MICROSOFT CORPORATION: IS STACK RANKING THE ANSWER?

INTRODUCTION

Cary Sheldon, a vice president of human resources at ABF Corporation, was reviewing the employee
appraisal submissions for her firm. After years of rapid growth, ABF — a technology software provider in
Toronto — was underperforming relative to its peers. Sheldon had a hunch that part of the problem was
its relaxed performance appraisal system. “Our current performance appraisal program isn’t getting us the
results we need,” she noted, looking over the submissions. “All of our employees end up being rated
either 3.5, 4.0 or 4.5 out of 5.0. The rankings are too bunched up for us to determine which ones are the
superstars and which ones are the poorest performers — the bottom 10 to 15 per cent — whom we need
to weed out.”

In two months, Sheldon wanted to unveil a new employee performance management program at ABF,
and she had instructed her team to look at various performance management examples at world-class
firms such as Microsoft. Sheldon’s goal was to develop a performance management program that would
enable ABF to attract, support and promote the best employees, weed out the laggards, and inspire her
engineers to develop new and innovative products. As much had been written about the stack ranking
system at Microsoft Corporation (Microsoft), on September 19, 2013, Sheldon sat down in her office and
began to get a sense of what she could learn from Microsoft’s example.

Sheldon looked at the binder of information her staff had collected on Microsoft. “I see that there is a lot
of talk about Microsoft’s stack ranking system. Can we use something like that to force the distribution of
employees along a broader range?” Initiated by Microsoft’s CEO, Steve Ballmer, around 2005,2 stack
ranking began as a way to identify the highest and lowest performing individuals with the intent to
promote the former and discard the latter. While the initial iteration of stack ranking at Microsoft called
for 10 per cent of employees to be given the lowest rating, the current iteration was a five-point scale with
1 being the highest rating and 5 being the lowest rating. Everyone on a team had to be stack ranked,
regardless of whether all were deemed to have evenly contributed or not. In any given team, 20 per cent
of employees received a 1; the next 20 per cent received a 2; the next 40 per cent received a 3; 13 per cent
received a 4 and 7 per cent received a 5. Given that employees rated 4 and 5 were barred from
transferring to another department within the firm, the bottom 20 per cent of employees would be
effectively asked to leave Microsoft.
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Stack ranking had its supporters and its critics. Jack Welch, former CEO of GE, stated: “This is not some
mean system — this is the kindest form of management. [Low performers] are given a chance to
improve, and if they don’t in a year or so, you move them out. And that’s the way it goes.” 3 In contrast,
there were many critics talking about Microsoft’s implementation of stack ranking. David Auerback, a
former Microsoft manager offered this view:

I had to evaluate others and be evaluated myself under this system. And I can say that yes, stack
ranking is as toxic for innovation and integrity and morale as media reports made it out to be, and
then some.

The stack rank was harmful. It served as an incentive not to join high-quality groups, because
you’d be that much more likely to fall low in the stack rank. Better to join a weak group where
you’d be the star, and then coast. Maybe the executives thought this would help strong people lift
up weak teams. It never worked that way. More often, it just encouraged people to backstab their
co-workers, since their loss entailed your profit.

The stack rank was a zero-sum game — one person could only excel by the amount that others
were penalized. And it was applied at every level of the organization. Even if you were in a group
of three high performers, it was very likely that one of you would be graded Above Average, one
Average, and one Below Average. Unless your manager was a prick or an idiot or both, the
ordering would reflect your relative skills, but that never came as too much comfort to the hard-
working schlub who just wasn’t as good as the other two.4

Microsoft had been in the news recently because Ballmer had just announced, on August 23, 2013, his
retirement within the next year. Despite the widespread criticism Ballmer had received about Microsoft’s
stack ranking system, in an exit interview with the Seattle Times, Ballmer insisted that stack ranking was
here to stay, saying “I think everybody wants to work in a high-performance culture where we reward
people who are doing fantastic work, and we help people who are having a hard time find something else to
do.”5

Sheldon was worried, however, that stack ranking, which seemed to work well at GE, seemed to result in
chaos at Microsoft. As she walked over to the cafeteria for lunch, Sheldon passed many colleagues at
ABF. While she was friends with many of them — developers, engineers, sales people — she had a
feeling that not everyone was a top performer. “Everyone can’t really be that good,” she thought. “To
ensure that ABF continues to perform strongly, we need to get a new performance appraisal system in
place as soon as we can. What we have is not working well.”

MICROSOFT CORPORATION

Founded in 1975 by Bill Gates and Paul Allen, Microsoft was a well-known technology company based
in Redmond, Washington. After seeing the launch of the Altair 8800, one of the first personal computers,
Gates and Allen co-wrote a software program called Altair BASIC and worked out an agreement for
Altair’s manufacturer to distribute it. Microsoft’s prospects received a boost when it capitalized on an
unexpected opportunity in 1980 to license an operating system — MS-DOS — to International Business
Machines (IBM). IBM had originally intended to license an operating system from California’s Digital
Research Inc (DRI). But instead of meeting with three IBM employees who had travelled to his office,
DRI’s owner, Gary Kildall, decided to go on a flight in his personal airplane that day. IBM then turned to
Gates – who had provided IBM with the referral to DRI in the first place. At that time, Gates was aware
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of another operating system — QDOS — developed by Seattle Computer Co. Gates purchased QDOS for
$50,000,6 renamed it MS-DOS and licensed it to IBM for a small royalty fee (while retaining ownership
of the program). This series of shrewd maneuvers by Gates allowed Microsoft to earn a fortune from MS-
DOS licenses.7

As the popularity of personal computers grew, Microsoft rode the trend, becoming the top operating
system vendor. In the 1980s, it released Microsoft Windows, which was a graphical extension for MS-
DOS. In 1986, the company held its first public offering of shares. Microsoft Office, the world’s most
popular application suite, was first launched in 1990. One of the biggest external challenges Microsoft
had to face in the 1990s was the antitrust investigation by the U.S. Department of Justice and the
European Commission.

At the height of the Internet bubble in 1999, Microsoft was the world’s most valuable company, with a
market capitalization of $619 billion.8 Microsoft’s shares enjoyed a 58,000 per cent increase from its IPO
to its peak price in late 1999, turning founders and employees into billionaires and millionaires.
Microsoft launched products in an attempt to diversify its revenue streams. It entered the gaming industry
when it launched Xbox to compete with Sony and Nintendo’s systems. In 2000, Gates stepped down as
CEO and was replaced by Ballmer. Gates remained as chairman and chief software architect.9

As employee number 30, Ballmer had joined Microsoft in 1980, and had, at the time of its IPO, 8 per cent
of its shares. He worked in operations, operating systems development, and sales at Microsoft, and was
named chief executive officer in January 2000. Ballmer was known for his exuberant, over-the-top
personality: there were numerous YouTube video clips showing him, variously, doing the “Monkey
Dance” and shouting the word “developers” over and over again, his shirt clearly stained with sweat.
Ballmer described his management preference to delegate work and make a “relatively low” number of
decisions. A Wall Street Journal interview added:

With respect to running meetings, Mr. Ballmer admits that his “brain jumps around too much.”
He prefers that the long, presentation style of meetings that are rife with “theater” are cut to a
minimum and instead favors a system of receiving materials in advance, which should lead with a
summary of the meeting’s main points and allow him some time to ask questions. “If I was a kid,
they’d say I have a little bit of — what do they call it? — ADD.”10

Twelve years later, Microsoft’s position as the world’s largest software firm was almost entirely due to its
dominant position in office software, operating systems, and server and tools — the same businesses it had
dominated in the 1990s. Observers were more critical, noting that Microsoft had missed major market
opportunities including the portable MP3 music player; social networking; smart-phones; and tablet
computers.

In 2012, Microsoft had a net income of $17 billion from sales of $73.7 billion. There were 94,000 people
employed at Microsoft and the majority, or 55,000, were in the United States. There were 36,000
employees in product research & development; 25,000 in sales and marketing; 18,000 in product support
and consulting services; 6,000 in manufacturing and distribution; and 9,000 in general and administration.
Microsoft’s overall strategy was as follows:

Our mission is to enable people and businesses throughout the world to realize their full potential
by creating technology that transforms the way people work, play and communicate. We develop
and market software, services and hardware that deliver new opportunities, greater convenience,
and enhanced value to people’s lives.11
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Microsoft’s corporate value statement was as follows:

Microsoft is focused on ensuring a high level of satisfaction among our customers and partners. It
is a core component of our business. Our vision is to provide experiences for our customers and
partners, across all of their interactions with Microsoft, that they value and recognize, and enable
them to realize their full potential. As a company, and as individuals, we value integrity, honesty,
openness, personal excellence, constructive self-criticism, continual self-improvement and mutual
respect. We are committed to our customers and partners and have a passion for technology. We
take on big challenges, and pride ourselves on seeing them through. We hold ourselves
accountable to our customers, shareholders, partners, and employees by honoring our
commitments, providing results and striving for the highest quality.12

Microsoft generated business in five divisions: Windows & Windows Live; server and tools, online
services; Microsoft business; and entertainment and devices.

Windows & Windows Live Division

In 2012, Windows & Windows Live generated operating income of $11.5 billion from revenues of $18.4
billion. Seventy-five per cent of this division’s revenues were generated by sales of the Windows
operating system to original equipment manufacturers that installed the system on computer equipment
before the computers were sold to customers.

Server and Tools Division

This segment developed products and services for information technology professionals and developers.
In 2012, the server and tools division had $7.4 billion in operating income from $18.7 billion in sales. The
majority of this segment’s revenues were derived from multi-year volume licensing agreements.

Online Services Division

Focused on the Internet, online services produced and managed Bing, MSN, adCenter and advertiser
tools. In 2012, online services had an operating loss of $8.1 billion on sales of $2.9 billion.

Microsoft Business Division

Microsoft Business generated operating income of $15.7 billion on sales of $24 billion. This division
generated 90 per cent of its revenues from Microsoft Office software sales. About 80 per cent of revenues
were volume-licensing sales to businesses.

Entertainment and Devices Division

With products such as the Xbox 360 gaming console, Xbox LIVE, and Skype, this division focused on
consumer entertainment products and services. Entertainment and Devices generated $364 million in
operating income from sales of $9.6 billion.
Page 5

An industry observer noted that Microsoft’s business focus was on selling software licenses to large
companies:

Microsoft’s business depends on big companies buying long-term license agreements — at least
$20 billion of Microsoft’s more than $70 billion a year comes from these agreements. These deals
tend to run on a three-year cycle, and include the right to upgrade to new product versions that
come out during that term. If Microsoft fails to deliver a new version of the product within three
years — as happened with Windows Vista and has happened with other products, like SQL
Server — customers wonder, “why did we buy a license agreement?” That makes selling
renewals and upgrades a lot harder the next time around.13

Sheldon noted that Microsoft continued to generate billions from markets it had entered in the 1980s and
1990s. Despite its enormous reach, its large cash reserves, and its huge investments in research &
development, Microsoft had not kept pace with newer and faster growing markets such as online search,
smart-phones and tablets. Sheldon looked at a couple of instances where Microsoft, despite its resources,
had stumbled badly and ended up launching products that eventually failed.

MICROSOFT’S MISSTEPS

In the first decade of the 2000s, following the dotcom crash, Microsoft’s share price fell sharply from its
peak of $60 in 1999 to the $30 range. In a decade where new firms such as Google and old competitors
such as Apple seemed to rise to prominence, Microsoft attracted attention for its less-than-stellar product
launches in its current businesses and in new ventures.

In 2000, its Windows Millennium Edition (ME) operating system was nicknamed “Mistake Edition” as
users endured crashes and compatibility issues with programs. It was listed at “#4” on PC World’s “Worst
Tech Product of All Time.” ME’s successors fared no better. Released in February 2000, Windows 2000
was widely panned, prompting websites to sprout up to discuss common problems. Microsoft replaced
Windows 2000 with Windows XP in October 2001, then with Windows Vista in 2007. But Vista was
widely derided for its restrictive licensing, lack of compatibility with programs, and cumbersome digital
rights management system. Many users posted instructions on how to “upgrade” from Vista to XP, the
operating system Vista was designed to replace.14

When Apple’s iPod was becoming more popular in the early 2000s, Ballmer dismissed the product,
saying, “We’ve had DRM in Windows for years. The most common format of music on an iPod is
‘stolen.’ Part of the reason people steal music is money, but some of it is that the DRM stuff out there has
not been that easy to use.”15

In an attempt to challenge the iPod, Microsoft launched Zune in 2006 — five years after the first iPod was
sold. Zune struggled to gain market share, never gaining more than a few points in stark comparison to
Apple iPod’s 66 per cent share of the market. Three other versions of Zune were launched in 2009, 2010
and 2011, with little success. Time magazine called Zune one of the “10 biggest tech failures of the last
decade.”16
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BALLMER’S LEADERSHIP STYLE

The flip side of having an energetic on-stage personality was that Ballmer was prone to displays of rage. In
2005, when a key employee — Mark Lukovsky — mentioned that he was leaving Microsoft for Google,
Ballmer, according to legal documents filed by Lukovsky became very angry. A newspaper reported:

Lukovsky’s statement says: “Prior to joining Google, I set up a meeting on or about November
11, 2004 with Microsoft’s CEO Steve Ballmer to discuss my planned departure. . . . At some
point in the conversation Mr. Ballmer said: “Just tell me it’s not Google.” I told him it was
Google. At that point, Mr. Ballmer picked up a chair and threw it across the room hitting a table
in his office. . . . Thereafter, Mr. Ballmer resumed trying to persuade me to stay Among other
things, Mr. Ballmer told me that “Google’s not a real company. It’s a house of cards.17

When asked about the iPhone’s prospects in 2007, Ballmer misjudged Apple’s potential, saying:

There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a
$500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3
billion phones that get sold, I’d prefer to have our software in 60 per cent or 70 per cent or 80 per
cent of them, than I would to have 2 per cent or 3 per cent, which is what Apple might get. 18

In January 2012, the iPhone generated more revenues in the first quarter than Microsoft’s total revenues. 19
Microsoft announced its first ever quarterly loss in June 2012, when it wrote off $6.2 billion from its 2007
purchase of aQuantive, an online advertisement service. The many mistakes led Forbes magazine to list
Ballmer as the worst U.S. CEO in 2012:

Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most
lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed
the growth and profits of not only his company but “ecosystem” companies such as Dell, Hewlett
Packard and even Nokia. The reach of his bad leadership has extended far beyond Microsoft
when it comes to destroying shareholder value – and jobs.20

Employees, on a Microsoft-focused online blog, lamented the fact that their firm seemed to have
ineffective leaders:

Billions have been sunk into the success that is Xbox, including funding the fall-out of rushed
technical designs. aQuantive happened.21 Six billion dollars in shareholder value gone “poof!”
without so much a “ta-da!” And now it appears the EU has the opportunity to return to the
Microsoft ATM for millions or billions of USD due to the browser choice screen mysteriously
disappearing from Win7 SP1. I guess the testers were too busy fixing their cranky automation to
notice. I thought perhaps this year’s SteveB Company Meeting “YEAAAAAH!!!” victory dance
song should be I’m Still Standing but now maybe Oops, I Did it Again is more appropriate. With
you know, a little pinky pointed to the corner of the mouth.22

Observers were critical of Ballmer, with one summing up his term as CEO as follows:

What has gone wrong? For starters, Ballmer proved to be the anti-Steve Jobs. He missed every
major trend in technology. His innovations alienated people. When he tried something new, like
Windows Vista, the public lined up around the block to trade it in. Microsoft missed social
networking. It completely misjudged the iPhone and the iPad. It embraced complexity in product
Page 7

design just as everyone was turning toward simplicity. It entered growing markets too late. When
was the last time you used Bing? In 2000, Microsoft made most of its money selling Microsoft
Office and Microsoft Windows. Today, it still makes its money that way. Ballmer’s reign has
done more to defang Microsoft than the Justice Department could ever have hoped to do.23

Sheldon noted that when news of Ballmer’s impending retirement was made public, Microsoft’s stock
rose, increasing the value of Ballmer’s shares by $1 billion. She wondered if Ballmer’s personality had
contributed to the failure of stack ranking at Microsoft, given that the same performance management
system had worked well at GE, under Welch. One commentator noted that Ballmer was widely ridiculed
for his demeanour during presentations:

Ballmer is a Maniac. If you’ve ever seen the guy do a presentation, you’ll know what I’m talking
about. He turns into this crazed psycho, something like a cross between a Planet of the Apes
extra, a solo mosh pit dancer, and Gallagher. Ballmer is infamous too for his temper, having
reportedly had many obscenity laced screaming matches in his office with subordinates. When
compared to the competition, Ballmer looks like a circus show. Apple’s Steve Jobs was always
cool, calm and collected when he did product release presentations. Oracle’s Larry Ellison is
seemingly overflowing with confidence and swagger, always with a quippy one-liner that makes
everyone laugh. Ballmer is just sweaty and disheveled and, well, a mess.24

It came as no surprise to Sheldon that Ballmer had a 46 per cent internal approval rating at Microsoft,
significantly behind his CEO counterparts at other firms: Tim Cook of Apple Inc. (97 per cent); Mark
Zuckerberg of Facebook (95 per cent); Larry Page of Google (94 per cent); and Larry Ellison of Oracle
(81 per cent).25

PEOPLE MANAGEMENT

Take our 20 best people away, and I will tell you that Microsoft would become an unimportant
company.
— Bill Gates, CEO, November 25, 1996.26

Microsoft’s top management team consisted of a group of about 600 executives led by Ballmer. Each of
the divisons was led by a president, and within the divisions there were senior vice presidents, vice
presidents and general managers. For example, in the Microsoft business division, there could be a senior
vice president of Office, a vice president of Office service group, and a general manager of FrontPage.
Microsoft’s staffing strategy looked at business needs over a three to five-year window, according to
Steve Vamos, managing director of Microsoft Australia:

Microsoft’s overall strategic plan has three objectives, the first of which is aligning and empowering
its people and teams to deliver. This objective is broken down into a number of goals:

• Develop a three to five-year strategic plan that defines priorities and aligns all staff, delivers a
framework for cross-team goals focused on strategic outcomes and integrates into
performance management and compensation.
• Drive programs that encourage and show all staff how to live the Microsoft values.
• Ensure staff vitality through strong recruitment and performance management processes.
• Skill and develop staff, ensuring adequate tenure and a clear career path.
• Develop a strong management team that puts people first.
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The above objectives feed into the operational goals of Microsoft’s HR department, which forms
the basis for its strategic alignment and, subsequently, the goals of employees.27

In order to gather opinions, staff members were surveyed regularly on issues such as leadership, culture
and goals. Scott Pitasky, vice president of human resources, noted that “the most important source of
hiring is from colleges and universities, so the strategy is to have a robust internship program that can
convert those interns into full-time hires.”28 It was not necessary for new recruits to have any experience
in the software industry. At one point in the mid-1990s, Microsoft was hiring just 400 computer science
graduates from a pool of 25,000 potential hires.29 Microsoft also worked with over 300 recruiting firms to
identify and recruit talented, ambitious and aggressive executives.30

Job interviews were set up with a combination of written tests and involved a panel of interviewers from
the team intending to hire the recruit. Microsoft had an ‘n minus 1’ staffing policy, which meant that it
aimed to hire one fewer person than the staffing team requested.31 New hires were put into the Leap
Engineer Acceleration Program (LEAP), a multi-week program which “imparted technical and personal
skills required to carry out the job”. In addition to LEAP, Microsoft offered a wide range of software,
language, product and leadership training programs.32

In October 2011, after surveying 2.5 million employees in 5,000 companies, a global research and
consulting firm announced that Microsoft was the number one firm in the “Top 25 World’s Best
Multicultural Workplaces” list. “We’re thrilled that Microsoft’s commitment to innovation and our
passion for how technology can transform people’s lives is recognized around the globe,” said Lisa
Brummel, chief people officer at Microsoft. “Microsoft is a great place to work not only because of what
we do, but because of the quality of the company culture that our employees have collectively created.”33

In addition to providing training for its employees, talent was encouraged to move around the
organization into different roles by applying through internal postings. Microsoft teams were kept small
and managers were focused on tracking progress. Performance reviews were given twice a year and were
based on objectives that were specific, measurable, attainable, results-based and time-bound (SMART).
As one observer noted: “reviews focused on learning from mistakes and the culture (fuelled by Gates)
was that the feedback was blunt and to the point. 34

Gates, who shaped Microsoft’s culture, was known to be confrontational with employees, as co-founder
Paul Allen recalled:

Bill liked to hash things out in intense, one-on-one discussions; he thrived on conflict and wasn’t
shy about instigating it. A few of us cringed at the way he’d demean people and force them to
defend their positions. If what he heard displeased him, he’d shake his head and say sarcastically,
“Oh, I suppose that means we’ll lose the contract, and then what?” When someone ran late on a
job, he had a stock response: “I could code that in a weekend!” And if you hadn’t thought through
your position or Bill was just in a lousy mood, he’d resort to his classic put-down: “That’s the
stupidest . . . thing I’ve ever heard!”

The irony was that Bill liked it when someone pushed back and drilled down with him to get to
the best solution. He wouldn’t pull rank to end an argument. He wanted you to overcome his
skepticism, and he respected those who did. I saw this happen again and again. If you made a
strong case and were fierce about it, and you had the data behind you, Bill would react like a
bluffer with a pair of threes. He’d look down and mutter, “O.K., I see what you mean,” then try to
make up.35
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In the 1990s, Microsoft’s rising stock price provided a significant boost to employees’ income, so much so
that Ballmer commented to an observer “on the challenge of running a company of volunteers — people
whose vested stock meant they were wealthy enough that they didn’t need to work. They sometimes seemed
to measure their value by frequent flyer miles, meetings attended and emails received.”36

But the opportunity to earn options — and keep the gains from exercising them — prompted employees
to work towards a common goal: driving the stock price up. Ed McCahill, a former marketing manager at
Microsoft stated:

People were eager and in a big hurry to capitalize on every opportunity to gather new revenue. In
every meeting, there were clear goals and clear outcomes, because everybody knew that the faster
they could move the quicker the stock price would go up and the sooner they would be wealthy.37

After reaching its highest level in 1999, Microsoft’s stock price stagnated over the next decade. Around
that time, according to company executives, Microsoft was grappling with “a corporate culture that by
2001 was heading down the path of self-immolating chaos People realized they weren’t going to get
wealthy. They turned into people trying to move up the ladder, rather than people trying to make a big
contribution to the firm.”38

Governing the evaluation of employees was a program called stack ranking, started around 2005, where
all employees were graded as individuals on their performance, every six months. Stack ranking was
patterned after Jack Welch’s Vitality Curve at GE.

STACK RANKING

These stack ranking reviews were held every six months and supervisors spent a significant amount of
time working with peers to determine whom to keep and whom to cut.

Each report’s name was written on an index card and put on the table. It was a two-step process. First,
reports were broadly sorted into four buckets: excellent, good, mediocre and awful. Then, within each
bucket, people were paired for comparison and bubbled up or down.

A manager’s goals here are twofold. First, you want to place your best people as high as possible
on the ladder. This will help them get big bonuses, promotions, and raises, and thus keep them
happy and less likely to leave your group or the company. Second, if you’re unfortunate enough
to have weak reports, you want either to help them by placing them sufficiently high that they
don’t get dinged too badly come the annual review, or to throw them to the wolves and let them
get ranked low. If you give up on them, they’ll be put on a dead-end track that marks them as
more or less useless. The object is to get them out from under you and make them someone else’s
problem.

I was lucky not to have any weak reports. I had been encouraged to take one at an earlier point,
but frenetically talked my way out of it, using all the managerese I could summon to argue that he
didn’t belong on my team.39

It was during these meetings that managers negotiated with each other in an attempt to rank their direct
reports:
Page 10

On the first day, the supervisors — as many as 30 — gather in a single conference room. Blinds are
drawn; doors are closed. A grid containing possible rankings is put up — sometimes on a
whiteboard, sometimes on a poster board tacked to the wall — and everyone breaks out post-it
notes. Names of team members are scribbled on the notes, then each manager takes a turn placing
the slips of paper into the grid boxes. Usually, though, the numbers don’t work on the first go-
round. That’s when the haggling begins. “There are some pretty impassioned debates and the post-it
notes end up being shuffled around for days so that we can meet the bell curve,” said one Microsoft
manager who has participated in a number of the sessions. “It doesn’t always work out well. I
myself have had to give rankings to people that they didn’t deserve because of this forced curve.”40

Some employees — interviewed for a magazine article — stated that they were coached by their
managers to be more “visible” to other managers, and to speak up and contribute in meetings so as to
appear valuable to the company. But some lamented that stack ranking fostered an antagonistic culture. A
Microsoft engineer stated:

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.41

The fear of stack ranking triggered defensive behaviour in managers and employees alike, with
unintended consequences:

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.

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. So while Google was encouraging its employees to spend 20 per cent of their time
developing ideas that excited them personally, Ballmer was inadvertently encouraging his to
spend a good chunk of their time playing office politics. Why try to outrun the bear when you can
just tie your co-workers’ shoelaces?42

EVALUATING THE PROGRAM

Sheldon finished reading her collection of articles on Microsoft and switched off her computer. ABF had
reached a point where they needed to do something different with their performance management and
appraisal system. They were long past the point of being a mom-and-pop software company, and she
knew the task of designing an appraisal system would only become more complex as the company
continued to grow. Frankly, there seemed to be a lot of negative information on Microsoft’s use of stack
ranking, but she also knew that this sort of system would inject some variation into the review process.
But what would the implications of such a system be? What would it take to make it work, assuming it
could work? She headed toward the coffee bar to fill her cup, knowing this would be a long night of
thinking through the pros and cons of various alternatives.