Pink Slips or Promotions: Do Corporate Managers Even Know What They’re Doing?

Investors often cheer corporate managements' decisions to cut costs by cutting payrolls. However, long-term investors should question layoff decisions. What's the likelihood that corporate managements even know who their best employees are? Microsoft (NASDAQ: MSFT  ) is embarking on a new and better way to make the judgments.

Whacking the stack
The Wall Street Journal reported that Microsoft (NASDAQ: MSFT  ) is moving away from its "stack ranking" employee evaluation system. Using this system, managers must rate their employees on a scale of one through five when comparing them to their peers. There have to be some ones. Not only is any sense that one is an "underperformer" a morale killer, but such employees lose out on promotions and bonuses.

General Electric spearheaded this system under Jack Welch; it theoretically separates stars from duds. It's controversial for many reasons, and quite a few companies are distancing themselves from the technique. That includes GE itself. Under Jack Welch's successor Jeffrey Immelt, the megacorporation has moved to qualitative rankings.

The creepy stack ranking practice has another nickname: "rank and yank." A risk of this type of system means that there are always low men on the totem pole to take out.

Such systems turn people into numbers, including dollars and cents. Another ominous side effect: a permanent bottom tier of people who could be viewed as "expendables." Red shirts are amusing on Star Trek. In the real world, assigning people expendable roles isn't amusing or good practice in any sense of civilized society.

Reality check
Even on the pure human nature level, there are many reasons to think the practice is ripe for myopia. Do managers even always know who the best workers are?

What about different personality types? Some people are well versed in the art of BS. There's a reason why BS works. It flatters and impresses; who wants proof when there's a likable and charming line?

The extrovert versus introvert balance is another fascinating facet of how employees flourish and succeed (and sometimes, unjustly, don't). Extroverts are effervescent, dynamos in meetings, and have no problem conveying ideas, often in rapid-fire succession with a verbal flair.

Introverts simply function differently. They're often quiet in groups, thinking, analyzing, and weighing. Many find that electronic communications allow them to convey their best ideas later, rather than immediately in face-to-face meetings. They also come up with brilliant, great ideas, even if they aren't delivered with overt fanfare. Sadly, sometimes such ideas and contributions are hardly recognized.

For whom the bell tolls
Companies that conduct serial layoffs imply how this style could veer toward the very worst extreme, debilitating employees, morale, and eventually, shareholder value when companies fall apart, attacked from the outside, and consumed on the inside.

According to The Wall Street Journal's research, Cisco (NASDAQ: CSCO  )  uses such a bell curve to assess employees -- Cisco is, in fact, a fascinating example to ponder.

In August, Cisco announced a plan to let go of 4,000 employees -- despite the fact that it's still profitable, reported a perfectly decent quarter, and has plentiful cash on its balance sheet. In 2012, it laid off 1,300 people. In 2011, it let go a whopping 6,500 employees.

Here's yet another element that should lead to questioning whether such situations add up to management failure and serious, yet basic, problems. This year, Cisco has hired 7,500 people.

On the one hand, Cisco hasn't taken too many jobs out of the already struggling economy. On the other, if management is hiring and firing, rinsing and repeating, is it hiring properly to begin with? In the social sense, that is actually messing with people's actual lives, as well. It also ruins morale with existing workers.

Blackberry (NASDAQ: BBRY  ) has been struggling for years now. Its need to lay off so many workers implies hardly that anyone will be left to help it compete in the smartphone market. Last month, it began the process of letting go of 4,500 people. Meanwhile, Blackberry investors have taken a bath when the potential of a takeover fell through recently.

Investors should view situations like these as major red flags. In addition to the possibility that managements aren't properly assessing the real loss inherent in mass layoffs, it could also show real chinks in the armor. For example, mass layoffs can indicate floundering companies that keep desperately changing strategy in order to find growth somewhere, anywhere.

The brain drain risk
In an interesting aside, news has broken that Yahoo! (NASDAQ: YHOO  ) CEO Marissa Mayer is going in the opposite direction from Microsoft, embracing this bell curve evaluation system. BusinessWeek expounded upon how significantly the style is going out of style, though. Of high-performing companies, only 5% used the system in 2011 versus 20% in 2009. Obviously, many companies are beginning to recognize the weaknesses in the controversial practice.

Many investors -- including myself-- try to conduct qualitative analysis of our own when researching stock ideas. However, the strengths of qualitative analysis, and trying to cut through the veils of assumptions about valuable assets, should be applied to business management, as well. These views of positive future growth go hand in hand.

Management quality and the way they handle their workforces have everything to do with whether companies are good long-term portfolio holdings or not. Brain drain is a real liability, even if it doesn't show up in companies' balance sheets.

Intellectual capital is an intangible asset and, therefore, often overlooked; but when it comes to corporate survival, it is real.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

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Read/Post Comments (29) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2013, at 5:50 PM, gskinner75006 wrote:

    In the past, mass firings were usually always a sign of management failures. Either in the understanding of the basic business model or the failure of the long term plans. Sadly, these days, the idea that "shareholder value" must be increased at all costs now drives most of these firings. People need to remember that in the end, all business exists because of both the human product and the human customer. Without either, the businesses does not exist.

  • Report this Comment On November 14, 2013, at 5:58 PM, TMFLomax wrote:

    If this were a Facebook type commenting area, I would thumbs up your comment gskinner. :) Indeed.

    Alyce

  • Report this Comment On November 15, 2013, at 11:40 AM, SkepikI wrote:

    Alyce: I read your whole article and sadly am no more enlightened than I was before I started. The struggle to select and rate people has been going on for Milena. There seems to be no particular improvement over the knight's system of trial by combat, regardless of rigid "bell curve" standards or kinder "hand up improvement program" standards.

    The only improvement I've ever observed in rating people has come from excellent managers who have experience and a track record of success using whatever system is in place honestly and effectively. I've also observed the OTHER KIND who regardless of the system find effective ways to game and abuse it to their own ends (usually to the detriment of success for the organization). If you ever came across ENRON when they were alive, you would know they had just such systems in place, with a ruthless bell curve and out the door for the bottom 10%.

    The use of one system or another is always subject to the human interpretation and judgement of those using it. I'd simply suggest to you and your readers that its much more important to look at WHO is using the system than what system is in use.

  • Report this Comment On November 15, 2013, at 12:20 PM, Megatron916 wrote:

    This entire article literally said nothing. This is the 3rd article of yours that I have read and upon finishing immediately questioned your role in any management position. I sincerely wish I had never clicked the link. Stop wasting readers time with your nonsense and quit writing. You frustrate me.

  • Report this Comment On November 15, 2013, at 12:49 PM, DeltaNKilo wrote:

    with regard to "stack ranking", this method was very prevalent a while ago. At Harvard Business School, they rank students against each other like that (at least, that's what they used to do; I am Class of '01). It was called "forced curve". Don't know if that's still the case, though.

  • Report this Comment On November 15, 2013, at 5:03 PM, lovepeace wrote:

    There is no bell curve in "team". I will not be investing in YHOO or any company that does not value it's employees enough to give them the tools to succeed.

  • Report this Comment On November 15, 2013, at 6:10 PM, xetn wrote:

    Lets get something clear; employers hire people that they believe will add to their bottom line. They expect when they make a hire (unless hiring a person without any experience) to be able to do the job they were hired for. They do no hire to "give them tools to succeed" or any thing else.

    So, if they hire an employee and pay them, say, $30 per hour, they fully expect that the employee will at least contribute more than $30 per hour to the bottom line. Why else would they hire someone that does not?

  • Report this Comment On November 15, 2013, at 7:35 PM, lovepeace wrote:

    They would hire someone who they hope can grow with the company, not stay at the $30 an hour level. Unless of course, the company does not expect to grow.

  • Report this Comment On November 16, 2013, at 5:38 AM, DJDynamicNC wrote:

    "They expect when they make a hire (unless hiring a person without any experience) to be able to do the job they were hired for"

    Agreed...

    "They do no hire to "give them tools to succeed" or any thing else."

    ... but here it goes off the rails. I've had over a dozen different jobs, from the most boring manual labour up to running my own companies. Every time I've been an employee, the skills I needed to perform the job were taught to me in training. I didn't know how to work a cash register at my first retail job, I didn't know how to work farm equipment at my first farm job, I didn't know how to input inventory at my first supervisory job, because all of those tasks were specific to the company in question. Without those "tools to succeed," I certainly wouldn't have. It is in the company's best interest to give its employees the tools to succeed and to grow as individuals and as workers.

    But we don't really have to reason it out for ourselves. The most successful corporations on the planet offer training to every employee; many of them will even pay for university degrees for employees in order to earn more from those workers. The market disagrees with you on this one, and surely you can't find yourself going against the market, can you?

  • Report this Comment On November 16, 2013, at 7:40 AM, gkirkmf wrote:

    @Megatron916... Alice had a simple message... avoid investing in companies which incorporate the practices she outlined... this to me is the Fool writers mission... exposing us to all aspects of investing in a company. Thank you Alice.

  • Report this Comment On November 16, 2013, at 8:15 AM, gkirkmf wrote:

    @TMFLomax

    There is another ranking method which is incorporated when a company is preparing to sell itself. Get rid of the highest paid persons to reduce the payroll, thus increasing profit picture quickly. This is the silicon valley model, and has been repeated several times over the years. If you can definitely establish that this is happening in a company, it is a buy sign. If all the other income and balance sheet numbers are good, there will probably be a nice bump on the buyout. Of course, for the employees, it can be a shocking experience as the highest paid are usually ones who have been working for the company for a long time, and are potentially the most valuable to the company in the long run.

  • Report this Comment On November 16, 2013, at 8:36 AM, Mathman6577 wrote:

    I didn't see anything in this article or the comments about the "rebuttal" op-ed article in the WSJ written by Jack Welch. He basically said the story about Microsoft (and GE) was completely off-base and inaccurate. He said that GE used a qualitative system all along. The author of the original story didn't even use the right term for "rank and yank" -- basically it was lazy reporting.

    Let's get both sides of the story written so readers can make their own informed judgement. Moving too far over to one side does not benefit anyone.

    Based upon my working in private industry for over 30 years and also talking to people who work at Cisco and GE (yes, I'm using real data here) there is no "bell curve" or numerical ratings. People get hired and fired based on "human" perceptions of their performance. Managers know the "good" and "bad" workers.

    The company I work for has practiced "mass" layoffs and "mini" layoffs over the years to weed out poor performers and when business conditions warranted it. However, it is consistently ranked as "A" quality by the S&P and also many other companies use their educational opportunities system as a model. Including dividends the stock has returned over 5000% since 1983. All-in-all a good place to work for (for those that want to work).

    I go back to my "canned" comments when I read an article like this: "If you don't want to a work for a company (that practices "bad" behavior like layoffs, etc.) don't work for a company. If you don't want to invest in a company, don't. If you don't want to buy from a company, don't. Just don't tell me what I should do."

  • Report this Comment On November 16, 2013, at 8:47 AM, Mathman6577 wrote:

    ... and as Steve Jobs said "just one more thing":

    Regarding Cisco firing 6,500 people and hiring 7,500 people. If the company is like most these days it probably needed to let go production workers (and hire engineers or other high tech workers) because of advances in technology that made manufacturing more efficient. It probably was not due to the fact that Cisco management hired the wrong people and had to let them go.

  • Report this Comment On November 16, 2013, at 1:57 PM, SkepikI wrote:

    @mathman6567: Very much the most useful information in this whole exercise. I missed Jack W's rebuttal, but given Jack's track record, and my own experience (similar to yours) I am unsurprised.

    For those of you who think some peculiar rating system or some non-success focused judgements are better for people or organizations, you might want to reconsider.

    You might also wish to consider which people were better served by the Enron bell curve approach wielded by managers focused on supporting illegal activities, crooked accounting and a growth story at the expense of real performance. The "bottom 10%" was heavily populated with those who wouldn't go along with these self-destructive activities. I never worked for them, but knew several people who did, and they became quite glad to have been in the bottom 10% though it was painful at the time.

  • Report this Comment On November 17, 2013, at 10:41 AM, stockdissector wrote:

    Great article Alyce.

  • Report this Comment On November 18, 2013, at 2:25 PM, alexf wrote:

    Sadly many big public companies work for Wall Street.They have permanent myopia. They do not look far ahead but generally only to the next quarter or two.

    Is the stock down and costs are high? Remove 4,000 employees and the investors like it. Mr. Market sees "they are cutting costs" and the stock price goes up.

    Now, does anybody look at which employees they let go and why? It takes a lot of money and effort to hire, then train employees (what they call "resources"). For engineers, software people and the like, they generally pay a hefty finders fee to sourcing companies too. Then they train said employees in the company's products or services. This has a cost.

    A couple of years later they let them go. A few months later, they need to "re-hire" thousands. Who do they hire? The same people? No. They are already employed elsewhere (remember they were valuable and knowledgeable people to begin with). So they hire inexperienced people and the training and adapting cycle starts again. Rinse and repeat. Myopia.

  • Report this Comment On November 18, 2013, at 3:39 PM, banmate7 wrote:

    Ironically, just like with investing, one can leverage the herd mentality to advantage in a professional setting. Keep a low profile. Do your job well enough so that that politicking social and career climbers need you. Let the herd fight amongst themselves while you develop "value".

    Even within a stacked ranking system, you will more often than not fall within the middle like this. And you should have ample warning to get out if management is really determined to put you in the bottom of an imposed curve.

    Save & invest your money. A strong financial foundation is the ultimate career independence. When you have money, you can afford to side step job politics. You can afford a range of salary. You don't need that promotion. You can afford the time it takes to find alternate employment.

    All the best.

  • Report this Comment On November 18, 2013, at 4:36 PM, MelissainVA wrote:

    Evaluating staff is DIFFICULT!

    With a capital D. No perfect system exists. And the debate over what the best approach or even OK approach is literally fills numerous PhD dissertations every year.

    Hiring folks is expensive in and of its self, and good people are a lot harder to find than you might imagine, so yes, you gotta set them up for success once you've made that investment. Also at times, you do make hiring mistakes and nothing drags down the morale of a team like having the wrong or non-contributing members involved.

    However the message that Alice is trying to get across is a simple one: No company every shrank its way to greatness.

  • Report this Comment On November 18, 2013, at 6:56 PM, Mathman6577 wrote:

    Good point MelissanVa: Apple and Google keep growing and hiring and not laying off.

  • Report this Comment On November 19, 2013, at 6:32 PM, tab66 wrote:

    Overall, I agree with Alyce. While there is no perfect system the ranking systems currently in use produce significant disengagement and the whole bureaucracy around 'performance management' is a massive waste of time for most managers.

    Additionally, the use of contractors is widely used by major companies to hide true headcount. Anyone who has been through a major downsizing in a mid to large size company has often seen ex-employees returning as consultants or contractors, but no longer on 'headcount'.

    With all that said, if a company wants to rank and yank (Yahoo?) the old-fashioned rating approach is effective if undeniably crude and only accurate 80% of the time.

  • Report this Comment On November 19, 2013, at 7:48 PM, TMFTomGardner wrote:

    71% of everyone who goes to work is either indifferent or downright negative on their employer and job. There are major disconnects between company, workplace, employee, and purpose.

    When the world looks back 50 years from today, they'll be horrified by the inability of individuals and organizations to do work that matters in a way that sustains the individual and the business.

    Alyce, you're right. The evaluation systems are flawed. Not just the systems, but also the way we're building teams. The way we're training employees and defining their roles. The lack of freedom for individuals.

    Think about this. Sick day policy. Why the hell does it exist? What tremendous level of distrust must exist between Employer and Employees to say, "You get x-number of days if you're sick." Yet that is the norm.

    At the same time, organizations have to be able to re-direct employees to higher purposes and different organizations. . when things just aren't working out. I suspect you'll agree with this -- how would you feel if you knew Cisco gave 2 years severance pay to all 6500 employees. . . all of whom had agreed to accept the offer. . . and to seek a better challenge in life?

    I am extremely optimistic about the future. It is getting harder to hide as an employer or a manager. Glassdoor is so valuable. The companies that want to be loved by the world will delight their existing and former employees. Very interesting set of ideas. Thanks.

    Tom Gardner

  • Report this Comment On November 21, 2013, at 12:50 PM, Mathman6577 wrote:

    Good point about Glassdoor. The companies that treat their employees well are usually good investments too.

  • Report this Comment On November 21, 2013, at 2:50 PM, miteycasey wrote:

    "There seems to be no particular improvement over the knight's system of trial by combat, regardless of rigid "bell curve" standards or kinder "hand up improvement program" standards."

    But trial by combat is easily measurable.Knight 'A' is beats knight 'B'. No amount of ass kissing can change those results. Nothing outside the combat arena matters.

    This is the point the author is trying to make. in a forced bell curve where managers rank employees employees will not be solely judged on the quality of their work. There are outside influences, not the quality of work, that drives the rankings.

    You're managers ability to haggle, or willingness to haggle, for their employees is as important as the quality of job you do. Also your ability to kiss ass to other managers who would be in the room grading employees would be important as well...

    Here is a great article about it...the rankings part start at the bottom of page 3.

    http://www.vanityfair.com/business/2012/08/microsoft-lost-mo...

  • Report this Comment On November 22, 2013, at 5:33 PM, SageoftheSouth wrote:

    Working for one of the largest global corproations in the world where the bell curve or forced ranking was used, has its merits and negatives. But in this time and age I though and many of my colleges thought there should be a more time effective and creative process. Why rank the group between the top and lower 5 percent. It was common knowledge and apparent to all, especially Managers, or they should not be managers, who the top performers are and who the bottom performers are as well. Why waste the time to formally rank the other 80%? Salary distribution. But again a manager should have the insight to determine who has been contributing in the past and who will be contributing in the future to the success of the company. Lack of sensible common sense controls from top to bottom let to the demise of Enron. Thus you need an objective method to determine the fairness of the "ranking system" and one with proper controls. Thanks for writing something I had not thought about in a good while, now I am retired after 42 years of working for several major companies and can look back at the ranking processes and say why, and why not bring change.

  • Report this Comment On November 22, 2013, at 7:09 PM, Jimmydz wrote:

    Alyce, your comments are spot on. My organization is currently in the process of eliminating jobs in North America. The reasons you outline for these types of moves are exactly why my company is eliminating jobs. The company is profitable, yet the new CEO appears to feel the need to make his mark, and doesn't know any innovative way to do this. Every move this company has made the last three years is something that other companies tried and in many instances discarded years ago. Let's see how the institutional investors react when the stock tumbles.

  • Report this Comment On November 24, 2013, at 7:07 PM, stan8331 wrote:

    Employees are human beings. They will not work any harder than they have to for any company that treats them like office equipment. Treating people well pays tangible dividends, because they WILL work harder than you could have forced them to through fear and intimidation. Companies that hire and fire people like a commodity will not be great long-term investments.

    Excellent article, Alyce.

  • Report this Comment On November 24, 2013, at 9:41 PM, linmarman wrote:

    Although Mathman6577 makes a very emphatic, knowledgeable-sounding argument about GE in an earlier comment, he did not, it seems, work for GE when Jack Welch was CEO. I did. In fact, my name alludes to what was a GE location. At this location, the engineers were force ranked (site term). I have not followed up to see the 'rebuttal' mentioned, but I have a hard time believing that the forced ranking policy was unique to our site.

    Further, as a veteran of many layoffs (as many of us must be), when a layoff is announced, it seems that the most productive employees, with the most initiative, go out and get other jobs. So numbers are met by losing the top and bottom. I've seen this multiple times.

  • Report this Comment On November 26, 2013, at 12:06 PM, beetlecat77 wrote:

    Living in Pawtucket, RI, I have watched Hasbro over the years. I am long on the stock, but I am concerned over their employment practices. First, a large number of their creative employees are hired on contract or other short term basis. IF after a year (or more) in this state, they MAY be hired or simply let go. Being hired is still no great security, especially over the course of the past three years. The point made by linmarman ("Further, as a veteran of many layoffs (as many of us must be), when a layoff is announced, it seems that the most productive employees, with the most initiative, go out and get other jobs.") is spot on.

    So, although as an investor, I am pleased with the increase I have seen in HAS, as an investor I am also concerned about their long term prospects.

  • Report this Comment On November 27, 2013, at 3:35 PM, LeeG3 wrote:

    I worked under many systems and each had benefits and each had drawbacks.

    One of the companies installed a forced ranking system and found that some of their most important/productive people were underpaid by more than 50% compared to some of their lower ranked teammates. To say the least, that year's raises made a lot of the top performers very happy and the underachievers not so much.

    On the other side of the argument a very long time ago, I got a new job offer for $14K but it was half way across the country. I went to my manager and said that I would stay for $13K (I was making $12K at the time). He went up the official channels with my offer. Because I had gotten a 20% raise (10k to 12K) when I was promoted to that position 6 months before, it was against corporate policy for a second increase. So I took the new job which one of the best moves of my life. The funny part was that the person who replaced me had "failed" at the job before and made $17K!

    Every system will fail if there is no flexibility to see where there are exceptions.

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