Dangerous curves: Is forced ranking the pay-for-performance answer?

I'm not sure I know anyone who enjoyed getting graded in college "on the curve." It's strange and unnerving going into an assignment knowing that a certain percentage of students in the class are guaranteed to fail. Forced ranking leaves me with the same impression. Before the process even begins, someone is going to be number one, and someone is going to be dead last. Fine for a race, but is it the best strategy for an organization?

i4cp recently conducted a survey on pay for performance (view the sample results), and one of the findings was that about 21% of respondent companies use a forced ranking system for performance management. I personally thought that number would be much lower. While it's used mostly by the largest companies (more than 10,000 employees), about 14% of smaller companies also said they use it.

It's not new to say that forced ranking is controversial. In the past, Microsoft, Ford and Conoco have all been sued over forced ranking systems. Microsoft managed to fend off numerous lawsuits, but it ended up ditching forced ranking a few years ago. Conoco and Ford both settled, with Ford paying out $10.5 million. Ouch. Check Google and you'll find endless articles on both sides of the issue. Dick Grote's book on forced ranking is a good reference on the pro side.

Those that are for the system will say that it's a relatively easy, definitive way to identify performers. As pay for performance becomes increasingly important, companies are looking for ways to effectively identify high performers. Forced ranking appears to be an attractive solution, forcing managers to be more objective in their review process and eliminating inflation. Most people would agree that performance review inflation is a little out of control, with 4's and 5's being handed out like candy from a bottomless Pez dispenser. But is ranking Smith as better or worse than Johnson the answer?

In a business world where teamwork is imperative, I can think of nothing more anti-team than forced ranking. "I need you all to pull together and make this work, but at the end of the year, it's every man and woman for themselves!" I imagine it's pretty easy to distinguish employee #1 from employee #101, but what sets employee #42 apart from #43? Was the knot in his tie tighter? Employees each have their strengths and weaknesses, and creating a forced ranking system that is both fair and effective seems like it would be more trouble than it's worth.

Of course, companies have been using the strategy for years, and many swear by it. They say it helps elevate overall performance by allowing a company to identify and eliminate the lowest performers. I just think there are other ways to accomplish this without hammering each employee into some arbitrary peghole.

What are your views on forced ranking, and what performance measurement standard do you think would be more equitable?