Like most iconic CEOs, Jack Welch was not a sinless leader. He had dubious business tactics and troubling beliefs on science, suggesting global warming was little more than a product of mass hysteria. He may have broken a few business laws along the way and mishandled a few earnings reports.
Yet he deserves credit for saving General Electric. He was brilliant.
But he also pioneered a brutal management tactic that many companies aren’t strong enough to practice — except Amazon.
How his ranking system evolved
First, managers were told to classify employees according to letter grades.
- A players are considered assets. They bring energy to everyone they deal with. They make business fun and highly productive. They should get raises that are at least twice the size of B players’.
- B players are good employees. They are the most common and are important to a companies success. Companies should push them to be A players and it is a manager's job to help them there. B players should still get raises.
- C players coast by and don’t get their job done. They are incompetent and procrastinators and take energy away. C players should get nothing.
Not only that, they should be fired. They are considered the bottom 10% (D and F players aren’t even a discussion). Jack Welch defended this rule, saying it was cruel to provide false kindness to people who weren’t thriving in their careers.
But here’s where things get problematic. The bottom 10% of a company isn’t ranked in one big bucket. Most big companies are divided up into teams of 3–8 people.
This system hurts morale and causes high performers to avoid working on the same team. After all, why would you want to be measured against other high performers and made to look like you are average? The system is called “Stack Ranking” and was practiced by Microsoft until 2013 when they abandoned it for exactly that reason.
How Jeff Bezo’s used this concept
Amazon has been under increasing fire as reports of their Darwinian, cutthroat culture continue to leak out. Central to their problems is a review system anchored in Jack Welch’s philosophy.
Each manager has an “unregretted attrition rate”. It is the expectation they will fire a certain percentage of employees, those they won’t “regret” losing. Just as it did at Microsoft, it often pits already-great performers against each other, and even leads to some of them being pushed out of the company. It is also behind the rise in reports of competitive turmoil within rank and file employees.
The system isn’t without merits. Creating a sense of urgency and survival instinct can be good for productivity. In an ideal world, your employees are energized and eager to compete to be the best.
Obviously, Amazon is doing something right, their market capitalization sits at 1.7 trillion dollars. And Amazon logos seem to be invading every corner of our daily lives.
The dark twist in this strategy
Recent reports indicate many Amazon managers are intentionally hiring people they intend to fire within a year. They do this to protect their “real team”. It mirrors reports from Microsoft's performance culture from a decade prior, where managers did the same thing.
Although deeply unethical, this “hire to fire” strategy is a clever strategy by current managers. It neutralizes the toxic effect that a stack ranking system and termination quotas have on collaboration. High performers are usually smart enough to know that helping a coworker is helping a potential threat. Why put yourself at risk of becoming a sacrifice to the termination quota?
At my last company, our COO often emailed his ten “Project Executives” and asked them to rank their project managers in a list. I used to wince as I saw the emails roll in. Indeed, many of the teams had decent project managers at the bottom of their list. Fortunately, they usually weren’t fired. Many weren’t even put on performance improvement plans. But a few on that list did indeed need to go.
The takeaway of it all
Every entrepreneurs' biggest challenge will always be their people. Even the highest performing companies still can’t get the interview process right — because it is deceptively difficult to get a true read on a person’s long-term potential. Any ol’Joe can wear a smile and fake it for a few hours. Slackers will slide through while many high performers never get offers.
Perhaps the requirement to fire a bottom rung isn’t terrible. I’ve seen underperformers slide by while their coworkers picked up their slack for years and years. Smaller companies are particularly sluggish in dealing with unproductive employees. I mostly agree that it is unfair to keep people in jobs they aren’t destined to thrive in. It hurts teams and robs that opportunity from someone who could truly perform.
But hiring someone with no intention of keeping them is deeply troubling, and wrong.