Microsoft is abandoning its controversial stack ranking employee review and compensation system, which encourages workers to compete rather than work collaboratively. The move comes just months before Microsoft CEO Steve Ballmer plans to retire.

If you were cynical, you might think the review system and Ballmer's imminent departure are related. Is Ballmer unwilling to review his controversial 13-year tenure at the helm? Maybe, but it is probably pushing the analysis of this change a little too far.

The Ballmer Question

No matter what happens between now, the announcement of a new CEO and Ballmer's exit, there have long been questions about the leadership at Microsoft. Ballmer, in fact, has been a subject of considerable discussion and conjecture, with a lot of the reviews trending from negative to critical.

However, the abandonment of the stack ranking seems to have less to do with Ballmer and more to do with the One Microsoft policy introduced earlier in the year. That policy is designed to break down silos, make divisions of Microsoft more interconnected and, more importantly, make them more sensitive to customer and market demands.

It is also designed to  develop internal talent, something which has been very difficult by the top heavy style of management current in Microsoft and the practice of stack ranking. Under the system, Microsoft ranked employees along a bell-curve with five points between good and poor performers.

It was designed to weed out  poor performers, but also forced managers to grade workers against each other — a practice that proved controversial, since the rankings were also used to allocate bonuses, equity awards and salary.

Power Struggles

Employees claimed it created power struggles at the management level and impeded innovation among the rest of the workforce. It also resulted in haphazard rankings and pay awards that some employees argued reflected internal rivalries more than professional achievements.

Lisa Brummel, head of human resources at Microsoft, said the system was designed for the old Microsoft — a company that was based on individual achievements. The new, restructured Microsoft depends on interdepartmental cooperation and team collaboration to develop products and releases  faster.

Microsoft Restructured Workforce

News of the changes were revealed in an email sent to employees yesterday and addressed to “Global Employees” and republished in full in the Wall Street Journal.

It said the changes were based on feedback from thousands of employees in the past few years. It also follows a review of numerous external programs and practices. There are four key elements to the changes:

  • Emphasis on teamwork and collaboration: This encourages workers to be more collaborative and assesses how they use ideas and input from others.
  • Employee growth and development: This will involve “timely” feedback and meaningful discussions with employees through a process called Connect. This is intended to help employees develop at a pace that suits their place in the company.
  • No more curve: While there will still be a rewards system for all employees, managers will be given the principal role in deciding who merits what bonuses or pay within the limitations of allocated budgets.
  • No more ratings: Focus on will be on progress across individual projects.

The Change Starts Now

The change  to the new system will begin immediately — good news for Microsoft employees, none of which are likely to be sorry to see the stack ranking system go. But don't think the stack ranking concept itself is dead.

Yahoo's Marissa Mayer just introduced something similar, according to reports in AllThingsD. The same report claims more than 600 Yahoo employees have been fired in the past few weeks for twice failing to make the grade. Some Yahoo employees are complaining that using a bell curve is forcing managers to give some workers low ratings, even if they are performing adequately.

At Microsoft, however, the end of the ranking system seems to be a positive move. The company is changing rapidly and tensions in the workplace created by such a system can only hamper the shift to a more agile and streamlined company.