Does ‘stack ranking’ actually work?

In his 27-year career at General Electric, David Calhoun shared CEO Jack Welch’s fondness for “stack ranking” employees. This controversial approach to performance evaluation requires that supervisors group employees from top to bottom.

Calhoun, now CEO of Nielsen Holdings, remains a fan of ranking the workforce. He argues that it forces managers to communicate clearly to staffers about their performance.

Under stack ranking, employees know that they’ll get judged against their peers. A few top performers will earn the highest marks, a broad grouping will fall in the middle and a handful of laggards will sink to the bottom.

Everyone gets evaluated, so employees tend to focus on where they rank among their peers. For Calhoun, the system spurs honest dialogue between supervisors and their direct reports. He says that it sets the stage for straightforward “tell me where I rank and tell me why” discussions.

Another benefit, as Calhoun sees it, involves the growth opportunities that stack ranking provides. Underperformers learn how they can improve and thus get a chance to elevate their game.

That’s better than what he calls “the worst possible situation,” where an organization announces massive layoffs and poor performers are stunned because “they never knew it, couldn’t prepare for it, weren’t mentally ready for it,” he says.

Calhoun acknowledges that many managers dread giving hard-hitting feedback to employees. That’s why he’s so enamored of stack ranking: It requires periodic performance evaluations and there’s no way to avoid them.

— Adapted from “A CEO’s passionate defense of ‘stack ranking’ employees,” Geoff Colvin, www.fortune.com.