In this post, I stand unabashedly against stack ranking. Evaluate how employees perform, not how they compare. Is this really controversial?
If you assign to teams or divisions a fixed budget for bonuses, promotions or stocks, you create de facto a zero-sum game. You need losers to have winners. From that point, you can make lengthy speeches about the importance of being on a team, you will see people nod at you silently, but immediately after your all-hands meeting, they will go on competing with each other.
"But competition is good, right?"
Not when it turns into sabotaging each other’s work, by action or inaction, consciously or not. Teams accomplish much more when they combine their efforts. It won’t happen if peers do not have a genuine interest in helping each other, but have more interest in watching each other fail.
"Everything in the company is budgeted, why not compensation?"
Every budget item has unknowns, including compensation. In a small company, the absolute numbers do not really matter. As the company gets bigger, statistics kick in, and compensation becomes predictable enough without requiring comparing individuals.
"If there is no fixed budget, managers will be too generous."
After all, it is not their money, so why not give it away. But that would quickly lower the productivity and incentive.
At Indeed, we don’t stack rank or fit to an expected distribution. We have a process that aligns performance reviews across teams and offices, so the company keeps the same definition of what “good”, “better”, “best”, and “not enough” means. No manager decides alone an individual’s evaluation, and there is no competition between teams. This review process is probably the fairest I have ever seen.
In the next post, I conclude my series on Indeed’s culture with thoughts on the most striking trait of individuals at Indeed.