March 19, 2001
Companies Turn to Grades,
and Employees Go to Court
An increasingly popular technique for evaluating employees is prompting lawsuits charging discrimination at three big companies.
At issue is the ranking of managers, professionals and sometimes lower-level employees from best to worst, or grading them on a bell curve, and then using that ranking to help determine pay and sometimes whether to fire someone.
In their suits, all filed over the last year or so, employees at Microsoft, Ford Motor and Conoco say the rating systems are unfair because they favor some groups of employees over others: white males over blacks and women, younger managers over older ones and foreign citizens over Americans.
A growing number of companies are turning to grading systems, also known as forced rankings or distributions, as a way of making sure managers evaluate employees honestly and make clearer distinctions among them. At companies that do not compare employees with one another this way, nearly every employee can come away feeling above average, like the children of Lake Wobegon. But under the grading system, managers are forced to identify some people as low performers.
At General Electric, for example, supervisors identify the top 20 percent and bottom 10 percent of their managerial and professional employees every year. The bottom 10 percent are not likely to stay.
As John F. Welch Jr., General Electric's chief executive, wrote last month to shareholders, "A company that bets its future on its people must remove that lower 10 percent, and keep removing it every year — always raising the bar of performance and increasing the quality of its leadership."
Ranking or grading employees is also common at technology companies like Cisco Systems and Hewlett- Packard. But recently the concept has been catching on more broadly, according to management consultants. One reason is that as the economy slows, companies often lay off employees. Cisco, for example, announced earlier this month that it would let go as many as 5,000 workers — and would use grading as one way to identify people to lay off.
"Companies are playing their version of `Survivor,' " said David Thomas, a professor at the Harvard Business School.
Another reason is that some companies are eager to copy Mr. Welch, long viewed as one of the most successful managers in America.
Defenders of these systems say anyone who gets a low grade is likely to view the process as unfair. " `A' students love grades; `F' students hate grades," said John Sullivan, a human resources professor at San Francisco State University.
But the techniques, which some employees label with terms like "rank and yank," have come under sharp criticism. While they appear to offer an objective way to judge employees, they can be vulnerable to bias, Mr. Thomas said. Managers may stereotype employees when evaluating them on vague criteria like career potential — deciding that older workers, for example, may have a harder time keeping up with new technology.
In some cases managers can view these systems "as a tool to be used to weed out the ones you don't want," said Thomas S. McLeod, a lawyer in Canton, Mich., who represents employees suing Ford in another case.
Critics of the system also argue that companies should not apply a bell curve, in which a small number of employees get the highest and lowest rankings and a much larger number are grouped in the middle. The bell curve model assumes a normal distribution among a very large group of random individuals, not small groups.
What is more, across a company, people who belong to a particularly talented unit will suffer if a certain number of them must be given poorer grades than they would get in another unit.
"You end up with dysfunctional results," said Edward E. Lawler III, a business professor at the University of Southern California.
Some lawsuits contend that Microsoft's grading systems are discriminatory. One, filed last October, seeks class-action status on behalf of blacks and women. The suit states that the rating system "permits managers, who are predominantly white males, to rate employees based upon their own biases rather than based upon merit."
According to the lawsuit, employees are rated on a five-point scale, with only a certain percentage permitted to receive each score. Employees doing the same job in the same unit are also given a "stack ranking," from most to least valuable. Managers decide those rankings largely using what are called "lifeboat discussions," where they choose which employees they would want with them if stuck in a lifeboat. Managers had no other clear criteria, according to Christine Webber, a lawyer at Cohen, Milstein, Hausfeld & Toll who is representing the employees.
Grading is highly subjective at Microsoft, according to Peter M. Browne, a former executive who is also suing the company, charging discrimination. Mr. Browne, who is black, said managers were forced to use a curve in evaluating even small groups. He said he had to rate a group of five on a curve, for example, in deciding which ones would not receive stock options.
"You weren't told anything — just meet the curve," Mr. Browne said.
He says managers ended up favoring people with whom they socialized. "People gravitate to people who are like them, and the system just forces that," he said.
Microsoft defends its system as fair and helpful. "We want to give the highest compensation to the very top performers," said Deborah Willingham, senior vice president for human resources, adding that the system included checks and balances to ensure fair treatment. Employees can appeal their ratings, for example, and are largely responsible for developing the criteria by which they are evaluated.
Ms. Willingham also said the company did not ask its managers to give a fixed percentage of their employees any given score. "We don't force that curve to look any certain way," she said.
Microsoft has no formal "stack rank" policy, she said. And when managers do have lifeboat discussions, they are a tool to consider which employees they would want to keep if they were starting again.
While the company would not comment on the lawsuits, Microsoft "expressly prohibits discrimination," Ms. Willingham said.
Similar criticisms emerged in a lawsuit brought last month against Ford. It argues that the company's new grading system discriminates against older workers. The company, which adopted what it calls its performance management process a year ago, gives its 18,000 managers A, B or C grades. Last year, the company awarded 10 percent an A, 80 percent a B and 10 percent a C.
Ford also faces a second lawsuit asserting that it unfairly discriminated against older white males in its grading.It would not comment on the litigation but defended its use of grades. "We believe the system is fair and nondiscriminatory," a company spokeswoman said. "We are in a very competitive industry, and we need all of our employees to be the best they can be."
At Conoco, employees contend that the company discriminated against United States citizens and older workers when it laid off a dozen geophysicists and other scientists in 1999 based on a ranking from one to four, according to a lawsuit filed last year. The majority of those let go were Americans, according to the suit, as opposed to British, Norwegian and Canadian professionals.
"The rating system was selectively enforced, and there were instances of manipulation," said John Zavitsanos, the lawyer representing the workers. Even though some were given higher ratings on earlier rankings, they were eventually given the lowest possible rating of four.
Conoco, based in Houston, has extensive operations in the North Sea, and many of the senior managers at the division in question are British, according to Mr. Zavitsanos.
While Conoco said it could not comment on the litigation, it said its evaluations were based on several factors, including performance, skills and expertise. The company said ratings often changed as more information was collected and people were evaluated in larger groups. Conoco company also denied that decisions were based on anything other than individual capabilities.
Companies "do need something in making pay decisions, downsizing decisions," said Jim Kochanski, a consultant with Nextera Enterprises. The problem is that companies may not take enough care in deciding how people should be ranked. "They can get it very wrong," he said.
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