Here is an excerpt from an article written by Sebastian Bailey for Talent Management magazine. He suggests that, as ‘rank and yank’ dominates the debate, talent leaders would be wise to focus the discussion on eliminating traditional manager biases and instituting a system of qualitative talent conversations. To read the complete article, check out all the resources, and sign up for a free subscription to the TM and/or Chief Learning Officer magazines published by MedfiaTec, please click here.

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It was just before Thanksgiving last November when the always-lively debate about performance management received a new jolt.

First, Microsoft Corp. announced it would ditch its stacked ranking system, a performance management process instituted by General Electric Co. in the 1980s that effectively ranks employees on a bell curve, looking to weed lower performers out and improve the organization’s overall performance.

The use of the performance measurement system, known as “rank and yank,” would become pervasive at large companies in the decades to follow, before many started to realize its unpopularity with employees and, in some instances, its penchant to actually hurt performance.

Then, in the same week, Yahoo Inc. CEO Marissa Mayer entangled herself in controversy when news reports picked up employee chatter on message boards revealing that the technology firm had instituted a similar stack ranking performance management system, called “quantitative performance ranking.”

The development ignited a firestorm in the human resources industry, just as when Mayer reined in Yahoo’s work-from-home program shortly after taking over as part of a massive turnaround effort.

“In this case, it looks like Microsoft is on the right side of history, and Yahoo is still in the Stone Age,” Max Nisen, a strategy reporter at Business Insider, wrote that week.

A System That Pleases No One

But on a broader level, the reignited debate over how to measure employee performance — and how to formalize the process to the benefit of both the employee and the organization — has always been tricky. For starters, the annual performance review has never been popular with either employees or managers. What’s more, attaining objectivity and fairness in the process is almost always threatened by the hidden biases.

With so much ambiguity, it’s no surprise that some leaders avoid controversy by rating everyone’s performance the same. In an August 2013 survey by human resources advisory and research firm Towers Watson & Co., fewer than half of respondents agreed that high performers in their organization are adequately rewarded, likely due to managers’ tendency to clump performance rankings toward the middle.

This is supported by research in the Journal of Economic Literature by University of Chicago economics professor Canice Prendergast. According to his research, when managers are given free rein on ratings, they tend to fall into two categories: centrality bias, where scores are clustered around the midpoint, or leniency bias, where scores bunch nearer the top.

In many cases, the research notes, neither provides incentive to work harder and little consequence to slacking off, so performance plateaus. Psychologists call this “social loafing,” when hard workers or high performers notice their lazier colleagues getting away with less while receiving the same rewards, so they reduce their effort. In turn, slackers ease off even more.

This is where the forced ranking system was supposed to come to the rescue. At its most draconian, the system sees the bottom 10 percent exit the business. “Rank and yank” certainly provides a wake-up call for coasters, but downsides abound. Most significant: After several cycles the free riders have all left and managers are forced to rate the worst of a very good bunch. As a result, the system creates a gladiatorial culture, where employees are competing against one another.

At Microsoft, according to a lengthy Vanity Fair feature in 2012, it led to employees “competing with each other rather than competing with other companies.” In some instances, according to the story, talented employees would go to great lengths to avoid working with other high performers so as not to harm their position in the rankings. The company abandoned the system in 2013 in favor of more frequent and qualitative employee evaluations.

It appears talent leaders are caught between a rock and a hard place. Is it best to opt for the forced distribution approach with the resulting competitiveness, perceived injustice and distraction of providing a rating? Or let managers rate performance haphazardly, leading to social loafing and a drop in performance?

Perhaps the solution is a healthy mix of the two. Either way, talent leaders and line managers alike are poised to change their mindset.

Guided distribution, where managers are encouraged to differentiate performance but with blurred edges to allow for individual discretion, has been suggested to lead to greater performance. The focus is on performance conversations rather than the overall score, so manager capability is the key to success.

But to rate fairly and consistently and to have constructive conversations about performance, managers with a guided distribution mindset need high levels of emotional self-regulation and the ability to keep unconscious, innate biases in check.

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Here is a direct link to the complete article.

Sebastian Bailey is president of Mind Gym Inc, a performance management firm.