Performance reviews are incredibly important for addressing performance issues, rewarding excellence and encouraging everyone to give their best effort. But leaders face a common conundrum: Should they compare their team members relative to each other or evaluate everyone independently?
Each option—relative (or stacked) and absolute performance metrics—has its advantages in measuring results and improving performance. Each also has some significant drawbacks.
When considering which option might be the best motivator for your team, you’ll want to distinguish between two levels of motivation, he says George Georgiadis, associate professor of strategy at the Kellogg School. The first is the degree of motivation: How motivated are your employees? The second is whether your employees are motivated to do what your company really wants them to do.
“When deciding how to motivate employees, you have to be careful not to distort motivation,” says Georgiadis. “If I create a very competitive environment, for example, I risk killing collaboration. In fact, it can even lead to employees sabotaging each other.”
Here, Georgiadis describes several ways a team can benefit from relative performance metrics—and when absolute or holistic performance metrics might be a better motivation tool.
What are the advantages of relative classifications?
Relative or stack ranking systems have long been popular. First, they are often relatively simple to execute: you can stack people in similar roles against each other and see who performs better. They also tend to provide stronger incentives for less money. “If I force my team to compete against each other, I raise the bar for everyone,” says Georgiadis.
Additionally, relative classifications are less risky for workers, particularly when it comes to factors outside of their control. For example, imagine a pandemic hits and your sales team can’t meet their goals. If they are rewarded based on absolute sales, everyone’s compensation will be hit hard for reasons that have little to do with individual effort or talent. “But if they are ranked relative to their peers, that unexpected shock will be filtered out,” says Georgiadis.
Finally, relative classifications provide companies with a useful buffer against uncertainty about what constitutes good performance. Since any business operates under dynamic conditions, it can be difficult to know in advance what might help or hurt employees’ ability to perform or how a new product might go to market.
“If your salespeople are operating in a new territory or selling a new product, there’s a lot of uncertainty and you don’t know exactly what to expect,” says Georgiadis. “But if you reward people who are related to each other, then those who sell more will earn more.”
What are the disadvantages of relative ranking?
Relative ranking systems, often based on objective, quantitative criteria such as sales or productivity, had their heyday in the late 20th century at large companies such as GE and Microsoft. Today, however, many organizations are moving away from this approach in favor of more holistic reviews.
First, the internal competition associated with relative ranking is not for everyone. It can alienate otherwise excellent employees who dislike the dog-eat-dog culture that can develop outside of stack ranking systems. It can also threaten teamwork.
“Microsoft was known for having a stack ranking system and a very, very negative culture,” says Georgiadis. “Part of that was because everyone knew that if their colleagues did well, it would hurt their own rankings. Thus, they had little incentive to help – and incentive to sabotage – their colleagues.”
This fear that others will step up can kill collaboration within the organization, which led Microsoft to abandon the stack ranking system in favor of more detailed assessments.
It is possible to take this tendency into account when designing a relevant ranking system based on objective criteria. For example, some companies rate employees based on both their individual performance and the performance of their larger team. But this can cause its own problems, leading to unbalanced team compositions where top performers gravitate towards each other.
“The problem with this mixed matchmaking is that workers often learn from each other,” says Georgiadis. “So if you have all the stars in one group, there won’t be much learning between the stars because they’re well-established and everyone else won’t have the stars to learn from.”
How to get the benefits of both (and why it’s so hard)
Is it possible to get the best of both worlds: efficiency and competition as well as collaboration and guidance?
Georgiadis points out that relative and absolute ranking systems can be used effectively in coordination. Even in isolation, stack ranking systems don’t “necessarily kill collaboration, provided you build collaboration into the criteria,” he says.
For example, you could use a relative ranking system to assess an individual’s objective performance, but also “based on their abilities and skills when working in a team.” That is, instead of pitting entire teams against each other, the evaluation would rate individual team members on their contribution to the collective good, including the development of other team members.
“There’s this idea that you can have a healthy level of competition and encourage collaboration,” says Georgiadis. “It’s important to have a more holistic assessment of performance.”
A complication with this method is that it requires you to develop subjective evaluation criteria. Unlike comparing sales numbers between team members, collaboration does not have the same objective metrics. Therefore, you often have to rely on feedback, peer reviews, and manager ratings and recommendations.
“Once you introduce subjective ratings, you have other issues like trust and influence to worry about,” says Georgiadis.
Ultimately, Georgiadis advises leaders to build their incentive structures explicitly around their own priorities.
“Ask yourself what you care about as a coach, what exactly do you want your team to do, and then pay them to do that. If I want cooperation, for example, then I should provide incentives for cooperation. One way to do that is to pay them based on how they work together.”