When FC Bayern or Manchester City look back at the end of the football season, how do they (and we) know how well each team played? The obvious answer is to look at the league tables, which rank clubs according to their performance. And it is not just football. Rankings are everywhere – from music charts, to lists of the most-wanted fugitives, to The Sunday Times list of the Best Companies to Work For.
So when companies’ R&D, sales or product managers reflect on the last year, how do they know how well they’ve performed? While there might be some variability in the chosen performance metrics, many companies follow a quite similar approach to football: they rank their employees.
The idea seems simple; by publicly ranking (or otherwise giving feedback to employees on how their performance compares to colleagues), companies can promote a healthy competitive culture, one that can spur both the employee and the firm to greater heights of innovation and success. Some companies go even further, using these rankings for bonus, promotion and termination decisions – the controversial rank-and-yank procedure. Even if the rankings are not directly tied to financial or career consequences, they may still reflect the underlying competitive incentive structure in those organisations.
But companies should be wary about the far-reaching consequences of using these types of ranking feedback structures. In our research, recently published in the Journal of Behavioral Decision Making, we found in some situations it could encourage destructive competition among colleagues – hurting both individual performance and the organisation as a whole.
To uncover this, we conducted a study where groups of participants played variants of a classic public goods game, across two scenarios. In one, competitive behaviour was rewarded. In the other, cooperative behaviour paid off for both the group and the individual. After each round, participants received feedback – either just on their own performance, or additional feedback on how they ranked relative to the other players (ranking feedback), or on the performance of the group as a whole (team efficiency feedback).
Granted, the game was much easier to understand than the actual bonus and career incentive structures employees in companies face. Nevertheless, most participants, some of them seasoned executives, based their actions according to the feedback they were given, rather than the actual underlying incentive structure.
Strikingly, participants given ranking feedback turned down guaranteed financial gains in the cooperative scenario to ensure themselves a higher ranking, even though it was financially irrelevant. They became increasingly competitive over the rounds played. Their actions resulted in avoidable harm to all parties, with others losing even more than they lost themselves, often starting a spiral of mutual destruction.
It’s not difficult to draw parallels to actual employees and managers. Most managers we interviewed during the research told us they were either already engaging in such destructive behaviour themselves, or that they witnessed it in their organisation. For instance, one manager told us he spent much of his time trying to advance his own pet project; one that was none too important organisationally, but might get him recognition from his bosses. Another said a common strategy of junior consultants was to time their suggestions for a big client presentation in such a way as to enable them to shine in the presentation – at the expense of trying to make the presentation as good as possible for the company.
So how can companies avoid inadvertently encouraging this destructive behaviour? First, it’s important to correctly determine what types of employee behaviours would truly benefit your organisation. After all, while sprinters competing in different lanes can benefit from comparing their relative progress on the track, rowers in the same boat are ill-advised to compete with each other to be the single, fastest rower. In many situations, companies would be better off with employees who cooperate rather than compete with each other.
For example, R&D success is typically driven by teams working together, rather than competitive engineers working in isolation. And in knowledge-intense industries, teams often need to be bigger (as specialised experts face situations that can only be solved by bringing together ideas from disparate fields).
Then, always remember the way feedback is focused and communicated ultimately drives how employees make sense of incentives, culture and behaviour at work. So we urge those who design such feedback structures to be mindful of the consequences for employee behaviour and company culture.
In situations where cooperation pays off – and arguably, such situations are common in today’s knowledge-based economy – the widespread use of ranking feedback is counterproductive. It can quickly lead to destructive competitive behaviour, harming both individual and firm-level performance.
Sebastian Hafenbrädl is assistant professor of managing people in organisations at IESE Business School, and Jan K Woike is research scientist at Max Planck Institute for Human Development