How Microsoft's Ruthless Employee Ranking System Annihilated Team Collaboration

I strongly suspect that the cigar smoking businessmen that tout competition as the only way to drive the world forwards, are simply incapable of imagining anything other than the instillation of fear as a way to elicit action.

The inability to inspire, motivate, or sufficiently empathize with people (admittedly, not an everyday skillset) compels them to rely on coercion as a crutch - usually by leveraging the exquisite threat of not being able to pay rent.

To add insult to injury, they then have the audacity to flaunt this principle to the rest of us as if it’s the only viable path to getting shit done.

Fortunately for us, the high-cost and ineffectiveness of such approaches (and their damage to our societal fabric and well-being) doesn’t have to be debated from a value-driven, humanist angle. There are plenty of case studies and data to support the argument.

A shining example of “instilling fear to boost productivity failing catastrophically” is Microsoft’s disastrous Stack Ranking reform back in the early 2000s.

The pitch was simple: we take it as a given that some employees are relatively more effective than their peers. A non-controversial statement. We then assume that if we had a way to systematically cull and replace the least performing workers every quarter, surely we’d be creating a self-perpetuating train of endless improvement within our company. Can’t fail.

This simple enough worldview was enthusiastically adopted by upper management, and employees immediately began to be ranked by their managers every few months using a 20-70-10 system to classify employees: the top 20% were considered the best, 70% received adequate ratings, and the bottom 10% were fired.

100% of employees were immediately terrified.

Already you may notice something is horribly wrong here with the incentive design: the ranking system is purely relative. Meaning that by definition, no matter what the absolute performance metrics of a person are - someone is getting whacked.

Thus began the great era of cross-employee sabotage within the organization. Since when you’re being chased by a bear, you don’t have to outrun the bear, you just need to trip over whoever’s running next to you.

The looney toons level of shenanigans that ensued is perhaps best described by the following account of a middle manager working there at the time, recalling an employee ranking meeting he was a part of:

“After the stack rank was over, our boss, who’d overseen the whole meeting, took our stack rank and then went to another, similar meeting one level up, where now we would be stacked and ranked behind our backs, then mixed in with the stack we’d just created, cruelly shuffled like a deck of human cards.”

In practice, the competitive framework played out like this:

“It served as an incentive not to join high-quality groups, because you’d be that much more likely to fall low in the stack rank. Better to join a weak group where you’d be the star, and then coast. Maybe the executives thought this would help strong people lift up weak teams. It never worked that way. More often, it just encouraged people to backstab their co-workers, since their loss entailed your profit.”

He’s not even describing the worst part. Other interviews with Microsoft developers at the time include gems such as:

“People responsible for features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the rankings.”

The complaints roll on and on.

This tragically misguided ruthlessness was later credited as being one of the driving factors for Microsoft’s stalling performance as an organization in the early 2000s, while Google, Apple, and Facebook enjoyed explosive growth.

This period was later branded as “Microsoft’s Lost Decade” by journalist Kurt Eichenwald, who after taking a deep dive into the matter concluded:

"Every current and former Microsoft employee I interviewed -- every one -- cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees"

After years of systematically constricting the free flow of collaboration, innovation, and result-oriented focus in the organization, the system was finally sacked in 2013, along with its key champion Steve Ballmer, who promptly announced his resignation from the company.

Lessons were learned, managerial roles changed hands, and after a period of reflection, a new approach was finally adopted by the company. Its key principles being based on:

NO MORE CURVE (or ratings!): Completely abandoning predetermined distributions, and allocating rewards based on team and individual performance. Instead of trying to calculate ratings, focus shifted to trying to measure the impact made by identifying new opportunities for improvement.

Personal Development: Emphasizing timely feedback, meaningful discussions, and continuous learning to help employees grow in a respectful and collaborative manner, all while introducing flexibility to how performance is measured (with respect to different contexts, business cycles, and team schedules).

And most importantly of all:

Teamwork and Collaboration: Giving importance not only to individual contributions, but also to how well input and ideas from others is leveraged in a team. Emphasis is placed on the cumulative impact of collective efforts, rather than individual nitpicking. Creating a positive sum dynamic rather than a cannibalistic one.

Imagine that.

At its core, the question of positive or negative incentives misses an important nuance - both can technically elicit action, but successfully pulling off positive sum dynamics requires a skillset, orders of magnitude more subtle and complex than the one needed to coerce through threats - that’s why people so often default to the latter.

The payoffs for positive-sum frameworks are always far greater however, you just need to put in the effort and dedication required to establish them!

Thanks for reading! If you'd like to hear more tales of how Kindness>Ruthlessness.

Also published here.