Should a company rate its staff? A former Amazon exec says 'stack ranking' is useful when done right

"Stack ranking," a controversial system of rating employees and laying off the poorest performers, has its benefits. 

That's according to a former Amazon attorney who worked for the company for almost nine years — and who says the technique has been "helpful" to his own career.

Alykhan Sunderji, now a managing partner at law firm Sunder Legal, broke down the process during a video call with CNBC.

"Stack ranking" is an employee rating system popularized by executive Jack Welch in the 1980s during his time as CEO of GE. Executives were categorized "A," "B," or "C," with "C" performers likely to be laid off.

When Sunderji was at Amazon, managers would get together once or twice a year to undertake employee appraisals known as talent reviews, he said. "They will categorize employees in different performance bands. So, it could be 'top tier — high value,' and then at the other end … it might be 'least effective,'" he said.

The process is collaborative, with several managers assessing the performance of the same employee together, which helps to weed out implicit bias, Sunderji said.

"In an alternate situation, somebody is making a decision very unilaterally, [it] could be arbitrary. In a stack ranking system, I have to defend my decision, I have to take on new data, I have to listen to others' opinions, and it forces that manager to make a better decision, frankly," he said.

Sunderji's roles at Amazon included lead attorney at Amazon Pay and head of legal for the company's Canadian operations. He also led the legal team for its fashion and apparel business before setting up Sunder Legal in 2021.

Those toward the bottom of the ranking at Amazon were not always laid off. "Amazon's culture is very much one of … 'What is the issue, and can we fix it?' As a manager, one of the things I was evaluated on was, if we identified a poor performer, it was a big win if you were able to go in and coach that person, and turn them into a good performer," Sunderji told CNBC.

Amazon staff were keen to know their rank, Sunderji said, but managers did not disclose those details. However, there is a compensation range for every role. "You can tell where you are on the rank based on your range … employees don't know the full range, but they can suss that information out from talking to others," Sunderji said.

An Amazon spokesperson told CNBC via email: "Like most companies, we have a performance management process that helps our managers identify who in their teams are performing well, who needs more support, and who might not be a fit for Amazon. The vast majority of our colleagues regularly meet or exceed expectations, but for the small number of employees who don't, we provide coaching and opportunities to help them improve."

"We keep our performance bar high, and that's one of the reasons why Amazon is one of the most sought-after places to work in the world," the spokesperson added.

While the technique has evolved over the years, similar methods have been used by tech companies, with Google introducing new details of its performance system in December 2022 that saw a higher proportion of employees fall into a low-ranking category. In January 2023, parent company Alphabet laid off 12,000 staff.

Banks have also laid off thousands of staff this year, with Goldman Sachs introducing reviews 2022 that saw low performing employees cut.

Sunder Legal helps people start companies, raise money, or buy and sell businesses and Sunderji said stack ranking is familiar to many of its clients, which include people who formerly worked at firms like Amazon, Microsoft and space technology company Blue Origin.

Spokespersons for Microsoft and Blue Origin were not immediately available for comment when contacted by CNBC.

"[Clients] are comfortable with this process. And when we help them sell themselves or take on investment, we have to investigate their HR practices to make sure … everything's legal, everything is compliant. And in many cases, having a stack ranking system is actually helpful, because there's an objective, collaborative process to evaluating employees," he said.

"For investors, I think that companies that do employ these processes are more successful because they understand that to have an 'A' team, you need to continually evaluate your talent," Sunderji said.

Amazon paused the process after the publication of a 2015 article in The New York Times that suggested the tech company's people management practices were "bruising," Sunderji said. The company's "Organization Level Review" had managers bring evidence of subordinates' performance to meetings where staff were rated during a process The Times described as an "internal competition" between supervisors of different teams.

But, according to Sunderji, the pause resulted in a negative result for Amazon. "Anecdotally, the experience was that poor performers just didn't end up leaving the company. And I think it hurt the company for a couple years," he told CNBC.

"Not every company is for every person," Sunderji added. "Working for a company is like dating and there needs to be mutual satisfaction. And I think some people thrive in that environment … [and] other people don't," he added.

McDonald's also uses a grading system to assess the performance of its franchisees, known as its Performance and Customer Excellence System, introduced in 2022. But franchise owners expressed concern that it would alienate workers, and in April CEO Chris Kempczinski said the firm was working its way through feedback on the system.

If someone works for a company that uses a system like stack ranking, they should "try and get the most out of their employer wherever they're working," Sunderji said. "That can be financial, but that is also training, development, guidance, advice," he said.

"Some of the most successful people I've seen didn't stay at Amazon forever. They took that great training, and they went to other companies, and they made those companies great," he said.

During his own performance evaluation at Amazon, Sunderji was told he needed to be more patient with his team, and that his writing could be more concise. "I still think about those lessons today … And honestly, I feel like I'm a much better lawyer today, because of all of the feedback that I got over nine years," he said.

 — CNBC's Jennifer Elias and Hugh Son contributed to this report.