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Employee Ranking is an Innovation Killer in Tech

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You’ve been in that meeting. HR’s leading the annual performance review process and you’re being asked to rank your team members with their peers. In larger companies you’re probably being asked to force your team into a bell curve of the top 20%, middle 60% and bottom 20%, or your HR person is talking about “the lifeboat test” (what order would you throw your employees out of the boat), or if you work for Intel maybe you’re being asked to do a literal forced ranking.

It’s a tried and tested HR process. Rank your employees, make sure they fit a bell curve, assign bonuses and merit increases accordingly, fit the merit increase budget that’s been approved at the top. And you’ll be told you’re a bad manager if you think half your team is truly excellent.

Makes sense right? People fit on a bell curve of performance don’t they?

The answer is no, especially not in technology. And as the recent Vanity Fair article about Microsoft points out, this approach to employees is an innovation killer. Kurt Eichenwald’s excellent article about the Microsoft “lost decade” points the finger at many of the reasons Microsoft lost it’s innovation mojo, and one is the adherence to stack ranking. “Every current and former Microsoft employee I interviewed—every one—cited
stack ranking as the most destructive process inside of Microsoft,
something that drove out untold numbers of employees,” Eichenwald
writes. “If you were on a team of 10 people, you walked in the first day
knowing that, no matter how good everyone was, 2 people were going to
get a great review, 7 were going to get mediocre reviews, and 1 was
going to get a terrible review,” says a former software developer. “It
leads to employees focusing on competing with each other rather than
competing with other companies.”

So this case is extreme, clearly. But I’ve seen it. I’ve been in the room, cringing.

Ranking has a role to play and can be useful, but as a CEO, or team leader, you have to be thoughtful about why you are doing it.

Where the process can be very helpful is to make sure you identify your top performers. Who are the people that really make a difference again and again? If  you get your managers in a room and debate that question it’s great to see leaders advocating for their people: why they are great, why they are one of our best, what their impact is on the company and it’s growth. This discussion should lead to a list of people you, as the leader, want to pay close attention to. Are they well taken care of? do they have plenty of stock options? are they paid well relative to the market? do you spend enough time with them? is their manager working with them on their career path and training? would they benefit from a mentor? All good questions that you should know the answers to for your top performers. They are your innovation engine.

It’s also good to force the discussion of the bottom performers. Not to hold a witch hunt, but to make sure your managers are not being lazy and keeping someone in the organization who should not be there. If an employee is not performing everyone around them knows it, it’s probably because they are in the wrong job, and it’s weighing down everyone around them. Forcing the conversation of who the bottom 10% are can illuminate who should be moved on, or who maybe needs some extra help, or moved into a different job within your company.

Forcing a stack rank through the whole population leads to politics without having any business benefit. HR loves it because it’s a clean process that helps them manage the budget, but as deeply technical companies (like Rambus where I chair the compensation committee of the board) know: if you have a world class technical team a great deal more than 20% of them are excellent.

When your goal is to innovate you want to build a team where more than half of them are truly spectacular in their field, and where you demand excellence from everyone. In innovative R&D teams you need a zero tolerance policy for low quality work – and yet at the same time you need to tolerate some failure. Innovation takes risk, risk means some failure. When you are developing new products the concept of stack ranking your team into a mediocre group in the middle is the kiss of death! You simply cannot afford mediocre.

The one team where a stack rank can be useful is sales. Sales is the ultimate measurable job – everyone sees the score card every month. I know a CEO who ran a large CAD company in the 90s and he would fire the bottom 10% of his sales team each quarter on principle. The company was wildly successful, but it had a brutal sales culture. But when you live by the numbers you die by the numbers and so firing the bottom 10% each quarter created the focus on results that CEO wanted.

So what do I do? I run a process, once a year, with my FirstRain leadership team to discuss who the top performers are. Which team members are doing really great work – innovating, delivering excellent technology, winning major accounts – who’s making the difference? It’s always a lively debate. Some of the same names are (of course) on the list every year. It’s exciting to see some  new employees join the list quickly, or existing employees move up because they’re growing and their excellence is emerging. It’s a fun discussion and we use it to make sure we are taking care of the people who are making all the difference building the company. And I challenge managers on the non-performers. Beyond that, I think stack ranking is a bureaucracy we don’t need.

Software is King and the source of growth in 2011 Silicon Valley

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Every recession, every major generation of the Valley, naysayers come out and say the good days are over – but Silicon Valley continues to reinvent itself.

The latest herald of doom is Scott McNealy, former CEO of Sun. In a Business Insider interview Scott claims that Silicon Valley’s emerging sectors, like social networking and “green” technology, will not make up for jobs lost due to the software and computer industry consolidation. But with big names like Google, Microsoft, and Facebook planning for expansion, I wouldn’t be so quick to assume it’s all over.

Claiming that every new transition creates less job opportunity than before, Scott lacks confidence in the future potential of contemporary partnerships to flourish. But he’s wrong. Not only is it anticipated that social networking industries will more than make up for lost jobs, but we are likely to see unprecedented growth in the consolidation of software and hardware companies. The technology sector never fails to impress me with new innovation and change, and this “recession” is no exception.

Even Obama sees it (although maybe he is here fund raising at the same time). He says that our tech companies are the heirs to the industries that made the United States the worlds biggest economy. He is in the Bay Area today to discuss job creation and innovation around the Silicon Valley with executives like Steve Jobs, Mark Zuckerberg, Eric Schmidt, and many more.

Maybe the irony is stinging. Facebook announced last week that it will in fact move its corporate headquarters to Sun’s old facility in Menlo Park (Sun having been swallowed by the Oracle whale). This is Facebook’s second move in the last two years and they have now leased a 1-million-square-foot campus. Google has announced a big addition as well, introducing a new campus in San Francisco to help alleviate long commutes. Google has also experienced a record 75,000 job applications over the last week, and they expect to grow more than 30,000 employees by 2012 (Dow Jones).

It is software technology that is driving this growth. Eric Schmidt, CEO of Google, claims that more than 300,000 Android devices are being activated everyday, requiring more engineers and sales people to keep up with the high demand. “This will be our biggest hiring year ever,” said Jordan Newman (a Google company spokesman). Note — FirstRain is currently hiring in California and India.

Growth Industries:

Sadly I think Nokia is trying to get back to growth by partnering with Microsoft for their phone OS but my personal opinion is they just killed what was once a great phone provider. Microsoft may gain – they are trying to make the new Windows Phone 7 a success – and they are hooking up with Nokia’s strong hardware but I doubt the combination will compete. But they are not the only ones focusing on Valley software innovation. Their old competitor, Sony Ericsson, is shifting resources from its headquarters in Sweden to Silicon Valley in order to keep up with the shifting increase from hardware to software demands in the mobile phone industry.


I think Scott is just plain wrong, or certainly colored by his predominantly hardware background. He believes that Silicon Valley is “not the best place in the world to start a company,” but the evidence in the software world is to the contrary. Maybe it’s just his personal preference, but as Senator Mark Warner of Virginia correctly claims, the Internet and social networking have been “one of the rare areas of growth in the U.S. economy” in a decade that didn’t spur much innovation.

As for “green” technology not being able to make up for lost jobs that is certainly true in the short term, as it typically takes a full generation for a new industry to take effect. However, the key to the Silicon Valley economy is now software innovation, and we’re excited to be a part of it.