Human Resources

Is this the end of Yahoo and employee Stack ranking?

As company after company announce the reformation of their performance evaluation process, some choose to die by the sword. Yahoo, a company that uses a system that represents the corporate world of yesteryear, is being sued for violation of Federal and California laws governing mass layoffs. In the lawsuit, Greg Anderson, an editor who oversaw Yahoo’s autos, homes, shoppings, small business and travel, alleges that the company’s senior managers routinely manipulated the rating system to fire hundreds of people without clear justification.

According to the law, layoffs of more than 50 employees within a 30 day period at a single location require an employer to give workers 60 days of advance notice. A similar federal law, known as the Worker Adjustment and Retraining Notification Act, requires advance notice of a layoff of 500 or more employees. Yahoo, who recently went through a restructuring process, has never provided these notices. In late 2014, and early 2015, the company fired 1100 employees, ostensibly for performance reviews. If the court finds that Yahoo violated these laws, the company will have to pay each affected employee $500 a day plus back pay and benefits for each day of advance notice it failed to provide.

According to Jon R. Parsons, Anderson's Lawyer, the California Department of fair employment and Housing is, at the same time, investigating Yahoo for the use of ratings to  fire its employees. While  this only an allegation,  Fahizah Alim, a spokeswoman for the agency, confirmed an inquiry was underway.

Anderson’s suit provides a peek inside Yahoo’s controversial quarterly performance review system, which Mayer, the CEO of Yahoo since 2012, adopted. Similar systems were once widely used in corporate America, and companies like Amazon still employ these methods. When Mayer joined Yahoo as CEO in 2012, she faced the difficult task of both downsizing and reinvigorating a stagnating company. Her main focus was to find a way to identify and retain top talent, while phasing out ineffective employees. In her first year of office, she instituted a new employee performance review system, saying that she planned to trim the yahoo workforce very surgically and very carefully.

Starting in September 2012, Mayer introduced a system known as QPRs (Quarterly Performance Reviews). Through this popular performance review technique, managers would set and communicate goals and results to the departments, teams and individual employees. Employees would get a score every quarter from one to five. A one meant the employee was consistently missing their goals, while a five meant that they were greatly exceeding their goals. In essence, the system is similar to stack ranking (as seen at GE & Adobe) The target distribution system or stack ranking, put employees in five buckets. Ten per cent of high performing employees would go into “greatly exceeds,” twenty-five in “exceeds,” fifty percent into “achieves,” ten percent into “occasionally misses,” and five percent into “misses.”

Forcing employees into buckets

The problem with this system was that it resulted in a forced curve. Seventy-five% of the entire company got into the top three buckets, while 25 percent of every team had to go into the bottom two. This results in an incredibly competitive work environment, where teammates directly competed with each other to make sure they didn't end up in the bottom 25 percent. By forcing a bell curve, it meant managers were involuntarily required to put employees into buckets, even if these employees were performing well. One manager reportedly said:

“I was forced to give an employee an occasionally misses, [and] was very uncomfortable with it. Now I have to have a discussion about it when I have my QPR meetings. I feel so uncomfortable because in order to meet the bell curve, I have to tell the employee that they missed when I truly don’t believe it to be the case. I understand we want to weed out mis-hires/people not meeting their goals, but this practice is concerning. I don’t want to lose the person mentally. How do we justify?”

This lawsuit could not come at a worse time, as a recent report compiled by Glassdoor, highlighted the fact that employees are disillusioned by the lack innovation. According to the article, more only 34 percent of the employees believe that Yahoo’s prospects are improving. This compares with 61 percent who are optimistic at Twitter and 77 percent at Google.

“Basically, it show employees are losing faith in Marissa Mayer and Yahoo” said Scott Bobroski, a spokesperson who analyzed Glassdoor data.

According to an article in the New York Times, employees’ faith in Mayer already started crumbling in August 2014, when the slew of layoffs started happening. For months managers would call in handful of employees each week and systematically fired them.

The decline of Yahoo can be down to many factors, however, it’s clearly evident that the performance review system that the company is currently using is detrimental to company moral. When employees work in a system which  stifles innovation and deters  risk taking, the company will inevitably fall behind it’s competitors.

Yahoo faced a mountain of challenges being in the same tech space as Google, and it now has to face the harsh reality that it may be too little too late. Some analysts are calling for drastic measures (e.g.selling off its search engine), however others are expecting Mayer to make only minor changes. Whatever the outcome, Mayer will have to make inroads in her management style.

Yahoo needs to take a leaf out of Microsoft’s book in order to remain relevant. Facing the lackluster innovation at the time, Microsoft needed a radical change. The outgoing CEO, Steve Ballmer realised that the system of stack ranking was forcing employees to compete with each other, instead of the competition. Microsoft implemented a continuous feedback programme, in order to understand  how employees could learn and grow. Impraise, a Y-combinator startup, is disrupting the whole performance management process, making feedback vital to the review cycle. Continuous feedback, that happens in real time, is key to unlocking employee potential.  Microsoft has started to see the fruits of their labor, with the recent success of products like Windows 10, Surface Tablet and Microsoft cloud computing. It’s evident to see that when employees feel valued, companies benefit from greater creativity and innovation .

Photo by Yahoo