By Andrea Gabor
The New York Times
January 26, 1992
With profits declining and competition on the rise, the International Business Machines Corporation wants to make sure all of its employees are pulling their weight. So the computer giant is making it easier for its people to get fired. Under one of the most intricately structured appraisal systems in the nation, 10 percent of Big Blue’s vaunted work force will get flunking grades in their annual reviews this year, marking for many the first step toward dismissal. Another 10 percent, deemed by their bosses to be superstars, could earn bonuses of $50,000 or more.
By contrast, Eastman Kodak’s Eastman Chemical Company has stopped grading employees. To eliminate a tier of managers and push responsibility down the line, Eastman recently did away with the top jobs in marketing, production and product development. Now, decisions in manufacturing, for instance, and solutions to, say, waste treatment problems, are hammered out in monthly meetings by the heads of the company’s three major plants. Because the new team structure makes it difficult to evaluate individual performance, Eastman Chemical is likely to adopt a system of peer review. Pressured by the recession to thin their ranks while improving products and services to remain competitive, companies across the country are grappling anew with how to get the most from their troops. And a growing minority are scrapping the all-American merit system — championed by companies like I.B.M. — in favor of a more egalitarian approach based on teamwork, where peer pressure, rather than the carrot-and-stick approach, drives motivation.
Companies as diverse as the General Motors Corporation and Eastman Kodak are experimenting with a pass/fail approach to performance evaluation as a way to replace the traditional star system. They are gradually being won over to the notion that rewarding a handful of “winners” and holding them up as the keys to corporate innovation and success brands the majority of employees as losers, hurting morale and cooperation.
The Trouble With Rating
“The merit rating nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, and nourishes rivalry and politics,” said W. Edwards Deming, a management expert whose principles for attaining higher quality are inspiring performance appraisal reforms.
Some experts, in fact, believe the merit system, and the way it measures and rewards individual initiative, is in fundamental conflict with the search for quality and solutions to competitive problems.
In his upcoming book “The Economics of Trust,” John O. Whitney, a former chief operating officer of Pathmark supermarkets and now a management professor at Columbia University, writes: “If we continue with our traditional measurements and rewards, our relative productivity will continue its decline, our quality will suffer, and our ability to compete will wither away.”
Traditionalists, for whom the star system is as logical as Darwin’s theory of natural selection, argue that abandoning it would breed complacency rather than discovery. “You start with your culture, where your history and practices have positioned you,” said Walton E. Burdick, senior vice president of personnel at I.B.M., who contends that performance appraisal systems must reflect the ingrained culture of individualism long fostered by American companies.
Moreover, he said, in defense of I.B.M.’s recent actions, “The destiny of this corporation is dependent on the quality of the employees. We’re still a compassionate caring company, but in a global competitive environment, making the bottom 10 percent uncomfortable is good business.”
But proponents of no-fault performance appraisals counter that the country has outgrown the corporate star system. It used to be easy to give merit raises to most employees, but as competitive pressures have tightened salary budgets, companies have been forced to make hair-splitting distinctions between individual performances.
Earl Conway, director of corporate quality at Procter & Gamble, said that as companies “get better and better at selecting and training individuals, it’s going to get harder and harder to make distinctions between the overall quality of individual performance.” That’s especially true as they encourage employees from different departments and with widely varying expertise to work in teams.
In response, a cluster of companies are overhauling the way they manage, evaluate and compensate workers to foster cooperation. Rather than passing judgment on individual performance, some companies are trying a pass/fail approach on the premise that individuals can be only as effective as the systems within which they work. In this setting, the boss is a trouble-shooter who helps employees improve the system and create an environment conducive to change.
They hope that the teamwork that results will have as big an impact on overall corporate productivity as it did on manufacturing in the 80’s, when it helped improve such things as car assembly at the Ford Motor Company. And in their view, it is a better way to capitalize on the strengths of a uniquely diverse work force. Although diversity may be difficult to manage, it is a resource that can give United States companies an edge over most foreign competitors because it provides the same creative potential that has made cross-functional problem-solving among the most important innovations of the decade, Mr. Conway said.
Lesson Proved in Japan
The nascent movement away from the traditional meritocracy draws much of its impetus from the growing popularity of the quality managment principles of Dr. Deming, a Ph.D in mathematical physics who helped inspire the quality revolution in Japan after World War II. At the root of the 91-year-old management guru’s teachings is the observation that all processes — whether they involve people or machines — are subject to some amount of variation that erodes quality. Management’s job is to control the level of variation and to enlist the help of employees to constantly improve the overall system.
“By managing the process, you free up people to do what they want to do anyway,” said Bob Dorn, chief engineer at G.M.’s Cadillac division, which has embraced the Deming concept. “It’s like being in a phone booth. You can turn around, but you can’t move very far. Management’s job is to continue to move the walls back.”
In recent years, Dr. Deming has gradually convinced corporate America of the value of a more collaborative, process-oriented vision of management. His concepts, for instance, were instrumental in the turnaround of a range of American manufacturing companies including Cadillac.
At G.M., the experiment began in 1989 after the automaker abandoned a company-wide ranking scheme, much like the one initiated recently at I.B.M., that graded employees on a curve, arbitrarily giving 10 percent of the staff a poor rating. The system implicitly penalized individuals for the company’s declining market share and implied that the fear of a low ranking could coerce employees into doing better. But G.M. employees say the scheme caused morale to plunge, setting off a “near revolt” among managers. The strategy was gone within a few months.
In its place, a number of G.M. units, including Cadillac, began to look toward an embryonic experiment in the Powertrain division of the company’s “big car” group, Buick-Oldsmobile-Cadillac. Powertrain executives had replaced rankings with a radically different appraisal system that reinforced a one-for-all group culture. It tied compensation not to annual appraisals, but to a “maturity curve” that considered an individual’s seniority, level of expertise and the overall market for his or her services. Evaluations were based on input from peers and subordinates as well as from managers.
Powertrain allowed for the possibility that an employee might truly be outstanding. But to prevent such designations from becoming demoralizing, such rankings require “consensus by acclamation; no debate.” Last year, only 5 of 1,600 employees were deemed exceptional.
The new appraisal and compensation plan has survived three Powertrain reorganizations, and is likely to be applied to all 65,000 employees in the recently consolidated and expanded division, which includes all G.M. engine, transmission and casting operations. In a recent company survey, close to 90 percent of the original Powertrain group supported what had been the most controversial aspect of the plan — the evaluation by peers and subordinates. It used to seem as though managers “were flipping coins to determine what your next career position would be,” said Chris Meagher, who oversees 20 Powertrain engineers. “With the new process, people are more confident that it’s an even exchange.”
The system is also considered a contributing factor to the turnaround of Cadillac, which adopted it in 1989. Cadillac, expecting to sell a total of only 60,000 of its 1992 Eldorados and Sevilles, already has orders and sales of 50,000.
At Procter & Gamble, some executives have begun to question the traditional merit system as a result of a recent study indicating that employees were starved for career counseling and that the company was losing many of its brightest as a result.
The consumer products company has one of the most selective hiring and training programs in the country and a turnover rate so low that most companies would envy it. Yet promotions and career development often seemed arbitrary. “Talented individuals miss out on career opportunities because they happen to be in the wrong place at the wrong time,” said one company executive. “Promotions don’t necessarily go to those with the best mix of skills.”
To improve on a collaborative management process that took root more than 25 years ago, chairman Edwin L. Artzt ordered his lieutenants to spend more time “mentoring.” First, subordinates will discuss with their managers once a year their progress in meeting long-term career objectives. Under another grass-roots proposal, every P.& G. employee would chart his or her career path for 10 to 20 years, amending it along the way. Managers would offer advice on how to achieve objectives and take useful career detours.
Proponents believe the process will keep talented individuals from falling between the cracks and help P.& G. pair individuals in marketing and product development, for example, who have complimentary interests and skills to build more creative work teams. “We want to make it easier for employees to focus on their customers, rather than on their supervisors,” said one executive.
The Zytec Way
Indeed, as companies turn to teamwork to foster innovation and speed decision-making, they are driven to reassess the way they supervise and reward performance. Take the Zytec Corporation, a maker of customized power supplies in Eden Prairie, Minn. After being spun off in 1984 by the Control Data Corporation and without a single outside customer to its name, Zytec overhauled its performance appraisal and compensation system with an eye toward building the sort of collaborative environment it deemed was needed to quickly churn out products for customers.
For the last few years, the vast majority of Zytec employees have earned the same percentage pay increases. The company has eliminated bonuses and executive perquisites, and it maintains a narrow 14-fold differential between the salary of the chief executive and the lowest paid manufacturing worker.
Like Powertrain, Zytec, in its only concession to the old star system, agreed to let managers petition for extra money for a few exceptional employees. “The system isn’t perfect,” said Ronald D. Schmidt, chief executive, referring to the difficulting of keeping the exceptional category below 5 percent of the work force. “But it certainly hasn’t hurt us any.”
Last year, the privately held company won the Malcolm Baldrige Award for Quality and made nearly $2 million on more than $74 million in sales. Since 1988, it has slashed the time it takes to develop a new product by 50 percent, cut product development cost by nearly as much, and increased sales per employee to $100,000, 20 percent above the industry average.
The recession and the need to pare personnel, however, confronts these pioneers with new challenges. G.M., for instance, looking to eliminate more than 20,000 jobs, has given the Powertrain division six months to cut 800 jobs. The division is canvassing employees for ideas and is considering everything from leaves-of-absence to job-sharing to transferring work once done by outside contractors to in-house personnel — but not trying to identify poor performers.
Says Mary Jenkins, director of human resource planning at Powertrain: “When we’re done, we don’t want people wondering how a colleague lost their job. If it isn’t done carefully, people who remain could be very negatively affected.”
I.B.M. Annual Evaluation: 7 Pages Per Employee
To identify the best and worst employees, every manager at I.B.M., beginning this year, will use a seven-page annual evaluation to rate employees on a scale of 1 to 4, with 10 percent receiving the top and bottom grades, and the rest getting 2’s and 3’s. The managers will also rank employees by their relative contributions to the business. People in the uppermost tier on both scales are eligible for bonuses, while workers with the lowest grades will be given three months to improve their performance, or lose their jobs.
I.B.M. says it is not abandoning its no-layoff policy. The new system is not related to its efforts to eliminate 20,000 jobs this year, it says. Rather, in trying to raise performance standards, it is retaining only the best people. “In the competitive world we’re in, we can’t drag along folks who aren’t” making the grade, said Walton E. Burdick, senior vice president of personnel at I.B.M. “This doesn’t mean people at the bottom are necessarily going to be fired,” he added.
But some management experts believe the strategy could backfire. Because I.B.M. is known for hiring only high achievers, alloting low ratings to a set percentage of the work force is “neither realistic nor fair,” said John Parkington, national director of organizational research and development at the Wyatt Company, a human resources consulting firm.
The new quota system, said John O. Raudsep of the Towers Perrin management consulting firm, could “destroy the credibility and the effectiveness of their appraisal program.”
What do I.B.M. employees think? “They’re just trying to get rid of a lot of people,” said one, who has worked at I.B.M. for more than a decade and asked not to be named. “There are feelings that Akers has been screwing up, and now he’s turning around and trying to blame others.” The reference was to John F. Akers, I.B.M.’s chief executive.
The employee’s story shows what a slippery slope I.B.M. may be on. She said she received the second-highest rating — a 2, on what had been a 1-to-5 scale — for most of her career there. But a few years ago, she got a new boss and her grade slipped to a 3. She believes the downgrading has more to do with her request for a job transfer than any change in her performance. Now, she says, she is in danger of being pushed to a 4.
Even colleagues with consistently high grades have reason to fear, she said. An employee with a 1 rating, for example, who has had a project cancelled could get a low ranking on the portion of the appraisal that measures relative contribution to the business. Under I.B.M.’s complicated new appraisal formula, the overall rating would probably drop.
To Cut Raises, Give Bad Grades
Many experts agree that tying raises to performance reviews can prove demotivating, particularly in a recession.
As budgets tighten, companies naturally want to cut down on raises. In many cases, that is most easily done by simply giving fewer favorable annual appraisals, said Marsha Cameron, a salary management expert at the Wyatt Company, a human resources consulting firm. But, of course, those being appraised are left to wonder why they are suddenly less valuable than they were in better times.
That may explain why only 40 percent of the companies with so-called pay-for-performance systems say they are satisfied with the results, according to a recent study by Towers Perrin.
Most companies, however, aren’t likely to scrap their performance appraisal plans soon. For one thing, companies switching to pass/fail evaluations say they have had to spend years re-educating their work force about the philosophy and the mechanics of the alternative system.
Also, many defend the grading game on the ground that employees want to be judged, and rewarded, for individual performance. Still, studies at many companies show that the vast majority of employees feel they are above-average performers. And most managers acknowledge that when people ask for a grade, they are expecting a good one.
Copyright 1992 The New York Times Company