Jack Welch: 'Rank-and-Yank'? That's Not How It's Done

Every now and again—like just this week, for instance, with the announcement that Microsoft will be changing its performance-appraisal system—some news event unleashes a fresh round of debate about the management practice dubbed "rank-and-yank." That's the term used to describe how companies supposedly identify their worst performers once a year and then, boom, fire them.

It makes me want to scream. And I know I'm not alone.

Because most experienced businesspeople know that "rank-and-yank" is a media-invented, politicized, sledgehammer of a pejorative that perpetuates a myth about a powerfully effective real practice called (more appropriately) differentiation.

Unlike "rank-and-yank"—I hate even using that term—differentiation isn't about corporate plots, secrecy or purges. It's about building great teams and great companies through consistency, transparency and candor. It's about aligning performance with the organization's mission and values. It's about making sure that all employees know where they stand. Differentiation is nuanced, humane, and occasionally complex, and it has been used successfully by companies for decades. Maybe that's not as headline-worthy as you-know-what, but reality rarely is.

Speaking of reality, here's a quick description of how differentiation works, including a look at the most common criticisms of it.

Differentiation starts with communication—exhaustive communication—of a company's mission (where it's going) and its values (the behaviors that are going to get it there). I'm not talking about putting a plaque on the lobby wall with the usual generic gobbledygook. I'm talking about a company's leaders being so specific, granular, and vivid about mission and values that employees could recite them in their sleep.

Why? Because the "guts" of the differentiation management system are performance appraisals that candidly evaluate employees at least once (and preferably twice) a year on how their results are advancing the company's goals and how well they're demonstrating its values. Two points here:

First, candor is absolutely essential to make differentiation work. Second, differentiation's performance appraisals are not—I repeat, are not—just about "the numbers." Yes, the system does assess quantitative results—say, an employee's sales numbers or inventory turns. But it also looks just as carefully at behaviors, the qualitative factors. Does this person embrace the company value of sharing ideas? Does the employee relish building leaders? What about going the extra mile to delight customers?

Now, one of the most common criticisms of differentiation is that it destroys teamwork. Nonsense. If you want teamwork, you identify it as a value. Then you evaluate and reward people accordingly. You'll get teamwork, I guarantee it.

Another criticism of differentiation is that it requires managers to let every employee know where he or she stands—how they're doing today, both quantitatively and qualitatively, and what their future with the company looks like. Are they a star in terms of both results and values (say, in the top 20% of the team), about average (say, about 70%), or not up to expectations (the bottom 10%)? Note: The 20-70-10 distribution is not set in stone. Some companies use A, B, and C grades, and there are other approaches as well.

Without a doubt, some companies use differentiation but leave this "grading" part out. Indeed, over the past 12 years, I've spoken to more than 500,000 people around the world and I always ask audiences, "How many of you know where you stand in your organization?" Typically, no more than 10% raise their hands. That's criminal! As a manager, you owe candor to your people. They must not be guessing about what the organization thinks of them. My experience is that most employees appreciate this reality check, and today's "Millennials" practically demand it.

Yes, I realize that some believe the bell-curve aspect of differentiation is "cruel." That always strikes me as odd. We grade children in school, often as young as 9 or 10, and no one calls that cruel. But somehow adults can't take it? Explain that one to me.

The final component that makes differentiation work so effectively is feedback and coaching. Your stars know they are loved and rarely leave. Those in the middle 70% know that they are appreciated, and they receive clear guidance about how to improve their performance. And the bottom 10% is never surprised when the conversation sometimes turns, after a year of candid appraisals, to moving on. No, they are not summarily shown the door. When differentiation is done right, their manager helps them find their next job with compassion and respect.

Differentiation is not something to be feared, dumbed down or politicized, but instead needs to be understood and implemented. Cruel? No way. Harsh? Just the opposite. With its candor and transparency, differentiation provides dignity, develops future leaders, and creates winning companies.

Mr. Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University.