How stack ranking corrupts culture, at Uber and Beyond

Creating a meritocratic workplace where decisions about promoting and firing are based solely on employees' performance is every manager's dream. Many companies hope to turn this dream into a reality when they impose stack ranking on their workforce. Instead, it often turns into a nightmare when managers find out that “rank and yank” doesn't quite produce the fair and smoothly performing workplace they were hoping to achieve.

Uber, Microsoft, and Yahoo are just a few of the companies that have discovered in recent years how stack ranking can do more harm than good.

What is Stack Ranking?

Stack ranking is a practice in which managers are asked to rank employees on a curve according to their performance with those at the bottom placed on “performance improvement plans” or fired straightaway.

This practice was popularized by Jack Welch during his tenure as CEO of General Electric in the 1980s. Welch also popularized the 15/75/10 curve for the top, middle, and bottom employees. Stack ranking worked well for GE because at the time Welch introduced it, the company had become too big and comfortable. Employees' performance also wasn't measured adequately, further contributing to the lack of motivation.

Stack ranking can work well for large bureaucratic companies, but only when it's applied temporarily. For example, Marissa Mayer used it when she became CEO of Yahoo as an alternative to mass layoffs.

However, for small innovative teams that are racing against time to put out a product—such as the typical startup—pitting employees against each other is a bad idea.

Creating a cutthroat culture inside your company may seem productive at first, but sooner or later it's bound to catch up—as Uber is learning.

Why Stack Ranking Doesn't Work

A study by the Institute for Corporate Productivity found that the number of companies using stack ranking has fallen from 49% in 2009 to 14% in 2011. The practice is clearly moving towards obsoleteness and there are multiple reasons for that.

Measurement systems are arbitrary

One of the premises stack ranking relies on is that employee performance is measured objectively. Most companies, however, rely on managers' subjective perception of the contribution of their employees.

Many studies also show that managers suffer from biases, which do not allow them to measure performance objectively. Paola Cecchi-Dimeglio, writing in the Harvard Business Review, shows examples from her research on how gender bias corrupts performance reviews at professional services firms.

Her research on individual performance reviews shows that women are 1.4 times more likely to receive critical subjective feedback—as opposed to positive or critical objective feedback. Cecchi-Dimeglio argues that this is the case because performance reviews are inherently subjective, thus opening the doors for gender bias.

Stack ranking triggers fear and shame

Subjective performance assessment makes stack ranking hard to understand, and introduces fear and shame to the workplace.

While fear can be a positive force, when employees feel anxious about losing their job or speaking up, they quickly end up feeling dissatisfied and unproductive.

Shame—unlike guilt, which can be productive—is malignant. It creates a feeling for employees that failure is part of who they are and that there's nothing they can do nothing about it. Shame is also detrimental to the mental and physical health of those feeling it, leading to negative tendencies, such as aggressiveness, lack of empathy, and risky behavior. There's ample proof that these lead to disengagement and lower productivity in organizations.

Shame and fear cause the negative behavior we associate with companies, such as office politics, cliques, and poor communication.

Stack ranking creates a negative culture

Stack ranking is harmful because it creates an environment which encourages unproductive behavior. Instead of teamwork, it tacitly rewards backstabbing. The fear of losing one's job makes people unlikely to speak their mind, leading to a closed environment, in which innovation suffers. Finally, it leads to the emergence of “brilliant jerks,” who don't recognize or care that running a successful business is more than just hitting quarterly targets.

Uber learned how destructive such a culture can be the hard way. For years, the company has been revered as a startup success story, but recently a string of accusations about inappropriate use of private data, sexual harassment, and dysfunctional workplace behavior, has tarnished Uber's reputation.

Many point to the company's core values and performance review process—based on stack ranking—for creating a culture that favors achieving revenue targets at any cost and disregards anything else. To succeed, your business has to be someplace that people want to work, can innovate, and are not punished for taking risks in the name of the success of the company.

How to Create a Positive Culture

Instead of fixating on finding the bottom 10%, managers should focus on creating a positive internal culture that enables the best people to focus on shared goals. Here are a few suggestions on how to achieve it, even if you're just starting out and working in a small team.

Know what employees are valuing

Especially in tech, the job market is tilted towards hunters. And the best people tend to go where they can work in a challenging, yet supportive environment. You need to listen to what your employees are telling you if you want to build a competitive culture at your company.

Research has shown that millennials, for instance, value experience, flexibility, and working towards collective goals over many other conventional workplace ideals. Designing a highly-competitive environment based on the “rank and yank” system might isn't going to be the best approach if you're working with people from that generation—and the odds are increasingly likely that you are.

When you're making process decisions that affect culture—such as choosing a performance review system—keep in mind the kinds of people you want working on your team in the first place.

Encourage people to speak up

People are the most important asset of any company. When they are afraid to share their thoughts, organizations waste valuable opportunities to improve. According to prof. Amy Edmondson from Harvard Business School and prof. James Detert from Penn State, fear is a natural phenomenon in every workplace, but that doesn't mean it's impossible to create an environment where workers feel safe to express opinions.

According to the two, creating an open workplace requires two things. First, employees must feel there's no personal risk involved in speaking their mind. Second, they shouldn't feel like coming up with suggestions would be a waste of time. Therefore, managers need a system that encourages employees' participation—both in setting objectives and in finding ways to accomplish them.

Use goal setting to stimulate pushing the limits rather than aiming for the middle

Instead of using a subjective system to rank employees, create a framework for goal setting that compels employees to think outside the box. When not using this framework to measure performance directly, you have the freedom to set ambitious targets that will push employees to use their imagination and take risks, without dreading the outcome of falling short of the goals.

Objectives and Key Results give you one such framework to work with. OKRs allow you to get your whole team aligned towards a shared goal, instead of promoting egotism and backstabbing, the way stack ranking does. Getting employees involved in the process for setting up OKRs gives them safety and signals that they're input is valued. Finally, the framework teaches managers and employees alike to set concrete measurable goals and tasks, thus promoting accountability and objectivity.

Stack Ranking is Obsolete. What's Next?

It is symbolic that even General Electric—the company that popularized stack ranking—has stopped using it.

With the changes happening in the world of work, it's no surprise that more and more companies find “rank and yank” an inadequate way to manage a workforce. With the shift towards more knowledge-based work, executives realize the need to give more autonomy and foster a collaboration at the same time.