Adobe's Stock Up 68% Since It Dumped Stack Ranking, Will Microsoft's Follow?
On November 13, Microsoft decided to dump stack ranking -- a people measurement system that forces managers to find and fire their "worst" people every year -- as word leaked that Yahoo had adopted it. Since March 2012, Adobe Systems (I own its stock) replaced stack ranking with what it calls "Check In," shares in the software company have risen about 68%.
Is there any relationship between the way a company manages its people, its financial performance, and its stock price?
Before getting into that, why did Adobe dump stack ranking 18 months ago? As Donna Morris, Adobe SVP of People and Places, explained in a November 26 interview, "We abolished stack ranking and annual performance reviews in March 2012. We now use Check In -- a system that fits with Adobe’s corporate culture of collaboration and creativity. With Check In, managers and staff members agree on goals and review performance on an ongoing basis."
Morris has spent 11 years at Adobe -- prior to which she was vice president of human resources and learning at Accelio Corporation, a Canadian software company that Adobe acquired in 2002 -- and now reports to CEO Shantanu Narayen.
She saw plenty of flaws with stack ranking. "Stack ranking was opaque. People would get written performance reviews once a year. Managers would rank them -- strong, solid, low. The managers would be forced to rank 15% as top performers [and meet target percentages for the other categories]. There was no logic between the written performance reviews and the rating or ranking of the person. The managers would get a budget and make salary adjustments based on the rankings."
Stack ranking led Adobe to lose people it wanted to keep and keep people it wanted to lose. "In January 2012, I looked at key people metrics and saw a consistent pattern. After they received their performance review and ratings, the people we wanted to keep would leave. And managers were not held accountable for changing out low performers. Moreover, we found that the performance review process consumed 80,000 hours every year," said Morris.
Since adopting Check In, Adobe has gotten better results. Morris explained, "Adobe adopted a new business strategy in November 2011 -- focusing on tools for digital creativity -- that required agility, speed, and increased collaboration. To implement the strategy, I thought that people would need to get feedback from managers on a more regular basis. And since we adopted Check In, we have seen much lower attrition of people we wanted to keep and involuntary attrition [managing poor performers out of Adobe] is up -- which is good."
Is there a relationship between Adobe's financial performance and the way it manages people? There may be some correlation. Morris argued, "Managers set expectations for their people that are tied to company performance. There is a more active dialog between managers and their people about whether they are executing relative to expectations. Managers are held accountable for changing out poor performers."
Furthermore, Check In motivates people to perform at their peak throughout the year -- instead of right before they will get their annual performance review. "One of our best people described to me a recency effect. He said, 'When we had stack ranking, people would try to do their best right before the annual performance review. The new system always keeps me on edge,'" said Morris.
Adobe's revenues are up a mere 4.4% in the last year while its profit has been flat. But Adobe's new strategy of charging users a software as a service fee in the cloud instead of annual license fees is expected to boost the lifetime value of its customers.
In its most recent quarterly earnings announcement, Adobe got way more people to sign up for this than expected. “We exceeded one million subscriptions during Q3, demonstrating that the transition to Creative Cloud is happening sooner than expected,” said Narayen.
Does ditching stack ranking have anything to do with Adobe's stock price rise? My conclusion is that high tech companies are heavily dependent on hiring and motivating the most talented people to do the right things.
Figuring out the right strategy is the job of a company's top executives. Managers need to translate a strategy into specific performance expectations that they negotiate with those talented people. Replacing stack ranking with Check In has helped Adobe to execute its strategy more effectively.
If Microsoft can get the right strategy and achieve better execution of it by ditching stack ranking, perhaps it will enjoy a spike in revenue and profit that boosts its stock. Doing that will be the responsibility of its next CEO.