Workplace Reality #5: There is always a stack ranking and a bell curve of performance rating

This post is part of the series on 9 Realities of Modern Workplace.

In this post, we talk about Reality #5: “There is always a stack ranking and a bell curve of performance rating, even in companies that claim they don’t have these“.

Let’s define the terms first.

Stack ranking is ordering employees in decreasing order of their ‘value’ to the organization. Typically, this ‘value’ is measured by performance during the review period, but it can incorporate other factors like potential, yrs. of experience so far, etc. (see why this is a bad or a good thing)

Bell Curve is force-fitting the rating of employees to a certain distribution: X% of employees have 4 or above, Y% have 3 or above, Z% have 2 or above, etc. (see below for math, or Forbes for why this might be wrong way of looking at employees).

Both of these are applied to an identified group of employees, mostly by grouping 2-3 nearby job levels into one group.

Let’s take an example of a group of 10 people (by the way, 10 is too small a sample size to apply these concepts, this is just for illustration).

Name Performance Rating (out of 5) Stack Rank
N1 4 2
N2 3 9
N3 5 3
N4 5 1
N5 4 4
N6 3 5
N7 4 7
N8 3 8
N9 2 10
N10 4 6

Note couple of things:

  1. It is not necessary that highest performance rating corresponds to highest stack ranking. Performance rating reflects performance against defined goals for the period. Stack Rank reflects ‘value’, which may be more than just performance in the given year (a recent hire who got 4 because he had only 4 months to show his performance may be the best bet for the company and hence can be ranked ahead of a senior guy who also got 4, who in turn may be ranked ahead of an average guy who somehow delivered exceptional performance this year and got a 5).
  2. In this sample, 20% got 5, 40% got 4, 30% got 3, and 10% got 2. Put another way, assuming 4 and above is excellent performance, 60% of the sample produced excellent results. Statistically speaking, this number is lop-sided – excellent performances are usually not so abundant.

As discussed in Reality #3, performance rating systems in most organizations are broken, which means #1 will be similarly broken.

According to the mathematics behind bell curve, the distribution in #2 above (if it was a large enough sample size) is an anomaly, usually created because managers are not strict enough in their evaluation. Hence managers are asked to change their rating to ‘fit the curve’, usually like this: 20% top performers, 70% average performers, 10% bottom performers, which makes a broken rating process more messed up and subjective.

Why would an organization want to have a stack ranking?

Looking from organization’s perspective, reason is simple to understand. As discussed in Reality #4, an organization will pay the minimum it needs to pay to keep you and will want to get the maximum out of you. Stack ranking is a good way to identify the employees who provide best ROI to the organization. It makes sense to identify them, reward them, and make best use of them.

Whether the above exercise happens in a formal way or not, organizations need this information and so managers will always keep such a sheet handy which tells them about performance rating and stack ranking of employees so that they can do their investments in employees accordingly. This is natural.

Implications of Stack Ranking and Bell Curve

Here are some of the implications that should be obvious now:

Outcome Reason
You have done great work, expect a 5 out of 5 performance rating, but end up with a 4. Company decided they can’t have so many people with 5 rating, and your rating was downgraded in the name of ‘curve fitting’.
Your manager says, “I wanted to give you 5, but management decided otherwise” In the meeting where the rating rationalization is done, your manager (or his manager who was representing you) was unable to convince others about your rating.
You get a 4 but the person who got 3 gets more rewards than you Your company rewards favor the stack rank more than performance rating

Dealing with the reality

Good thing is that there is enough buzz in the air that these are bad thingsMicrosoft recently got rid of both rating and stack ranking, Adobe got rid of its annual performance review system. However, you still need to understand the rationale and deal with them, because as I mentioned above, even when these are formally gone, they exist informally, and so they impact you. Best way to deal with these is to work closely with your manager (or manager’s manager) to make sure you understand where you are in that ‘valuable employees’ list. Also, it is more important to observe the behavior, just listening to your manager may not help much. Watch for these:

  1. When a new/interesting project comes, are you asked to work on it?
  2. When you ask for a reassignment to an interesting project, how hard it is to convince the decision-maker?
  3. How much do you have to haggle with your manager for bonuses/raises?
  4. How many of your ideas/thoughts are entertained or accepted by your manager?

If you think you are not high enough in that ‘valuable employee’ list, you need to change something.

In the next post, we will discuss the Reality #6: “The new hire can replace you any day if your only strength is technology“. Stay tuned.

Maths behind bell curve

A theory called Central Limit Theorem suggests that if you take random observations from a large enough sample size, their average values, when plotted on a graph, will resemble a bell curve (normal distribution). Applied in performance rating context, it means that with a large enough number of employees in a group (large sample size), their performance rating will be a normal distribution and produce a bell curve.


Workplace Reality #3: Most performance review systems are broken and useless

This post is part of the series on 9 Realities of Modern Workplace.

In this post, we talk about Reality #3: “Most performance review systems are broken and useless“.

I have written many posts on performance and performance appraisals before (managing performance, annual review, self-appraisal) and so have others (Forbes, Wall Street Journal, payscale). Most have been critical of the performance appraisal systems. It is very hard to find articles that talk about good systems; most such articles talk about what it should be (Forbes, Gallup). So the statement above shouldn’t feel very shocking. However, I have very specific reason to use the words broken and useless that I want to explain. Hopefully this will also explain why organizations behave in a certain way in some cases.

Performance Review System

Performance review is the process by which an employee’s performance is evaluated. Organizations use this process to make sure they are getting good returns on their investment in a particular employee. Idea is actually quite good: rate the employees based on their performance, use the rating to rank the employees, and then compensate them according to the rank. Tell poor performers to improve or get out, to be replaced by better performers. This will maximize the ROI on people investment.

However, this makes certain assumptions:

  1. It is possible to objectively rate (based on performance measurements) employees across the organization
  2. It is possible to compare rating (or performance) of any 2 people and rank them relatively
  3. Employees will agree to linking compensation to value creation
  4. There is always a steady supply of talent available who will perform better at the same compensation

Unfortunately, none of these assumptions hold true in today’s organizations.

  • #1 requires rating is based on objective metrics and is done by able managers. Both of these are hard to come by.
  • #2 requires quantification of every performance which is hard. How do you compare the performance of a business analyst vs. a sales person?
  • #3 makes the compensation fluctuate widely which employees can’t handle
  • #4 depends on external factors and always comes with a time lag which hampers quick results

Broken and Useless

System is intended to adjust compensation and rewards every year to align with performance of the individual. This is expected to create incentives for high performance. Since above assumptions don’t hold true, rating and ranking results are inaccurate. This means compensation and rewards are not aligned with performance all the time. Instead of incentivizing value creation, it may create unhappy employees and thus hamper performance.

System is also intended to give feedback so that employees can improve their performance. For the reasons cited above, this feedback is not useful at all, and can be harmful in some cases.

Dealing with the reality

Most people use performance review system outcome as a way to measure their own worth, and their career growth. If they get a raise or get promoted, they think they are growing, and they are worth more. If they get no raise or promotion, they think they are not growing or are worthless for the company (my earlier post evaluating your performance).

It is critical to wean yourself away from the myth that performance review outcomes are a good indicator of your career growth and personal worth.

If you can do that, following statements will make sense:

  1. Performance rating your manager gives you may have little correlation with your performance
  2. Bonus, salary increment, rewards that you get may have little correlation with your performance rating
  3. Performance rating may have little correlation with your worth to this or another company

If you can adjust yourself to live with above statements, you will realize that you can deal with your workplace much better.

In the next post, we will discuss the Reality #4: “Promotions and bonuses are determined more by available budget and market conditions, less by your capabilities or your performance“. Stay tuned.

Caveat: Above post exaggerates the situation by assuming that all parts of the system are broken. Most companies will have some parts broken and not all, so your personal experience with your performance review system will be better than the above description. However, being ready for the above scenario serves you well.