They are your most motivated, engaged, and skilled workers. This group receives the lion’s share of financial incentives and rewards via raises, bonuses, and stock options.
Group B (the middle 70%): While this group does not contain top talent, it is still vital to your company’s success. It consists of average performers who put in consistent work but seldom go above and beyond. While most companies shower Group A with all the rewards, it’s common for Group B to receive smaller raises and incentives to improve.
Group C (the bottom 10%): Group C is the bottom of the barrel, where your underperformers dwell. These are low performers who are consistently overshadowed by Groups A and B regarding motivation, engagement, and teamwork. This group tends to receive no rewards besides training and performance improvement plans. Group C is also where a majority of layoffs occur.

For most companies, the strategy then becomes:

Slap golden handcuffs (deferred stock options, high salaries, etc.) on your top performers to encourage them to stay with you for as long as possible.
Work on improving Group B by encouraging them to go above and beyond.
Fire poor performers in Group C to ensure a high-performing workforce.

At its core, stack ranking is meant to encourage a healthy competitive culture and a productive, constantly evolving labor force.

Is that what it always provides in practice?

No.

As you’ll see in a moment, stack ranking has flaws that can lead to severe problems in your organization.

However, that doesn’t mean the model is useless; you need the right strategy to make it work.

Criticisms of stack ranking employees

Stack ranking as a performance management system could be better.

Many major companies, like Microsoft and Amazon, have abandoned the practice due to intense employee backlash and adverse effects on their bottom line (more on this later).

This is because stack ranking can cause:

An unhealthy amount of internal competition
Adverse effects on employee morale and employee engagement
Without proper standards in place, it can lead to subjective bias
It fails to consider individual performance standards

These downsides are significant, so let’s look at each one closer.

Unhealthy internal competition

There’s nothing inherently wrong with a competitive workplace culture. It can even be healthy for employees at times.

However, the healthiest types of competition are when your employees compete with other companies and their past performances.

Competition between co-workers becomes less productive, especially when fighting to stay out of the dreaded bottom percentile, which can lead to termination.

While internal competition between co-workers can be healthy, what they compete for should always be positive.

For example, a sales team competing against one another to win prizes is an example of healthy competition. Everyone starts on equal footing, and the winner gets the prize. In this case, there are no negative consequences for losing the competition.

In the case of stack ranking, the playing field is unequal, and serious negative consequences exist.

Top performers already have an unfair advantage, and failing to keep up with co-workers can result in dropping into the bottom 10% and potentially losing your job.

Negative effects on employee morale and engagement

One of the most common arguments against stack ranking is its negative impact on morale.

This is because it creates a lose-lose scenario for most employees.

No matter how hard they work, they risk being outperformed by their colleagues, which will land them in the bottom 10%. This means they could still get fired even if they work harder than ever.

This realization causes many employees to lose motivation to give it their all and can influence them to seek employment elsewhere if the pressure doesn’t increase.

Stack ranking can also wreck synergistic relationships between co-workers due to the cutthroat, competitive nature of the performance review process. For this reason, stack ranking can negatively affect teamwork, which is never suitable for the employee experience (or your organization as a whole).

Subjective bias can take place

For stack ranking to work, it needs an airtight review system that clearly defines high performance and can provide a realistic estimate of the revenue generated per employee.

With such a system, it’s nearly possible to determine what constitutes a stellar performance by being subjective.

That means managers and human resources departments may inject their biases into performance reviews, which could be better.

It doesn’t consider individual performance standards

Talent management works best when clear performance metrics are in place for every position at your organization.

After all, only some positions feature the same workload and skill requirements.

This highlights the major underlying flaw of stack ranking: everyone’s job is different.

For example, consider the average workday for a top salesperson and an administrative assistant.

The salesperson is closing million-dollar deals, making new contacts, and attending important meetings and seminars. In other words, they’re knocking it out of the park and providing tremendous value for the company.

Conversely, the assistant spends a relatively quiet day answering phones, signing for packages, and scheduling events.

One has a more demanding and productive job than the other. Still, in the case of traditional stack ranking (which doesn’t separate individual departments), these two employees would be directly compared against each other.

This isn’t a fair comparison since the assistant has different responsibilities and expectations than the salesperson.

Most alternatives to stack ranking have different standards for salespeople and administrative assistants so that they wouldn’t compare the two.

Prevalent examples of stack ranking

Now, look at the stack ranking strategies several major companies have utilized over the years to varying degrees of success.

It’s important to note that nearly every company on this list has since abandoned the process and moved on to different performance management systems, like continuous feedback.

Microsoft

Technology giant Microsoft was a staunch advocate of forced ranking as a performance measurement system for many years.

The company had its managers rank their teams from top to bottom regarding performance.

However, this methodology was flawed because it inevitably yielded the same results.

For example, if you have ten employees, two will receive fantastic reviews, seven will receive adequate reviews, and two will receive terrible reviews – and there’s no way around it.

Saying everyone is doing excellent or average and no one is falling behind isn’t an option.

What did this do to Microsoft?

It caused them to have a ‘lost decade‘ of innovation and productivity. The company remained stagnant while competitors Apple and Google were gaining serious traction.

This led Microsoft to abandon stack ranking in 2012.

Amazon

Amazon had what one former employee described as ‘purposeful Darwinism‘ in place for its employees, which was reportedly very cutthroat.

However, instead of firing employees in the bottom 10 percent, Amazon placed them on three-month performance improvement plans (PIPs for short).

Despite this, stack ranking still had a negative impact on Amazon’s workforce and reputation, so they transitioned to a continuous feedback model.

Google

Google’s approach to stack ranking was the most unique of all the companies on this list.

Stack ranking was only used as a promotion tool instead of to judge employees’ overall performance.

In that sense, it gave employees something positive to compete for instead of fighting for their lives.

However, as of 2023, Google has changed its mind and implemented an Amazon-style stack ranking system, which its employees aren’t thrilled about.

Many Google employees have received support check-ins (SICs), the Google equivalent of Amazon’s PIPs. These are concerning because they make employees feel like they’re being judged to leave the company, which isn’t good for morale.

Alternatives and other approaches to stack ranking

Okay, we’ve covered the bad so far, but let’s briefly consider the good.

Stack ranking, with proper checks in place, can still be a positive way to encourage better employee performance.

You need:

A clear way to define high performance for each department and position.
The bottom 10% shouldn’t fear for their jobs and should receive support instead.

Still, there’s no denying that more effective performance management systems exist.

You’ll likely achieve far better results if you opt for a model like:

Continuous feedback. Rather than conducting annual performance reviews, continuous feedback requires you to check in with your employees to provide constructive feedback regularly. This lets employees know their strengths, weaknesses, and primary areas for improvement without pitting them against their co-workers.
Psychological appraisals. This approach focuses on what an employee could be instead of what they’ve already done. It examines an employee’s cognitive abilities and traits to determine how to utilize them most effectively.
Objectives and Key Results (OKRs). The OKR model requires you to set a primary objective for each position (such as increasing newsletter signups by 10% in six months) and include a series of key results tied to the ultimate objective. It’s a way of setting goals that include actionable milestones along the way.