Microsoft Jettisons Stack Rankings Microsoft has always been on the cutting edge of performance management and compensation. The firm has a reputation for hiring good employees and taking care of them by providing generous rewards and opportunities. In particular, paying workers based on their performance is an approach that the company has utilized for some time. Over the last several decades, Microsoft has given employees stock options, generous increases to base pay, and restricted stock units. A number of years ago, the flexible rewards program MyMicrosoft was offered, and it enabled workers to earn merit pay, bonuses, and restricted stock units.

In an effort to support this HR management philosophy, Microsoft introduced a stack rankings process more recently, which required managers to rate employees (on a scale of 1 to 5, with 1 being the highest) so that they could be ultimately ranked against each other. These rankings affected the amount of compensation (i.e., merit, bonuses, restricted stock units) employees would receive. The ranking process also forced managers to designate a certain percentage of their employees as poor performers.

This requirement makes stack ranking a controversial performance management approach because there are always losers, despite the fact that a company may be hiring and developing well. Critics also point out that the stack ranking process, or rank and yank as it is sometimes called, doesnt do much to create a sense of teamwork among employees. Despite these limitations, some managers, including the previous CEO of General Electric Jack Welch, defend the practice. They claim that it allows leaders to effectively differentiate varying levels of job performance among employees more effectively.

Given these concerns, Microsoft elected to drop its stack ranking system a few years after it was adopted. This means that managers do not have to use the scaling and ranking methods that were introduced several years earlier. In addition, managers do not have to indicate through the employee appraisals that a percentage of workers are not meeting standards. It will be interesting to see how managers continue to tweak the companys performance management system so that employees are rewarded fairly and accurately for their job performance.*

Questions What is your overall opinion of the stack ranking system? Do you think this approach serves a purpose in modern organizations?

If you were to implement stack ranking in a company, how would you do it? What are the potential challenges associated with implementing this system? Would you use it, or would you elect to use an alternative approach?

Please read the Case and provide full responses for each question located at the end of the case. In a 3-4-page Microsoft Word document, students are required to provide a response to each question presented at the end of the case.