A CEO's passionate defense of "stack ranking" employees

November 19, 2013: 5:00 AM ET

Nielsen chief executive and 27-year GE veteran David Calhoun is an unapologetic fan of rating employees. Why? It's the best way to force honesty.

By Geoff Colvin, senior editor-at-large

Calhoun uses stack rankings to rate his employees at Nielsen.

Calhoun uses stack rankings to rate his employees at Nielsen.

FORTUNE -- Loathing is the strongest emotion coming through the coverage of Microsoft's big HR announcement last week that it is ending its "stack ranking" of employees. Everyone seems to hate stack ranking, which requires managers to place employees in performance categories—typically a top group, a broad middle, and a small percentage at the bottom.

The practice was certainly reviled at Microsoft (MSFT), where employees called it destructive, cutthroat, and political. You could practically hear the cheering in Redmond when the email from HR promised, "No more ratings." The burden of the news coverage is that stack ranking, popularized by Jack Welch at General Electric (GE)—which has since ended the practice—is outmoded and headed for history's dustbin.

So it's instructive to hear from a passionate, unapologetic advocate. David Calhoun is CEO of Nielsen Holdings (NLSN), which he joined in 2006 after 27 years at GE, where he was vice chairman. He employs stack ranking at Nielsen. "I'm a fan of relative ranking, a big fan," he tells me. "I thought the whole thing [the media hub-bub over Microsoft's change] was silly because it misses the point."

The chief executive of the ratings and information company is perfectly clear about the point: "You have to have an objective when you do stuff like this. At GE there was only one objective, and that was to force honesty. That's all it ever was—to force an honest discussion between your manager and you. And there's nothing that quite forces that more than employees knowing that they expect to know how that manager ranks them, and then asking that manager, 'Tell me where I rank and tell me why.'"

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Not having that discussion is bad for the company and potentially disastrous for the employee. Maybe you keep not getting promoted "and nobody ever tells you why." Or—"the worst possible situation"—the company has to lay off 200 people, and when those in the lower ranks inevitably get the bad news, "they never knew it, couldn't prepare for it, weren't mentally ready for it."

Outsiders rarely understand any of that, argues Calhoun: "The media wants to focus on, 'Oh, they want to get rid of the bottom third.' That's a bunch of crap. The bottom third usually leaves when they find out. Or some of them really bear down and do something about it."

The problem, Calhoun says, is that hardly any manager wants to hold that honest discussion. "Every first-time leader, me included—you hated giving feedback. But this [a stack ranking system] is a really good forcing function."

I asked him if, in theory, finding some other way to guarantee that discussion would be as good. "It would be great," he says. "I just haven't figured out the other way."

It's by no means clear that Microsoft has either.

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