How dropping the bottom weight builds better organizations
Leaders who compensate poor performers in the same way they treat their best people will not get the best of either. Performance, as defined by the organization, must be rewarded accordingly.
That means that good people should be nurtured and promoted, while recurrent poor performers should be purged and let go.
GE and the now bankrupted power company Enron famously implemented “peer-review” compensation programs, where best performers (usually the top 20 percent) were given outstanding bonuses and promoted, while bottom 10 percent performers were given no bonuses at all and put on a watch list for another period (12 months in GE and 6 months in Enron).
People who remained in the bottom 10 percent for another cycle would be automatically removed from the organization.
Despite the bad rap that these reward systems created for their promoters, in this
It’d be too easy to hold it against Enron and say the system was proof of the dog-eat-dog environment that took the company down.
But the SAME system was also curiously used effectively by Jack Welch, America’s most beloved CEO, and a similar system is currently being used by Amazon. Coincidence?
In essence, the system seeks to sort out the A-, B- and C-players and compensate them in proportion to their contribution to the organization’s success.
In the case of GE, A-players embodied what Welch called the “Four Es of GE Leadership”: high Energy levels, ability to Energize others, the Edge to make tough decisions, and the ability to consistently Execute and deliver. For Enron, the company sought to reward “brains, innovation and dedication”.
Under this performance-based system, A-players could get up to three times the raises and bonuses of B-players, while C-players would get nothing.
Amazon has implemented a variation of this system called pay to quit, where they offer people in their fulfilment centers up to $5,000 to leave the company. According to Amazon’s executives, the goal of this program is to ensure they only retain people who are committed to their jobs.
Letting people go is a very unpopular way of increasing performance standards in an organization, but is probably the most effective for creating and maintaining elite teams that win all the time.
No CEO has been successful by avoiding tough decisions, and in the end, if your favorite sports team consistently passed on opportunities to bring in and retain the best players, would you still root for it?
Netflix, another company well known for only hiring top talent, considers working for it like being part of an “Olympic team”, where being cut off while disappointing is not shaming at all.
It’s just that the employee is no longer a top performer among their peers, but at some point they were. In the end, dismissed employees get a generous severance package and in most cases they will be quickly hired by another company.
Monitoring performance closely and dropping the bottom of the pot is how you keep it always fresh.
This performance system, however, must be protected to keep it pure and prevent misuse as happened in Enron where it was used for personal vendettas and group agendas.
But when well implemented, the “rank and yank” as many call this system can keep the company’s engine always working at optimal speed and continually outperforming itself.
To encourage effective execution of your business’s strategy, your reward and compensation systems must be carefully designed to produce the behavior your company needs to nurture a winning culture.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Welch, Jack; Byrne, John A. Jack: Straight from the Gut. Business Plus. Kindle Edition.
McLean, Bethany; Elkind, Peter. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. Penguin Group US. Kindle Edition.
Umoh, Ruth. Why Amazon pays employees $5,000 to quit. CNBC. May 2018. URL: https://www.cnbc.com/amp/2018/05/21/why-amazon-pays-employees-5000-to-quit.html
Murphy Jr, Bill. You Don’t Just Get Fired at Netflix. What Happens Instead Is Brilliant. (Or Maybe Insane. There’s a Raging Debate). Inc.com. URL: https://www.inc.com/bill-murphy-jr/you-dont-just-get-fired-at-netflix-what-happens-instead-is-brilliant-or-maybe-insane-theres-a-raging-debate.html