RISMEDIA, Jan. 25, 2008-(careerbuilder.com)-Every company should have a strategy for dealing with underperforming employees. Some employees should be invested in, whereas others should be eliminated. Jack Welch, former CEO of General Electric, implemented a strategy of annually eliminating the bottom 10% of his company’s employees. This effective strategy is one of the keys to GE’s long-term success.
In the never-ending push to better the bottom line, managers are often faced with difficult decisions concerning underperforming employees. Many managers often look at precedents set by top performing companies to determine the best way to handle these types of situations. When searching for a proper business philosophy to model, look no further than the ideas set forth by former CEO of General Electric Jack Welch.
In 1981, Jack Welch became CEO of GE and immediately began implementing his philosophy and changing the face of the company. His revolutionary ideas allowed GE to thrive and earned Welch the honor of being named “Manager of the Century” by Fortune Magazine in 1999. In his book Straight from the Gut he describes exactly where he came from and how he got to where he is now.
One of the issues discussed in this book is the dilemma of dealing with underperforming employees. Welch’s idea was to annually purge the company of the bottom 10% of the staff. This notion, however imposing as it may be, is an assured way of not only evaluating the company but also motivating the employees to perform better. It works so well because it forces employees to work harder in fear that they will lose their jobs. This fear can be incredibly motivating and in turn can increase the productivity of the company as a whole. However, eliminating the bottom 10% of the staff was not the only aspect of his plan. The other piece to the puzzle was allocating bonuses and stock options to the top 20% of the staff. Having both ends of the spectrum accounted for gives the employees two reasons to work harder.
Welch’s system created three groups: the top 20, the vital 70 and the bottom 10. At the end of the year, the three groups would be established and the bottom 10% purged from the company.
The next question asked is, “What is the best way to implement this system?” The answer to that question is simply to create a ranking system for the company. What this means is that on a yearly basis, the company will organize all the employees into groups congruent with level of productivity. Welch’s system created three groups: the top 20, the vital 70 and the bottom 10. At the end of the year, the three groups would be established and the bottom 10% purged from the company. Meanwhile, the groups at the top of the company will receive bonuses for their hard work. By creating these groups employees know exactly where they are positioned in the company and how well they are performing compared to their coworkers. When this system is implemented into a company, every single employee is obligated to demonstrate they not only want to work but also deserve to work with the company.
Some critics say that the system is cruel and companies should not engage in this approach. However, Welch’s ideas present the argument that it is cruel to keep the bottom 10% around and hold down the company. By only keeping the employees who are driven to perform well, the company itself will operate at a much higher level. The system is deliberate, straight forward, easy for anyone to understand and provides constant feedback to all employees. No employee is ever left in the dark; he or she always knows what level they are operating at and if they are in danger of being a part of the bottom 10. Possibly the critical point of this ideology is that it communicates to the remaining employees at the end of every year that they are doing a good job and should continue to do so in the subsequent year.
The bottom 10% who lose their jobs will actually benefit as well.
Another argument against the critics is that the bottom 10% who lose their jobs will actually benefit as well. Employees know that the reason why they no longer have a job is because of a lack of performance Everyone in the bottom 10% now understands that they need to perform at a higher level in their next job. This lesson, however hard it may be to learn, is beneficial and will help those employees in the future. Also, many times both the employee and the employer don’t mesh and suffer. Therefore, a yearly purge of any employees that are not the right fit will result in a win-win situation in the long run.
Jack Welch has proven that his theories work and the results can be seen in the massive growth of GE over his tenure. An integral part of that growth was his method of eliminating the bottom 10%. Success comes from the ability to motivate employees to produce to their highest level. Welch’s advice proposes an immediate change that will certainly increase the performance level of any organization.