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.
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 (NYSE:BB) 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.