Why Performance Management Works the Way It Does - Stack Ranking, PIPs, Ratings, and a FAQ
Most employees only learn about how performance management works at their company when it's too late. Here's what happens behind the scenes.
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This can be a bit of a depressing topic. And often one of the more taboo topics for managers to talk about. It would be a fairly unique sight to see a manager bring their team into a room and say, "Let's talk about PIPs today!" Awkward.
It should happen. But instead, most individual contributors (aka non-managers) hear almost nothing about performance management unless they get into trouble. And at that point they have to scramble to figure out what the heck is going on.
FYI, my knowledge and advice is for corporate positions, like product managers, data scientists, managers, sales, marketing, software engineers, etc. I know just enough about warehouse and data center employees to understand that their processes are vastly different.
The majority of my experience with these processes is from my time at Amazon and Facebook/Meta, but most companies have similar processes.
Why do companies have performance ratings in the first place?
Almost all companies have a concept of performance ratings. These ratings range from some form of not-good to just-fine to incredibly-valuable. Every company has different titles for these ratings, but the purpose of these ratings is twofold.
- It is a mechanism to pay more money to their top performers. You limit those top ratings, forcing managers and organizations to choose only a few top performers to receive top money. Those top performers make more money, and theoretically, you keep them from leaving the company. Because I assure you that companies would be thrilled to pay you nothing if they could get away with it. So this is a retention mechanism.
- It is a mechanism to reduce the number of poor performers in the company. That's the topic of today's article.
You notice how there is a limited number of top ratings at almost all companies? That's because, lacking firm control, many managers would happily rate the majority of their team as incredibly-valuable. Why? Because we're all human and biased. We can't help it. If you've worked for me, there's a good chance I liked you. I just think you deserve that great rating. Also, my team is happier and has higher retention if I pay you all more. So I'm also incentivized as a manager to bribe my team to be happy and stay.
(Which, as a side note, is a good reason to be skeptical when people say that managers love to give poor ratings. That's rarely the case. Most managers need corporate incentives and encouragement to rate people poorly.)
What companies quickly recognize as they grow is that they need to know who to reward, if managers always insist that their entire team should be rewarded. By limiting the number of top ratings (as a proxy for compensation increases), managers are forced to be selective. When they're forced to be selective (and sometimes required to defend their decisions), the company hopes that managers will actually reward only top performers (not just the people they like).
The mirror situation exists for managing poor performance. Managers usually like their team members. Managers also don't like to hurt people's feelings. As I explained, managers would prefer to just say that the majority of their team is incredibly-valuable. Similarly, in most cases, managers will go to great lengths to avoid flagging someone on their team as not-good.
However, imagine you own a company. You know that your teams sometimes make bad hires. It's pretty obvious when you grab your coffee from the company kitchenette that some of your employees can barely follow coffee making instructions, let alone help you make money.
So what do you want to do? You want to reduce the number of poor performers in your company. You're not evil. You just know that you're wasting money on this employee when you could have a different (and better) person do that job.
At a company of sufficient size, there are always people who are demotivated, in the wrong job, lazy, bored, distracted, or missing critical skills. Many of us have worked alongside poor performers. We know that it's highly disruptive to a team to have a poor performer stick around. It's most impactful to our top performers, who quickly lose patience with their incompetent team. Keeping a poor performer on a team is a quick way to lose your top performers. So in a way, firing your bottom performers is also about supporting your top performers.
Yes, you can, should, and do coach people to improve their performance. But obviously not everyone will improve or has the capacity to be a valuable contributing member of the team. Regardless of the reason, some employees need to go.
How do you identify the employees providing the least value to the company? You use the rating system again. But, considering managers would rather eat live worms than flag a team member as not-good, how do you force that process to happen?
The infamous Stack Ranking.
