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So if we review some of these things that we've seen, when we're

looking at now this question of an evaluation scheme like this, not from the

top down, which is to say, a sort of straightforward view of how it

might optimize firm outcomes, by doing things

like establishing monitoring controls and boosting productivity.

But from the lateral point of view, from the point of

view that is triggered by our evaluation of the Roman grain trade,

which is to say how can you

control for agency costs, absent effective monitoring mechanisms.

And that in turn invites us to ask

the question where do people's primary incentive lie?

When we answer that question that people's primary incentive

lies in avoiding termination, we see the consequences from that.

What does that do for firm outcomes?

A firm that systematically discourages risk taking,

a firm that discourages the clustering of talent.

A firm which encourages its employees to identify a kind of baseline

metric relative to the performance of their peers, and work to that.

So there seem to be any number of reasons why perhaps, you might

end up with suboptimal outcomes as a result of a scheme like this.

This we would call the critical perspective on managers,

because this is a management decision, is it not, right?

This is a decision that management takes in

order to control for agency costs within the organization.

No good manager is going to show up to work one day, Monday morning at 9 a.m.,

and say, what is the best scheme that I can think

of to, discourage my firm from taking risks, to ensure that talent

in my firm stays well apart from one another, to try

and foster an environment which no one wants to collaborate with anybody.

To try and set up a benchmark where people identify the bare minimum

they need to do in order to get by, and won't do much more.

Where people are kind of pissed off, nervous and anxious all the time.

What's the best way for me to achieve that for my organization,

because that sounds pretty great. No one's going to say that, right?

Which means that people who have put this place, this system in place

are unlikely to have thought about it from this lateral point of view.

In other words, they're unlikely to have thought about

the agency problem in the way that the Roman

grain trade case invites us to think about it,

which is, how do I establish trust, reputation, positive incentive?

Instead, they're thinking top-down,

what is the best monitoring scheme that I can

put into place in order to keep those costs minimized?

But when we look at it from that first point of view, from that

lateral point of view we start to

see, any number of unintended, perhaps unintended outcomes.

So why firms do it?

Why do they, why do so many of

the world's leading firms implement a scheme like this?

Jack Welch in 2000 I believe when he was the, the CEO

of GE, wrote on newsletters to shareholders, they have a scheme

like that, and he said it's fundamental to our firm's success.

This is one of the ways that we can retain our

competitive advantage maintain the edge that we have in the market.

Why would someone like Jack Welch, a very smart

guy, why would he in a letter to his shareholders,

identify this, take the time to actually single this out

as being one of the reasons to explain GE success.

What do the firm, what do the firms think

they're achieving in this, with this. And

I think the point is that they're looking at it from, they're looking at

it from a results driven perspective which places the agency costs in the wrong lane.

And

because of that, it's not clear that in fact the outcome

that they want to achieve is in fact, is actually being achieved.

Well that's not a problem you say, no worries.

Given how many companies do this, given how pervasive this

is in a firm environment, there must be an abundance

of evidence, out there, that indicates firms that, that employ

a curved evaluation scheme, do better than firms that do not.

And yet when you go into the literature, what do you find?

Don't do this. You can go to Amazon and

type in, forced employee appraisal, and what will come up are

any number of books saying, drop this form of employee appraisal.

Don't do this.

It creates bad results.

Mostly, I have to say, gathered

on anecdotal impressionistic evidence from disgruntled employees,

who are all unhappy that they've been part of that

two, [LAUGH] 20% being invited to look for other, other jobs.

[COUGH] Well, that's okay.

Because perhaps there is on the other

side some robust statistical evidence from social

scientists showing optimal firm outcomes for those

firms that choose to employ this scheme.

But when you go looking into that literature what you

find is that the few studies that exist that discuss this,

exist purely using baseline models.

There are no real world examples that demonstrate

optimal firm outcomes using a forced ranked distribution scheme.

And even though studies which based on models predict perhaps a boost

of productivity in firm performance, find it that boost, of that productivity boost

is limited, last maybe a year or two years, which makes sense,

which is to say once you've gotten rid of all the dead weight,

your firm, your firm's performance will be enhanced, but thereafter you don't see or

you don't predict according to the model any particularly substantial improvement.

So, it's odd.

Isn't it?

Here we see this thing which has basically become a kind

of common currency for managing

agency costs, unsupported by substantial literature

that demonstrates unambiguously optimal outcomes.

And indeed, challenged by a not insubstantial amount of

accumulated evidence that says it doesn't work very well.

Why, then, do we still see this being practiced by so many firms?

What could possibly explain why some practice, which affects the lives

of many, many people, why should it then be so widely implemented?

I'm going to suggest to you the answer to that

is, one, it just seems like a good idea.

If I go to you and I say, look, I've got this great scheme.

And you're going to be able to constantly promote

talent, and constantly remove slackers and complacent employees.

And you're going to be constantly

rejuvenated, and you're going to send great

signals to the market, and it's going to lead to wonderful results.

What are you going to say? Well, do that!

That's perfect! That's exactly what I'm trying to achieve.

And if I don't tell you it's true, you won't be taking risks

anymore, and your employees won't want to collaborate and they'll all hate you.

Are you then likely to adopt it? And the answer is yes.

Because all you'll see are the positive outcomes that, that, that occur.

And I suggest the reason why so many firms do it is essentially a network effect.

Once one firm starts to do it you'll start to see

many firms do it because it creates a kind of fear.

Good heavens the guy down the street is now stack ranking his employees.

I better do that too.

Otherwise I might lose my competitive edge.

And that network effect seems to have taken hold.

And so what we find is that an

essentially unproven idea has taken hold of, or has become

embedded, as a good management principle for controlling agency costs.

Despite the fact that our Roman grain trade case would

predict that it's a bad way for controlling agency costs.

Because the Roman grain trade case suggests you

don't need that kind of coercive monitoring mechanism.

Instead you want mechanisms that foster trust

and reputation amongst your employees, because that's the

best way to align incentives.

Incentives that are aligned through fear of being

fired are not going to be as effective as

incentives that align based on a desire to

produce or to participate in a shared reputational mechanism.

I can't tell you because we don't have the evidence,

whether, in fact, unambiguously, one is better than the other.

But if you compare firms that do employ stack and rank like Microsoft, and

you put them up against companies that

don't, like Google, it's not clear, I think,

to any of us, that we're necessarily seeing

unambiguous better performance in one than the other.

And so absent clear empirical evidence that this should be the case, it

invites us to go back and to question, why do we do this?

And if we simply do something because it seems like a good idea without

considering why it's a good idea from

every possible angle, and only implementing it after

we have made that consideration, we are not engaging in good management practice.

That is an example of management failure.

And this is what we need to avoid, this is what firms

need to avoid, they need to avoid that kind of failure, and you

avoid that kind of failure by coming at the questions, at the problems

that you need to solve, in the widest and most informed way possible.

If you simply look at something from the top

down, and you forget to consider it from other perspectives,

you are unlikely to be able to project all

of the potential consequences for the decisions that you're taking.

And yet that is the role of a good management.

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Weighing the Method

Critical Perspectives on Management

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