Now that Ballmer is retiring from Microsoft everybody is piling on him for all manner of perceived failings as CEO. Most recently for the toxic culture that the Microsoft review system is said to have engendered within the company.
http://www.slate.com/blogs/future_tense/2013/08/23/stack_ranking_steve_ballmer_s_employee_evaluation_system_and_microsoft_s.html
Now I hate to do this because ordinarily I take great glee in razzing Microsoft for its blunders but in this case, I have to take Ballmer’s side of the argument. Criticizing Microsoft is fun, but having actually been CEO of several technology companies, I’ve got to say I’ve developed some sympathy for Ballmer’s position over the years. One of the biggest challenges I’ve always experienced making big technology is that you’re only as good as your tools and your tools are people. When I have great people working for me… I become a great CEO. When I have less-than-great people working for me… I’m a less-than-great CEO. Which very quickly makes you realize, as a technology company CEO, your primary job is recruiting and retention. I don’t think that a lot of people would dispute that Microsoft has managed to recruit and retain a lot of top notch talent over the years. It’s always been one of Microsoft’s great strengths.
It’s also the case that unlike almost any other industry, software development can have a very extreme productivity curve. There are engineers out there who can out code 5-20 ordinary skilled programmers. There are one in a thousand engineers who can out-innovate nearly all ordinary skilled programmers. If you wanted to design a compensation system that rewarded programmers in direct proportion to their contributions to a products success the contribution curve would generally show that 98% of your people were contributing between -1X to 3X units of productivity relative to their peers and the remaining 2% of employees where contributing 3-20 units. In other words the top 2% of your team might be contributing 20%-40% of a successful products value. In traditional organizations top performers were promoted to management in order to justify their higher compensation but in a technology company converting a great engineer into a bad manager is the last thing you want to do. You need that engineer to stay exactly where he is in the organization but compensate him “fairly” for his productivity. That means you need a review system that can pay one engineer 5X-20X what a peer sitting next to him in the same cube is earning.
On such a review scale the majority 99% of your employees are going to sit in a very tight cluster. Most of them will never have the potential to be 10X contributors and a few are active productivity inhibitors that need to be removed from the organization if they remain that way.
Microsoft’s review system was designed very early on to try to capture these observations about engineering performance. The fact that the Microsoft’s TRIES to pay exceptional people exceptionally is a great thing! Most companies are content to pay all of their employees a flat market salary that sits somewhere near the market average for their position and experience + or – maybe 25%. Microsoft “solves” this problem in a mathematically “obvious” way. The company generates profits which, combined with market pricing for talent is used to set a “budget” for review time. That budget is fixed. It doesn’t matter how many super-talented geniuses worked on a product if the product didn’t perform exceptionally… the value of their productivity may still be low despite their best intentions and hard work. That fixed “review” budget has to be distributed among those team members as closely as possible to each member’s contribution to the products success. On a team of 100 people 2 of them may have written 20% of the used code and solved design or performance problems in an innovative way that nobody else could have discovered. A few of the team members may have worked 80 hour weeks on code that all had to be thrown away in the end because it wasn’t used in the final product. How do you distribute raises fairly?
Under the Microsoft review system the team’s manager would stack rank the team based on a large number of subjective variables. The purpose of the stack rank is to force the manager to honestly assess the value of each team member to their organization. A stack rank prevents a manager from being lazy by reviewing all of his team members to be equally valuable. That stack rank is then used to distribute review scores and compensation along a bell curve proportionate to each team member’s position in the stack. Since the manager has to deliver the reviews, he had better be prepared to defend them to his employees. A few top performers get a lot, a few bottom performers get “the shaft”. If you want a promotion at Microsoft, you need to review near the top of your stack several times. If you review at the bottom of your stack several times you will be given a certain amount of time to find a new job in a different part of the organization… or be terminated.
This review system is the source of endless whining, chaffing and grieving at Microsoft. Almost nobody likes it. It doesn’t try to coddle emotionally fragile people and make them feel good about their mediocre contributions to their team. There are no easy places to hide for the lazy and incompetent. Managers are forced to be clear and accountable to their teams about each members relative value… which most people don’t want to hear if they are not #1. Top performers, who should be happy, often feel guilty that they are making so much more than their less valued friends and team mates. There is social pressure for them to commiserate with their less rewarded peers. It is said that the system results in heavy internal politics and competition, that people on the same team are incentivized to back-stab one another, that managers will deliberately seed their teams with mediocre talent so they can pay their top people and close friends more generously and that Microsoft lost top talent because of it. Etc.. etc.. Although all of this is true to some greater or lesser degree, I don’t believe that any of it is necessarily a BAD thing. Here’s why…
How to “Prove” your review was “unfair”?
Quit and get a better job.
I know of very few people who have an accurate perception of their own value to an organization. Do useless incompetent idiots KNOW they are useless incompetent idiots? Isn’t one of the hallmarks of the most useless incompetent idiots, that they zealously believe they are top performers? Do all exceptional people KNOW they are exceptional? The Microsoft review system is a very clever economic structure for correctly valuing people over time regardless of their imagined value… which is almost always greater than their real value. There is a simple way for anybody unhappy with their Microsoft review to PROVE that they are incorrectly valued. They can quit and take a higher paying job at another company. Anybody who remains at Microsoft after a dissatisfactory review and bitches endlessly about it, is just WRONG about their actual value… clearly nobody else in the market is willing to pay more to hire them. Microsoft measures its churn rate to determine how FAIR its compensation system really is. If Microsoft’s overall churn rate is too high then it can INCREASE its review budgets to bring it’s aggregate churn rate into a desired range.
Microsoft WANTS to churn out weak employees. If a manager is deliberately seeding his team with weak employees in order to pay his top contributors MORE, then Microsoft’s system will force that manager to automatically churn them out, forcing the manager to spend more time recruiting WEAK talent from other internal groups. Thus, there is even an economy and some job security for bottom performers. If you believe that this is a widespread practice at Microsoft then imagine how unproductive you must be to not be able to find another job in the organization when you have been forced out of your current one as a result of constantly getting reviewed at the bottom of the stack?
Does the system really incentivize backstabbing within a team? That would tend to assume that the team manager is UNAWARE of this incentive AND that the team is so small that backstabbing a few members has a chance of boosting an employee’s stack rank into the vaunted top 2% stratosphere… otherwise backstabbing, which takes time and effort, would not be a particularly advantageous activity unless the team manager actively rewarded it. Since the overall size of the compensation budget is proportionate to the company’s actual performance, engaging in backstabbing would have the collective effect of reducing the size of everybody’s compensation by making the company less productive.
In short the underlying economic incentive ideas behind Microsoft’s review system are BRILLIANT and provide inherent resistance to fraud and gamesmanship. That does not mean that such a brilliant system can’t be poorly administered or that people will LIKE being judged and compensated fairly. If a manager rewards gamesmanship or tries to curry personal favor with disappointed employees by blaming the system for their review then the system will obviously be less effective. If employees with an inaccurate view of their “worth” believe that getting an accurate assessment of their value to the organization is equivalent to being told they suck every review period then it would also cause an understandable morale problem… among the mediocre… which they can fix by improving their performance by accepting that they can do better or by proving the review wrong by quitting and taking a higher paying job elsewhere. People who remain in the same job and remain disgruntled about their review are just proving that they have, apparently, been assessed accurately… Moreover, that being delusional about their real value and developing a poor attitude when challenged to perform better, are two areas they could improve on.
Now the California school of millennial management thought on this subject is that it is more important to make employees feel happy about their jobs and peer relationships than it is to treat them fairly. We all know that happy employees are more productive don’t we? Also because the market for engineers is so competitive, unhappy, less productive employees can always quit and get another job elsewhere, sometimes with a raise simply because there is such a scarcity of talent. Better to try to keep everyone happy and forgo the whole systematic measurement of productivity and fair compensation for the sake of institutional peace?
Do useless incompetent idiots KNOW they are useless incompetent idiots?
Bill Gates and Steve Ballmer however would tell you that being surrounded by mediocre talent they have to carry and not being recognized for their contributions is precisely what guarantees that the top 2% performers will quit and go elsewhere. Mediocre people can always be replaced. The most valuable employees are hungry, aggressive and embrace the challenge of climbing to the top of a stack ranking rather than making excuses for their shortcomings and developing attitude problems when they don’t get their way. People who consistently sit at the top of their stack ranking will eventually get promoted into a different stack (with higher standards) thus making room for their former peers to move up. Bill and Steve would say that keeping the best and brightest people challenged was more important to retaining them than keeping everybody “happy”.
Of the many failings that Ballmer can be ascribed, Microsoft’s review system is hardly one of them. I believe that he and Gates knew exactly what they were doing when they designed it and that it was responsible from a very early stage for cultivating a culture of excellence among Microsoft’s BEST performers and a culture of systematic and rationale productivity measurement. I believe that Microsoft’s struggles under Ballmer are the result of too much success and complexity for anybody to manage at that scale, which is hardly an indictment of his tenure as CEO.
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