Expert Perspective by Grahall’s OmniMedia Editorial Board
In her MARCH 10, 2010 article for the Wall Street Journal (AIG’s Rankings Will Weigh on Pay) author Serena Ng says: “American International Group Inc. is basing its upcoming round of bonuses and incentive pay on its new “forced ranking” system that measures the performances of about 10,000 employees… to demonstrate to the public and the government that AIG is paying employees for their performance and not just for staying at the company.”
As US taxpayers and therefore part owners for the company, we hope AIG has carefully thought this through. Forced ranking systems are not “plug and play” type tools. The success of this methodology is highly dependent on how it is implemented. And when implemented improperly, it can create or exacerbate human resource problems. AIG has a boat load of those problems in that arena.
To implement forced ranking systems effectively, corporations require the following:
1) Specific, solid and irrefutable performance metrics attached to individuals who can directly influence the metrics by which they are evaluated
2) Comprehensive and extensive succession plans
3) Supporting organizational capability and culture
Grahall would suggest another very important consideration for AIG, especially since the forced rankings are to be used primarily as a tactic for determining pay and incentives: use a surgical approach. As we explained in our June 2009 blog It’s Better to be on the Bus than Under It : “The best approach for AIG would be to select, retain and mobilize not just its best people but the people best suited to drive its success in the future.
”This surgical approach to compensation design requires a clear understanding of both the business strategy and corresponding people strategy that the company will pursue. From a company’s people strategy will flow decisions regarding the critical organizational capabilities, and more importantly the key drivers of future success A surgical approach can identify the positions in the organization that are directly and indirectly linked to those critical organization capabilities that should be the most highly valued and staffed by top talent, who are appropriately compensated to join and stay and work in those jobs.”
This step of determining not just who is “excellent” but also which positions are “critical” would transform AIG’s ranking system from “highly cosmetic” to “highly constructive.”
Like any methodology there are supporters and detractors of forced ranking systems. “Supporters… believe it motivates the best employees, removes dead wood, and helps to develop strong leaders. Detractors see a myriad of problems including a system that is open to bias and discourages teamwork.” (From “‘Rank and Yank’ Systems Could Improve Organizational Performance“).
Not surprisingly, it appears that there are some detractors in the ranks of AIG employee. Ng continues: “The forced-ranking system is already proving controversial among some AIG employees, who feel it could hurt morale and create more uncertainty at a time when the company is struggling.”
Somewhat unusual and even surprising is the fact that once the AIG forced ranking is complete, the company apparently doesn’t intend to “yank” the lowest rated employees. Ng says: “Human-resources staffers at AIG have been reassuring employees that they won’t be forced to leave the company if they fall into the bottom group, and that the company will help them improve their performances…”
No doubt those told they are “needing improvement,” or who get a “performance warning” won’t be happy. One wonders how the morale of these individuals assigned to the “bottom rung” might impact the company. In his March 13, 2010 article in Entrepreneurial Engineer (Secret to Having Happy Employees: Fire the Unhappy Ones) Jack Krapansky references a New York Times blog by Jay Goltz (The Secret to Having Happy Employees) . Krapansky says: “The real point is that employees need to do their jobs without having a significantly negative emotional impact on those around them, whether they are other workers or customers.”
More unhappiness won’t be good for AIG. And perhaps the company should consider the risk of retaining low level performers, despite the harsh alternative. Could these employees become a limiting factor in AIG’s turn around efforts? At Grahall, we think with AIG essentially on life support (through taxpayers’ contributions) that eliminating the lowest performing individuals might enhance the company. And using taxpayer’s money to reward high performing individuals in non-critical positions isn’t very smart either.
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