Many chief executives, from General Electric's Jack Welch to Enron's Jeffrey Skilling and Ford's Jacques Nasser, swear by the process. Many of their employees swear about it.
It is known as the performance review ranking system and it requires managers to rank employees against each other on a bell curve. At GE, which has used the system for several years, this means that 20 percent of salaried, managerial and executive employees are rated outstanding each year, 70 percent "high-performance middle" and 10 percent in need of improvement.
At Enron, where some have nicknamed the system "rank and yank," employees are put in one of five categories: 5 percent are identified as superior, 30 percent excellent, 30 percent strong, 20 percent satisfactory and 15 percent "needs improvement."
And Ford, which began using rating systems last year, dictates that 10 percent of the automaker's 18,000 managers will get A grades, 85 percent Bs and 5 percent Cs. (Initially, it asked for 10 percent Cs.) Those who receive a second consecutive C can be fired.
Executives who aim to improve staff performance and weed out deadwood say the grading systems force managers to frankly assess and inform employees about their work and chances for promotions. Otherwise, they say, managers tend to push along poor performers with deceptively inflated reviews.
"Not removing that bottom 10 percent early in their careers is . . . a form of cruelty because inevitably a new leader will come along and take out that bottom 10 percent right away, leaving them, sometimes midway through their careers, stranded," Welch wrote in his annual letter to shareholders in February.
The grading systems, however, are based on subjective judgments and often produce skewed results, critics say. Employees who belong to a particularly talented or productive unit, for example, may receive poorer grades than they would get in a less-talented unit. And while employees who are outstanding or weak usually stand out, trying to strictly quantify each group can be a problem. "Once you start attaching a number or percentage to this group, they no longer fit the definition of exceptional," says Mary Jenkins, a Brighton, Mich., business consultant.
At the same time, trying to distinguish among the vast majority of employees in the middle who rates a three and who rates a four, for example, may be impossible. "There's an assumption that a manager can know the precise performance level of an employee, when this sort of ranking is really a very subjective judgment that depends on many factors," says Tom Coens, an East Lansing, Mich., labor lawyer and co-author with Jenkins of the book Abolishing Performance Reviews.
Among these factors are a manager's biases about the qualities he values and the fact that management is so often in transition. Also, ranking by a single grade tends to blur the range of talents and deficits within one person.
Moreover, the grading systems pit employees against each other, undermining teams, which often are intentionally put together with varying talents in mind. In Internet chat rooms, scores of employees complain they've been graded unfairly, feel angry and unappreciated and don't want to collaborate with co-workers with higher grades.
The grading systems also have triggered employee lawsuits at Ford, Conoco and Microsoft. One class-action lawsuit filed against Ford in February alleges that the grading system discriminates against older workers. A second suit alleges it discriminates against older white males.
Defending the system as fair and necessary in a competitive industry, Ford spokeswoman Anne Marie Gattari says that in the past employees "weren't given honest and frank feedback that they could use to improve themselves. It wasn't a good system for them as much as it wasn't a good system for the company." But some Ford employees in their 50s and older who received Cs think the grading system is a way to get rid of them.
"They've gotten excellent written evaluations for years and all of a sudden they get a C," says Michael Pitt, a Royal Oak, Mich., attorney who is representing nine Ford employees.
Even employees who have received high grades question their value. Steve Carpinelli, a former research analyst at EDS, says he was graded in the top 1 percent of his peers, yet was laid off about 18 months ago when the company cut staff and dissolved his business unit. "It was confusing because no one ever clearly communicated what the ratings would be used for," he says.
Defenders of grading systems acknowledge that their fairness and usefulness depend largely on how they are implemented. GE initially assigned employees one of five grades but streamlined that into three grades. "We had a system where 90 percent of employees felt demoralized," says Bill Conaty, senior vice president of human relations.
GE tries to make sure the bulk of managers who fall in the middle ranks don't feel demoralized by rewarding many of them with stock options. "These people may not be highly promotable but they may be your best plant manager or your best design engineer," he says.