Bell Curve Madness, Or How Not to Run Your Business

From a Vanity Fair article on Microsoft’s lost decade via Slate:

At the center of the cultural problems was a management system called “stack ranking.” 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. The system—also referred to as “the performance model,” “the bell curve,” or just “the employee review”—has, with certain variations over the years, worked like this: every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…
For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings. And the reviews had real-world consequences: those at the top received bonuses and promotions; those at the bottom usually received no cash or were shown the door…
“The behavior this engenders, people do everything they can to stay out of the bottom bucket,” one Microsoft engineer said. “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.” Worse, because the reviews came every six months, employees and their supervisors—who were also ranked—focused on their short-term performance, rather than on longer efforts to innovate…

This strikes two of my pet peeves. First, it shows a fundamental misunderstanding as to how normal distributions work. Despite many of my high school English teachers insisting otherwise, not everything is normally distributed. In fact, there is very good reason to expect Microsoft employees to not be normally distributed. Microsoft should be hiring the very best of the best programmers in the world. Thus, they are sampling from the right tail of the normal distribution–there are a lot of very good programmers, fewer very very good programmers, and yet fewer very very very good programmers.

Second, the system institutes perverse incentives. It is fully reasonable to believe that everyone within a division is a productive employee. Yet the system assumes otherwise. As a formal theorist, I am all for making assumptions when they serve a purpose. There is no purpose here. Managers should be evaluating everyone’s performance over the hypothetical replacement employee. Instead, a certain percentage are forced to be bad by assumption. This leads to stupid infighting–employee rankings are zero sum, so some might need to step on others to reach a higher rank.

It also wouldn’t surprise me if many employees bolted to other companies for better wages in search of fairer wages. If only the top five people are receiving large bonuses but the sixth-best contributed a great deal to the company, that sixth person is also worth an equitable share of the bonus. If he can’t get it from Microsoft, he’s going to go a place that will give it to him.