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The Ramifications of Stacked Rankings

A new lawsuit claims that Yahoo's performance review system violates California and federal laws. What lessons can other employers and HR leaders learn from this case?

Tuesday, February 9, 2016
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There are plenty of adjectives that could be used to describe stacked ranking systems: Controversial. Divisive. Unpopular.

But illegal?

A lawsuit recently filed in Federal District Court in San Jose, Calif., alleges that Yahoo Inc.'s quarterly performance reviews -- which rank every Yahoo employee on a scale of 1 to 5 -- have been manipulated by managers to justify firing hundreds of employees in the name of reaching the organization's financial goals, and have violated federal and California state laws in the process.

David Anderson served as editorial director of Yahoo!'s auto, home, shopping, small business and travel websites for the company before being let go in November 2014. In the suit, Anderson claims the decision to terminate him was based on numbers generated by Yahoo!'s quarterly performance review procedure, famously implemented by Marissa Mayer upon taking over as president and CEO of the Sunnyvale, Calif.-based technology company in 2012.

The aforementioned review process -- similar forms of which were at one time used at companies such as GE and Microsoft -- assigns Yahoo employees rating numbers based on how they performed in comparison to their direct peers. According to Anderson, he was informed at the time of his termination that he was in the lowest 5 percent of Yahoo employees. Anderson maintains that he requested documentation stating as much, but was "denied any information concerning the metrics upon which his termination was supposedly based," the suit alleges. The suit notes that roughly 600 other Yahoo employees were relieved of their duties around the same time as a result of their latest quarterly ratings.

Such cuts, Anderson told the New York Times, amounted to "illegal mass layoffs."

California law mandates that employers making layoffs that affect more than 50 employees and take place within 30 days at a single location must provide workers with 60 days advance notice. A federal law, the Worker Adjustment and Retraining Notification Act, obliges employers to offer advance notice for a layoff of 500 or more employees.

Anderson's lawsuit claims that Yahoo never provided such notices, and as such, "employment made pursuant to the [quarterly performance review] process are without legal or just cause, lack good faith, falsely rest on non-existent or pretextual causes, and are made in violation of the legal rights and contractual expectations of Yahoo!'s employees."

These claims have merit, says Rosanna Sattler, a Boston-based partner at Posternak Blankstein & Lund, and a member of the firm's executive committee.

"Yahoo!'s quarterly performance review process is very similar to the stack-ranking or forced-ranking procedures used in the past by other large companies," says Sattler, noting that these practices "have fallen out of favor, especially in light of recent criticism and adverse court decisions."

A forced ranking system, she says, often incorporates the subjectivity of department heads, "who can institutionalize bias and devalue older workers or have a disparate impact upon female employees or workers with disabilities," for example.

These processes can also be "easily manipulated," adds Sattler, "to meet a variety of perceived economic advantages at the expense of workers, and have unintended consequences such as disparate impacts."

For its part, Yahoo maintains that its rating system is sound. In a statement, the company says its performance review process "also allows for high performers to engage in increasingly larger opportunities at our company, as well as for low performers to be transitioned out." In regard to Anderson's legal complaint, the company says his specific allegations are groundless, and claims that Anderson unsuccessfully sought a $5-million settlement before filing the suit.

Regardless of how this case shakes out, Anderson's claims should underscore the dangers associated with employee-ranking systems, says Katalin Takacs-Haynes, an assistant professor of strategic management at the A. Lerner College of Business and Economics at the University of Delaware.

"For one, a quarterly evaluation system that results in the layoff of the bottom 5 percent makes employees who want to keep their jobs focus on avoiding being in the bottom 5 percent rather than [concentrating] on doing their jobs," she says.  

"Instead of working toward long-term company goals -- assuming that Yahoo has such goals an employee will focus on just making the cut each quarter," Haynes continues. "This is a tremendous waste of human resources that is not translated into performance."

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Ranking systems can also foster a dysfunctional work environment, she says.

"No matter what Ms. Mayer mandates that layoffs be called, they are in fact layoffs. Everyone at the company knows that," says Haynes. "It would serve her and her top management team to engage in authentic leadership practices, rather than label what they're doing a ‘remix.' It's offensive to the employees involved to try to sugarcoat the process with such an inaccurate designation."

Higher-performing employees may eventually feel the effects as well, adds Haynes.

"Given that the ranking system … appears to include some level of randomness due to higher-level managers overwriting the rankings provided by lower-level managers, high- and mid-performing employees are probably on the constant lookout for a new job with another company, probably one that provides higher job security and has a more positive culture."

The issues Haynes spells out have a lot to do with why stacked ranking-style systems have fallen out of fashion. While they're not likely to be back in style any time soon, Yahoo!'s struggles should remind HR professionals to approach performance reviews -- in whatever shape or form they take within their organization -- very carefully, says  Keith Watts, managing and founding shareholder of Ogletree Deakins' Orange County, Calif.-based office.

"Oftentimes, evaluations are done but once a year," says Watts. "And all this stuff comes up, and the employee feels blindsided."

While honest feedback may be uncomfortable at times for all parties involved, "performance evaluations are still really critical," says Watts. "A lot of employers treat them as the red-headed stepchild. They take time, and managers worry about falling behind on their other work, for example. But employees really want to know what's going on with their performance.

"Ultimately, you can communicate tough messages without being insulting," he adds. "So, if you're going to do performance evaluations, do them well or don't do them at all."

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