Updated: Jul 23, 2020
When Steve Ballmer stepped down as CEO of Microsoft last year, he made it clear in his exit
interview to The Wall Street Journal that he’d had a certain amount of nudging from the board. He came to the conclusion that he couldn’t make Microsoft move fast enough to make the board happy. Many have claimed that Microsoft lacked an innovative culture or that it made bad investments.
But I would argue one of the root causes of Microsoft’s underperformance in innovation can be attributed to its “stack ranking” performance system, which caused massive and destructive competition among its innovation teams. Under the stack ranking system, every department was forced to identify an imposed specific percentage of employees as being top performers, good performers, average or poor. One in ten employees ended up in the “poor” bracket, which meant they were first in line for unemployment when there were cutbacks.
While stack ranking, also referred to as “the bell curve”, is prevalent in many major companies such as General Electric (GE), critics of Microsoft believed the system created an environment where employees competed more with each other than with outside competitors. This was one of the reasons Ballmer couldn’t get an iPhone-like innovation off the ground. Employees believed they were being unfairly treated and felt envious of those
rising in the ranking system to the extent they were more motivated to undermine each other
rather than the competition.