when it's time for annual reviews at lendingtree, there's one question on every employee's mind: am i a 1, 2 or 3?
managers at the online lending exchange rate workers on a three-step scale, based on individual goals and performance. the top 15% are told they are "1s," the middle 75% are designated "2s" and the bottom 10% are assigned "3s." managers are also ranked by their respective bosses.michael sloan
the ranking system was established to reward and retain top performers, but when the mortgage slump forced layoffs, founder and chief executive doug lebda knew where to start. "the '3s' were the first to go," once salary and department headcount were factored in, he says.
mr. lebda is a vocal advocate of forced ranking, the controversial practice of rating employees from best to worst. the method, sometimes called "rank and yank," was pioneered by jack welch when he ran general electric co.ge +2.53% from 1981 to 2001, and was rapidly adopted by other firms.
today, an estimated 60% of fortune 500 firms still use some form of the ranking, though they might use gentler-sounding names like "talent assessment system" or "performance procedure," says dick grote, a dallas-based performance management consultant who has written a book on the topic.
still, a recent study by the institute for corporate productivity found that 14% of all companies reported using a forced ranking last year, down dramatically from 42% in 2009.
that may be because "no one calls it forced ranking anymore," says mr. grote, who has helped about 60 fortune 500 firms implement the practice. "that term has become so pejorative."
critics of forced ranking say that it demoralizes workers and fosters backstabbing and favoritism. mark parbus, a former sales manager for the consumer health-care division of glaxosmithkline gsk +0.98% plc, says he dreaded the year-end ritual of rating his 15 direct reports. because the company practiced forced ranking on a regional basis, mr. parbus and other area managers met before christmas each year to spar over which employees got which ratings—a grueling process that could take an entire day. "it was like being in court—the more you prepared, the better chance your people had of reaching the top of the scale," says mr. parbus, 51.
glaxosmithkline says it rates its employees on a four-point scale, with one representing the best performers. only 25% get the top rating, but the company says no quotas exist for the remaining categories.
mr. parbus, who now runs a recruiting firm in raleigh, n.c., was laid off in 2005, though he says he never learned whether his own ranking was a factor.
proponents of forced ranking say that it fosters meritocracy. and because employees are generally told where they stand during performance reviews, layoffs and dismissals bring few surprises, says mr. welch, who introduced the "20/70/10 split" when he was at ge. "this is not some mean system—this is the kindest form of management," mr. welch says. "[low performers] are given a chance to improve, and if they don't in a year or so, you move them out. and that's the way it goes."
but what suited ge didn't work for everyone else. brad smart, a chicago-based hiring consultant, worked with mr. welch in the 1980s to implement what eventually became ge's forced ranking system. mr. smart says he disagreed with mr. welch's insistence on identifying a "bottom 10%" because sometimes a company simply doesn't have that many underperformers.
"to force those distributions when the percentages don't meet the reality is nuts," mr. smart says.
ge has since dropped forced ranking, according to spokesman andrew williams. he says the company continues to "embrace differentiation," though he declined to give details on the current process. the company phased out forced ranking during the mid-2000s.
aig's "relative performance rating system" was implemented by ceo robert benmosche in part to justify its compensation decisions to shareholders in the wake of the company's government bailout. it rates roughly 40,000 employees around the world on a five-point scale. groups of managers then decide on rankings at a yearly round-table chaired by a mediator.
in the end, 10% are deemed "1s," and receive the largest bonuses; 20% are "2s," and receive somewhat smaller bonuses; half are "3s," who get the smallest bonuses. the remaining 20% are split between "4s," who may not receive bonuses at all, and "5s," who are dismissed if they don't show improvement. a breakdown of the results is shown to the board of directors.
"prior to this, everyone was above-average," says jeffrey hurd, aig's senior vice president of human resources and communications. "you never really knew where you stood."
mr. hurd says the company is still tweaking the system based on employee feedback.
"this is all subject to human frailty," mr. hurd says. "but the alternative is where a manager sits in a room by himself and makes recommendations."