Jack Welch's Rank and Yank System: How Does It Work?

This article is an excerpt from the Shortform book guide to "Winning" by Jack Welch and Suzy Welch. Shortform has the world's best summaries and analyses of books you should be reading.

Like this article? Sign up for a free trial here.

What is Jack Welch’s “rank and yank” system? Does this system actually work?

According to Winning by Jack Welch, the controversial side of differentiation is employee differentiation. This involves systematically firing your worst-performing employees, in a system called “rank and yank.”

Discover more about the rank and yank system and how it’ll help your business.

Employee Differentiation

There’s a specific method to implement Jack Welch’s rank and yank system: the 20-70-10 rule. The 20-70-10 rule recommends categorizing your workforce into the top-performing 20%, the middle 70%, and the bottom 10%. Then, reward the top performers, keep the middle, and fire the bottom. Though Welch admits that implementing employee differentiation can be brutal, in the end, it’s both an effective and moral practice.

(Shortform note: Welch’s method of differentiating employees based on the top 20% of performers is reminiscent of the Pareto Principle, which states that in many instances, 80% of consequences come from 20% of causes. Applied to a workforce, this means you get 80% of productivity from the top 20% of employees. In The 80/20 Principle, Richard Koch explains that you can use the Pareto Principle to improve your business in several ways. Not only can you apply the 80/20 principle to help identify the top performers of your organization, you can also use it to simplify parts of your business and eliminate waste. For example, you can outsource the less important work or cut down on bloated management.)

Welch claims that employee differentiation is effective because it promotes candor and motivates employees. In a company that uses differentiation, employees know where they stand and if they need to improve. While some say that differentiation can be demotivating to the middle 70%, Welch claims that most people in the middle 70% will try to reach the top 20% to receive rewards such as bonuses, stock options, or promotions for their work. Furthermore, when the top performers aren’t rewarded for their production, they can become less motivated, which will substantially harm the business.

Welch further claims that, despite the controversy surrounding it, employee differentiation is moral for several reasons. First, retaining underperforming employees isn’t doing them any favors. Eventually, these underperformers will probably have to be let go, so it’s best to get it over with. Second, differentiation involves honestly assessing an employee’s performance, which, along with the threat of potential termination, will help employees either improve or find something they’re better at. Finally, differentiation is moral simply because it’s necessary in order to stay competitive in today’s business world. If you don’t do everything in your power to improve your business, it’s likely to fail, and then everyone loses their jobs, not just the bottom 10%.

Critiques of Employee Differentiation

Though Welch heartily defends employee differentiation, the effectiveness and morality of the system are heavily debated. Highlighting the many problems of employee differentiation, major companies such as Microsoft, Ford, and Capital One have dropped the system.

Also known as “forced ranking,” “stacked ranking,” and “rank and yank,” employee differentiation can cause many problems in a company that may hurt its productivity. Critics say, for example, that it can cause a toxic and anxiety-filled workplace, as workers are pitted against each other and many, even above-average producers, constantly worry about being fired. No matter how you implement it, employees may feel they’re being judged and treated unfairly, which leads to low morale and self-interested employees who don’t work well together. Because of this, if a company relies heavily on teamwork and cooperation, differentiation may be especially harmful.
Another problem is the logistical issues of systematically ranking and firing employees.

For one, high turnover can be incredibly costly. Also, as some critics point out, if you annually fire the bottom 10% of your workforce, you should have a largely productive workforce after a few years: As you remove people at the bottom, everyone slides down the scale, and valuable employees will eventually be removed, resulting in a less productive company. Further, this might also result in people who were previously in the top 20% being “demoted” to the middle 70%, potentially demoralizing workers who were previously considered highly productive.

There are also several arguments against the morality of forced ranking. A system that commonly leads to a toxic and hostile workplace culture can easily be seen as unethical. Beyond this, however, it can also lead to discriminatory practices. It led to age-related discrimination lawsuits for companies such as Ford and Goodyear, for example, and to a gender and race discrimination lawsuit against Microsoft. Whether forced ranking was the cause of or merely used as a cover for discrimination is up for debate, but either way, the ethics of a practice heavily associated with discrimination is questionable.

Jack Welch’s Rank and Yank System: How Does It Work?