Why Yahoo’s Performance Review System Was Flawed From the Start [e252]

February 10, 2016

Nasir and Matt talk about Yahoo’s quarterly performance review system andwhy it was flawed from day one.

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist.
My name is Nasir Pasha, and…

MATT: I wasn’t quick enough there.
My name is Matt Staub.
You gave me a fraction of a second to say something and I hesitated.

NASIR: Well, I give you a one out of five then in your performance review.

MATT: Ah, well, very pertinent to what we’re talking about today.

NASIR: Yeah, that’ what I do.

MATT: That could end up being all right based on this stacked ranking system. I believe it’s kind of a bell curve on how all of this works but was it the QPR Quarterly Progress Report?

NASIR: Yeah, this makes my eyes roll. It’s some kind of corporate program that it needs an acronym to it.

MATT: Well, yeah, this isn’t the first time this has been implemented and I think some other big companies have run into similar issues before but one thing that Marissa Mayer did when she came into Yahoo was install these quarterly performance reviews. What did I say, “quarterly progress report”? I was one-third of the way correct.

NASIR: You got the quarterly correct.

MATT: Well, I got the QPR. I just hadn’t opened up the article yet to remember what it was.
So, they have this rating system to rank the employees and there’s a couple of issues that are going on here. One, well, the person that ultimately brought the lawsuit is claiming a couple of things but one of which is that this stacked ranking system is just unfair in general. Two, I think this probably would be the bigger one, the scores or this rating system was manipulated and there’s a few issues with that but it was manipulated to then I guess give some sort of legitimate grounds for terminating people and the number of people that were terminated is also another problem involved in all this but it all kind of comes back to this rating system. I mean, I don’t know how much you want to talk about that and the actual rating system itself on how fair it is.

NASIR: Well, yeah, let’s talk…
The rating system is like, it’s so silly. Honestly, it really represents Yahoo as a company because I don’t think it’s ironic – or I don’t think it’s a coincidence, I should say – that around the time that the stack ranking – like, which Matt said, it’s literally a one to five rating, bell curve – that means only so many people can get fives, only so many people can get fours, et cetera, and one, and most everyone’s going to get threes. And so, this system was pretty much abolished by Microsoft and GE. As they were ditching it, Yahoo was starting it. It’s very reminiscent to Yahoo as a company. I mean, they always seem to be kind of late in the game. Frankly, if you’re kind of late to the game compared to Microsoft and GE, I mean, that’s telling you something.

MATT: Yeah, and it just reminds me and I know there are some schools that this is the way they do all their classes. I took a class in college – some accounting course, I can’t remember which one – it was the same sort of concept. It was like, well, you’re going to take the exams and the top ten percent are going to get an A – or maybe it was the top twenty percent – the next thirty are going to get a B, the next thirty are going to get a C, ten percent D, and ten percent fail. So, ten percent automatically failed every single exam. To be fair, I thought that was ridiculous until the exams all ended up being tough so definitely more than ten percent of people failed every exam so it kind of worked itself out in that aspect.

NASIR: Yeah.

MATT: But, in terms of people’s jobs, I mean, I don’t know what percent applies here but let’s say everyone that worked for Yahoo was a good to great employee – which probably wasn’t the case, it definitely wasn’t the case but let’s say it was – you have to throw people into this bottom. I mean, there’s a top, there’s a middle, and there’s a bottom. People have to be on the bottom based on this ranking system – not just we’re going to rank every person individually and it doesn’t matter if everyone turns out good to great. I mean, I don’t really get that aspect of it unless it’s kind of what they allege here. It’s a way to terminate people with a little bit more justification behind it.

NASIR: One of the problems too is that, let’s say you have two great employees, they’re not going to want to cooperate or be with each other because, again, even if they’re rating five employees, because they’re in the same department or whatever, they’re not likely to get fives because there can only be so many fives given out. So, little weird game scenarios end up playing out and it just ends up being silly.

MATT: Yeah, I think it’s at least part of the reason that they’re also alleging here in this lawsuit, there was a manipulation of their rating system in order to justify some of these layoffs but let me give some specifics on the layoffs here.

NASIR: California law?

MATT: Yeah, and I was trying to find the exact numbers on how many they laid off but California law – which is where Yahoo’s located – if a layoff of more than 50 employees within 30 days at a single location, the employer has to give 60 days’ advance notice. Federal law – something similar until Warren Act requires advance notice a layoff of 500 or more employees. I can’t find the exact number here but it looks like they violated that as well. I mean, it’s one thing to implement this system where you know you’re going to probably terminate a bunch of people but, if you’re going to do that, at least give them the proper notice and the advance notice in doing so. Obviously, a big layoff like that’s going to come with the detriment of the stocks probably going to take a hit and things like there’s people who are going to start questioning a lot of things. But, if it’s ultimately going to happen anyways, I mean, at least follow the rules and give that advance notice.

NASIR: It actually matters whether they’re being terminated because of a layoff or because of performance and I think what this lawsuit argues is they wanted to do a layoff but, instead of doing a layoff, they just used this performance system that basically says, “Okay, just cut out the ones and twos and, therefore, we’ll be okay because we’re terminating because it was a termination based upon performance.” In California, the definition of layoff means something to the effect of a separation from a position for a lack of funds or a lack of work. As we know, Yahoo, for sure, has been going through financial difficulty. And so, whether that definition applies and how they’re kind of gaming the system with using the performance metrics, then that’s where this case is going to resolve.

MATT: Yeah. I mean, I guess it’s an attempt to do something but, ultimately, I don’t think that’s going to work out.

NASIR: This is interesting – more criticism for the actual system – this one person in the suit, Mr. Anderson, said he was fired for several reasons unrelated to performance and he said he had complained to management about the impact of the QPR process on the people he supervised and even reported an attempted bribe by one of the employees who wanted him to reduce another employee’s rating. And so, I can imagine that’s kind of an interesting circumstance, but this is like the silliness that this system created and, of course, it’s easily abused. In the complaint, they talked about supervisors changing it, changing the ratings arbitrarily. Of course, just because you have this so-called objective method of measuring people’s performance doesn’t mean that you can be objectively discriminatory towards certain protected classes whether it’s gender discrimination or racial discrimination of what-have-you.

MATT: It’s one thing to manipulate reviews in order to try to put out good grounds to terminate someone but, when the system itself has flaws, it’s like a double-whammy. “Well, we have this flawed ranking system but, also, higher-level management is manipulating the rating system in order to do other things.” It’s like everything they did here seems to be wrong. I get what they were trying to do now with the “non-layoffs” but, you know, it just keeps piling on top of it, too. It’s just mistake after mistake. Well, I don’t know if mistake is the right word but it’s part mistake, part bad decision-making, I guess.

NASIR: Yeah, and it doesn’t help. Like, I think it was just February 2nd, Yahoo announces that they’re laying off 15 percent of its workforce. Like, everyone pretty much knows what’s going on here. This is kind of an open secret, I would say. And so, let’s talk about performance reviews for a second because, I think, this is probably a bad example but performance reviews are very helpful but it can have its drawbacks, too. I’ll give an example of both. The positive is that, okay, you have an employee that is consistently underperforming and you document that. Every quarter, it’s like, “Okay, so and so, you’re coming in late to work and you need to come in on-time,” or, “Your writing needs to be better,” or whatever, and you have that feedback and you document it in your quarterly reports or yearly annual reviews and so forth. And then, one of these days, the person gets injured or they complain to you about some kind of wage policy and then, at the same time, that person continues to stop coming on time and their performance goes even below what it was before and you need to terminate them, the concern is that, “Wait a minute. If I terminate this guy, this guy might just turn around and say, ‘Hey, you terminated me because I complained about a wage violation or some other kind of illegal reason to terminate.’” But that personnel file is your backup.

MATT: Right.

NASIR: Unfortunately, the opposite is also true. You really have to be honest in your performance review because some people don’t like to criticize and so forth so it’s always good to have some kind of positive and some kind of negative in your performance review for legal purposes because, if you say, “Okay, this person’s been a perfect employee,” after five or ten years’ employment, all the positive and then they’re not good and you terminate them and they turn around because you fired them because they were a woman or a certain race then you can’t say, “Well, it’s because you’re a bad employee,” because those last ten years you’ve said that they were perfect, right? So, it works both ways, that’s why performance reviews are good but it just has to be done well and properly and honestly.

MATT: Yeah, exactly – what you just said. They’re good for those reasons but there’s no advantage in just giving someone a five-star review across the board – unless they’re a really phenomenal employee – because, what’s that going to do? Like you said, (1) if they are in fact not that great, you’re putting in writing that they were and that’s going to come back to haunt you if there’s ever an issue and (2) from the employee’s perspective, I’m just thinking, “If I’m great, then maybe I can slack off a little bit or maybe I can ask for a raise.” They ask for the raise and you say, “Well, we’re not giving you a raise.” “Why? I’ve gotten five-star reviews the last however many years. What gives here?” And so, there’s really no benefit – well, I shouldn’t say there’s no benefit – there’s just not a lot of benefit in just giving someone a great review just to be nice about it. I mean, if anything, you want to give constructive feedback so, if there is something they can work on, you know, you tell them what it is and they can work on it and the business is going to be better as a result.

NASIR: I know what we’re saying sounds kind of obvious and maybe, for you guys that are listening, it sounds obvious, but I’m telling you, employers have trouble with this. It’s so common that they kind of ignore a problem or they don’t find it significant enough to raise it up or especially document so it’s like, “Oh, yeah, he’s always late but I’ve never said anything for him,” and the time that he’s late a lot, you fire him and then it comes back to haunt you later because that person thinks that they were fired for some other illegal reason.

MATT: Right.

NASIR: I’ve said this many times before but, when you are terminating somebody, understanding that what their perception of why they’re being terminated is super important in risk management in the sense that, if they feel that they are unjustly being terminated, then they’re going to find a reason that you fired them for some unjust reason or some illegal reason. If they understand your perspective of why you’re terminating them – whether it’s money or whether it’s because of their performance or what-have-you – then you’re going to be a lot better off. There are some schools of thought – from a legal perspective – that, when you terminate them, you kind of just say, “Hey, we’re letting you go,” and that’s it, don’t give a reason and so forth because, once you give them a reason, you’re kind of stuck to that reason. And, if you say something else later and there’s inconsistency, people can use that against you. But I’m of the opinion that it depends on the situation but you really have to kind of dive a little bit deeper into the psychology of the person to make sure that the separation is as smooth as possible.

MATT: Yeah, terminations are not always… it’s not just a legal analysis. I mean, that’s why I tell people, “Well, you know the individual, you know how they’re probably going to react to it or respond so just keep that in mind when, you know, how you go about it, if you can.”

NASIR: It made me just think of, you know, you’ve seen that movie, Up in the Air?

MATT: Yeah.

NASIR: I don’t know. I was just chatting with somebody and I was like, “You know what? I think I could do that job. I could go fire people for a living.” But then, I was like, “You know what? No, I don’t think I could because I would need the reason. I would need the reason to know why that person’s being fired in order to do it effectively.” Of course, if you remember the movie, George Clooney, he didn’t care what the reason was. It doesn’t matter and that’s what he said to the employees. Like, “Why am I being terminated?” He would divert the conversation saying, “It doesn’t matter.” But, you know, it sounded glamorous, right? It sounded like the right thing to do but, still, even in that, it’s problematic because all the employee needs to do is recall, you know, “Why me and not the person in an office next-door in the cubicle next-door? I wonder, that supervisor made that one joke at that birthday party that kind of had a racial undertone and I wonder if it’s because that’s the reason why.” Of course, one year later in court, they’re going to ask you, “Did you make a joke about this and that?” and show that the person may have a racial bent to them and then use that to prove that the only reason that person’s been terminated is because of that and it’s because they have no idea why they were terminated and they’re searching for a reason.

MATT: Yeah, there you have it. So, you went on record saying just the job of firing people is glamorous is what I pulled from that. You can go back. This gets transcripted out so you can go read that and that’s just like a performance report – once you say it, you can’t take it back.

NASIR: Ah, it did make it look glamorous, but I think it was just the travel.

MATT: Well, that too. I mean, there’s the scene where he goes back to wherever he actually lives and there’s just…

NASIR: Oh, yeah, there’s nothing, right?

MATT: Yeah, it’s just a completely empty apartment or whatever it is. Yeah, but he hit the – what was it? The seventh person to get one million miles or whatever it was.

NASIR: Oh, yeah, something silly like that.

MATT: The pilot came out and, yeah, shook his hand or whatever. It was pretty funny.

NASIR: That’s funny.
Well, I think that’s our episode, but I’m kind of sad to see it go.

MATT: Yeah. Well, our takeaway I guess for this is, actually, there’s a lot of good advice for employers, document and these performance reviews. Well, don’t use the weird QPR ones – the stacked ones that Yahoo did. But, in your own performance reviews, document, be truthful, be honest. Like you said, it’s funny. It seems like it’s common sense but it’s easier said than done, I think.

NASIR: Well, all right, thanks for joining us.

MATT: Keep it sound and keep it smart.

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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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