In an internal memo, Microsoft revealed this week that it is doing away with a controversial employing rating system called stack ranking. The long overdue move should help to eliminate some of the internal competition that has prevented Microsoft employees from working together for the good of the company and help the firm realize its ambitious goals to remake itself.
The change was first reported by All About Microsoft's Mary Jo Foley, who obtained an internal memo from Lisa Brummel, the head of human resources at Microsoft. Addressed to all full-time employees, the memo states that Microsoft is abandoning the stack ranking system, which created a grading curve guaranteeing that the lowest-performing employees in any given group were identified as such and then often pushed out of that group.
"We are changing our performance review program to better align with the goals of our One Microsoft strategy," the memo notes. "[There is] no more curve and no more ratings ... Managers and leaders will have flexibility to allocate rewards in the manner that best reflects the performance of their teams and individuals."
In its efforts to remake itself for a highly-connected and mobile computing future, Microsoft has made sweeping changes to its executive ranks and internal reporting structure and has completely upended its business model. But as with any company, it is sometimes internal politics that matter most when it comes to performance. And at Microsoft, the ability and desire of employees to work together has long been thwarted by this stack ranking system, which pits employees on the same teams against each other.
You may recall the infamous (and fictional) Microsoft org chart in which all of the product groups at the firm are pointing guns at each other. Microsofties have often confided in me that this diagram is a bit too close to reality to be funny, and that this system is—now was—in place within individual product groups as well.
"Our new approach will make it easier for managers and leaders to allocate rewards in a manner that reflects the unique contributions of their employees and teams," Brummel writes. "We will continue to ensure that our employees who make the most impact to the business will receive truly great compensation."
Stack ranking dates back to Jack Welsh and General Electric, and outgoing Microsoft CEO Steve Ballmer has often cited Welsh's influence on his own leadership style. But Microsoft isn't alone in using this "cruel and brutal" system: An estimated 30 percent of the Fortune 500 utilizes stack ranking, including tech heavyweights like Amazon, Facebook and Yahoo.
But Microsoft's use of this system gained public attention last year when a muckraking Vanity Fair article infamously noted that stack ranking was a key element in what author Kurt Eichenwald termed Microsoft's "lost decade" under Mr. Ballmer. "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," he wrote. "It leads to employees focusing on competing with each other rather than competing with other companies," one employee told Eichenwald, who then went on to suggest that this system would probably have pushed out such tech luminaries as Steve Jobs (Apple), Mark Zuckerberg (Facebook), Larry Page (Google), Larry Ellison (Oracle) and Jeff Bezos (Amazon) had they worked at Microsoft.
Flamboyant writing aside, the criticism is valid: At Microsoft, top-notch engineers have often deliberately chosen poorly-performing product teams over the opportunity to work with other like-minded geniuses just so they could be ranked higher and be rewarded accordingly. That intelligent people could so easily game such a system—and irreparably harm the firm as a result—should not have been surprising. Nor should it have been allowed to continue for so long.