Thursday, January 12, 2006

20 70 10 for 5 (Years)

Those of you who have been following my blogs may remember my May 10 contribution entitled “20 70 10”. I described Jack Welch’s perspective on managing peoples’ performance this way:

Locate the top 20%, tell them where they stand, and reward them profusely with significant compensation, lucrative career mobility, and lots of loving attention. The great gray 70% should also be told where they stand: and then rewarded with mild approval, job security, training and development, and the enthusiastic opportunities to get into the top 20%. The bottom 10% should also be told where they stand, given opportunities to improve, and if they don’t—they’re out. A failure to let people know where they stand, and act differentially, says Welch, is not only lousy leadership, it’s immoral.

Obviously, this 20 70 10 approach, like any forced ranking system, is like a nuclear bomb. It has to be handled very carefully, or else vicious backstabbing politics arise and contaminate everything. Yet I’ve always appreciated the underlying principle behind Welch’s approach: Your friendly personality and good intentions do matter, but at the end of the day, it’s your actual contributions that matter the most. If you add genuine value to the organization, you’ll add genuine value to your compensation and your career. If you don’t, you won’t get nearly the goodies that value creators do, and you may even wind up losing your job. That’s the underlying principle, and I find that it’s missing in many decaying organizations.

On the other hand, there's a gnawing problem. Let’s follow the 20 70 10 principle to its logical conclusion. If you, the leader, really do weed out the bottom 10% in this round of performance reviews, and then do it again next round, and then again, and so on, how long will it take before you’ve weeded out all the poor performers and are left with only the good ones? That’s your goal, isn’t it? But if you meet that goal, what’s the point of continuing a forced ranking like 20 70 10? You’d just be weeding out good people who—because of the requirements of the system—are “forced” to fall at the bottom end of the pile. A professor who has a class full of Einstein’s would be foolish to “grade on a curve”, because forcing students into a bell curve means that the largest group of Einstein’s would have to receive a “C”, and as many would receive “D’s” and “F’s” as “A’s” and “B’s”. In this environment, the group dynamics in class would become psychotic, and very few budding Einstein’s would be attracted to that professor’s class.

Lo and behold, some empirical evidence now corroborates my logical extrapolations. Recent research indicates that when first applied in an organization, forced ranking systems like 20 70 10 result in an impressive 16% improvement in productivity—but only after the first two years. Thereafter, the marginal gains diminish: 6% the third and fourth years, and so on until 0% in the tenth year—presumably because the forced rankings “worked” and everyone became a contributor.

So what does all this imply? I think that a leader might initially be wise to use a forced ranking like 20 70 10 to instill performance accountability, form a merit-based culture, separate the best performers from the mediocre ones, and build performance gains. But the leader should also be aware that if he or she is executing correctly, there will necessarily be diminishing returns to this process. I suspect that by year 5, the remaining performers ought to all be good ones. If that’s not the case, then keep up the forced ranking. But if your employees are all good, it might be wise to take a break from forced rankings and go back to some other form of individual merit assessments.

In any system, the good leader should always insure that the best performers are rewarded the most. But forcing the ratings into a bell curve might not be necessary after the fifth year—or, according to the research, certainly not after the tenth, . The leader should always track the team carefully, and if it looks like performance is starting to get ragged, or some people are slipping to the bottom, then going back to forced rankings might be the antidote. The key is flexibility in your quest for top performance. Don’t get hung up on the means. Focus on the ends.


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