Yahoo's dumb - but smart - way of judging employees

(MoneyWatch) Managers, you may rate 10 percent of your people "superior performers," 40 percent as "exceeds expectations," 40 percent as "meets expectations" and the remaining 10 percent as "below expectations." Sound familiar? This breakdown is known as a "stacked ranking" or "forced bell curve ranking." 

Microsoft (MSFT) was one of the many big companies that used this method to classify how their employees perform. No more. The software maker has declared that approach a failure and scrapped it at precisely the same moment that Yahoo (YHOO) is embracing it. Both Bloomberg and Forbes point to the latter as further evidence of Marissa Mayer's bad management. Words like "epic fail" and "HR disaster" are being thrown around. Combine this with Mayer's telecommuting ban, and she looks like the manager who is trying to take a company back to "Mad Men" days. 

But, what is so bad about stacked rankings? Forbes contributor Peter Cohan explains that it's all about incentives. He writes:

And stack ranking is an incentive system that rewards the wrong behavior. The winners in the stack ranking game are the engineers and marketers who spend all their time meeting with each manager who will decide whether they get a bonus or get fired. And during those meetings, the winners talk about all the great things they claim to have accomplished. 
The losers in the stack ranking game are the people who decide that their accomplishments -- whether it's developing a customer-pleasing new piece of software or implementing an effective marketing campaign- will speak for themselves when it comes to deciding their position in the stack.

Cohan is right. Those who speak up for themselves and can better "market" their successes and hide their failures will always get the better rankings, regardless of whether or not there is a limited amount of "exceeds expectations" appraisals available. No matter how many people can be designated as "awesome," companies still have a limited amount of money for raises and an even more limited number of promotions to hand out. By allowing everyone to have the same rating, employers over-reward the poor performers and under-praise the good performers. 

Result? Your good employees eventually leave and your poor performers pat themselves on the back for another job well done.

If you have managers who are thoughtfully evaluating their employees, you should see a natural "bell curve" appear. Some employees will be better than others, with most performing at similar levels. When this pattern doesn't emerge you need to ask why. 

There are several possibilities. First is that you have an utterly spectacular group of employees. This is very possible on a small scale -- it's feasible to have 25 outstanding people. Second, you have an utterly awful group of employees. Everyone stinks. This is also possible on a small scale and is a clear sign of bad management. The third possibility, though, is the one that Mayer is probably battling -- your managers are not willing to manage.

Mayer's widely derided telecommuting ban was another side of poor front line managers. When you're not sure what all your employees are actually doing when they are working from home, the solution is to find out what they are doing. The easiest way to do that was to bring everybody into the office. Likewise, the easiest way to find out who the real high performers are is to change the incentives -- for the managers. 

With a stacked ranking requirement, managers are forced to evaluate employees against each other. And while that approach is certainly not perfect, it requires them to think through things and make decisions, which they don't have to do in a different system.

Does a stacked ranking or forced bell curve solve your management problems? Of course not. As Microsoft found out, it doesn't make bad managers go away and it can cause internal grumblings. But it is a logical step when you're faced with managers who aren't wiling to make the hard decisions on their own.

Will this last forever at Yahoo? Probably not. Will it help weed out some dead weight in the first couple of years? Absolutely. And from all outward signs, this is something Yahoo desperately needs.