How to improve performance of workforce and productivity is perhaps one of the most
challenging issues for companies today. Rating systems can be used to improve performance
potential by identifying high and low performers. Probably the determination of who shall or who
shall not be promoted is the most important use of ratings (Odiorne, 1963).
Performance rating systems can be classified into two general categories: absolute and relative
systems (Cascio, 1991). Absolute ratings assess individuals against the same standards, and
relative ratings are required to assess individuals in relation to another. Heneman (1986) and
Nathan&Alexander (1988) examined the differences between relative and absolute ratings, and
found out that relative formats have stronger correlations with results orientated criteria like
production quantity and sales volume. Forced Distribution Rating Systems (FDRS) are relative
rating systems which evaluate performance, forcing raters to assign ratees into at least three
categories (top, middle and bottom) and are often tied to termination decisions. The most basic
approach of FDRS is sometimes referred as a “totem pole” because it involves ranking all
employees in a particular workgroup from best to worst (Grote, 2005). FDRS and other relative
approaches have been argued to be more accurate than absolute systems as FDRS require
raters to objectively find differences between ratees and leave distributional biases behind
(Goffin, Gellatly, Paunonen, Jackson, & Meyer, 1996; Heneman, 1986; Jelley & Goffin, 2001;
Nathan & Alexander, 1988; Roch, Sternburgh, & Caputo, 2007).
When it comes to performance improvement, proponents and critics of forced ranking have both
found support for their positions within the limited available existing research. Even FDRS
supporters acknowledge that their fairness and usefulness largely depend on how they are
implemented and whether or not they are accompanied by other changes in the overall
performance management system. While there are no hard and fast statistics regarding which
companies have succeed with the process and which have not, most observers agree that
FDRS is more favorably in companies with a high-pressure, results orientated culture (Bates,
2003) and seemed to be more acceptable at high-tech, manufacturing and financial service
organizations, rather than in the public sector and retail sector (Todd & Ramachandran, 2007).
When done correctly, FDRS ensures that company resources are directed toward those who
contribute the most or have the potential to make a positive difference. These resources include
compensation and other rewards like internal promotions.
“Forced Distribution Rating Systems are probably the most controversial issue in management
today" (D. Grote in Bates, 2003, p. 64). Since 2000, articles about FDRS (also known as forced
ranking) have appeared in such prominent international media outlets like The New York Times,
The Economist, The Chicago Tribune, Financial Times and so on. The practice of FDRS gained
fame based on the endorsement of General Electric CEO Jack Welch. The latest estimate is
that up to 20 percent of all U.S. business organizations and up to 25 percent of Fortune 500
firms use some type of FDRS (Sears & McDermott, 2003)). As many as a quarter of the Fortune
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500 companies, including Cisco Systems, Hewlett-Packard, Microsoft, Lucent, Conoco, EDS,
and Intel, may be currently using some type of performance management system built around
that principle (Melsler, 2003). Nevertheless given the intense interest in FDRS, it is surprising
that there is virtually no published research that can inform practitioners about their
effectiveness.
A prominent study on the field of FDRS was conducted by Scullen, Bergey and Aiman-Smith
(2005). Scullen et al. demonstrated for the first time the efficacy of FDRS by means of a
simulation obtaining performance potential in a scope of 30 years. The present study sought to
extend Scullen’s study attending the limitations they highlighted in their discussion. Our study
comprehends the following improvements: a) inclusion of a non-zero correlation between
turnover and potential b) firing the lowest performers of the company (instead of firing the
poorest performers of each workgroup) and c) evaluation of productivity by adding the costs per
hire and the costs of replacement. Furthermore to emulate the reality of modern companies we
decided to define a multilevel structure (executives, managers and workers) and we also
considered the effects of using internal promotion or not.Outgoin
