A perennial issue for any entrepreneurial business is how to get more out of your staff. Making sure they are committed to the cause can be the difference between success and failure. In the early days it is easy, the highly visible energetic CEO in the compact growing business is the ideal stimulus for productivity. But what about maturing businesses?
Jack Welch, CEO and chairman of GE for 20 years had an answer. He said you should fire 10% of your employees every year. Welch's HR policy categorised the entire workforce, using a classic bell curve, into the 20% top performers, 70% average performers and 10% worst performers. Every year the worst performing 10% were shown the door. He thus earned himself the nickname of Neutron Jack, after the neutron bomb, which kills people and leaves buildings standing.
Welch's “rank and yank” system, otherwise known as forced ranking, is as controversial as it is admired. It has been accused of inducing fear and loathing among employees, and of encouraging staff to concentrate more on achieving a good ranking than on helping the business succeed.
So does it work? Welch's stratospheric success at GE, where stock price, profits and productivity increased enormously under his leadership, certainly seems to support the philosophy. Now 20% of US businesses have some kind of forced ranking and Welch's tenure at GE spawned tiers of managers who evangelise his beliefs.
Emphasising individual performance can be very motivational to staff, who see it as a challenge, a chance to achieve recognition for their contribution to the company's success. Welch himself puts the focus on staff development, expressing a strong belief in communication, particularly with those falling into the lowest category.
But smaller business must remember that very large organisations often have the right kind of structure for using forced ranking, which requires a clear and objective set of criteria to be effective.
Welch's criteria included both “making the numbers” that is, doing your job well, and operating according to GE's core values. In larger organisations forced ranking along these terms can provide an effective way to make sure values are common throughout. These companies also have significant numbers of employees at similar levels within the organisation – which makes comparing them against one another easier and meaningful.
So when it comes to smaller entrepreneurial businesses although the results may be desirable, adopting a rank and yank HR policy is not. Smaller businesses, such as those in the creative services sector, would find the threat that forced ranking poses to their cultures too much to bear.
Faced with the possibility of being ranked in the bottom ten percent and the sack, many employees would choose to leave instead, and with staff churn a still big issue for growing businesses, forced ranking would only compound problems.
And in a company where team working is essential for business success, introducing a policy that encourages competition between individuals can damage collaboration, if employees feel that helping another member of staff will hurt their own ranking.
Forced ranking should not be seen as a panacea for HR problems because it can create as many problems as it solves. Industrial behemoths are often well placed for introducing a successful ranking scheme, but growing businesses have wholly different needs.
That said, good HR policies will work whatever the size of the company, if they are applied equally and consistently and if they are communicated effectively to the work force.
You must decide what constitutes 'good policy' for your company's size, shape, sector and maturity. Welch and his HR philosophy have their fair share of detractors, particularly since he left GE, but he was right to be brave. That's what leadership is about.
Rebecca Caroe is a partner at business advisory company the Pembridge Partnership www.pembridge.net