This system was exposed most brutally in the Vanity Fair profile of Microsoft in August, 2012. Many current and former Microsoft employees attribute at least some of Microsoft’s problems in missing big new markets, and underperforming as a stock over more than a decade to this practice which pitted employee against employee and essentially ignored any team incentives while creating an individualistic culture that was political, and prone to internecine squabbles and non-cooperation.
Getting pay for performance right is no small feat and Microsoft’s choice to use a system developed for a completely different company and industry (GE under Jack Welch) proved divisive and according to many not talent-friendly. In the current landscape where talent acquisition and retention is again becoming a competitive differentiator, it seems Microsoft has had to rethink a much-maligned HR process that seemed ingrained in their culture.
Among many lessons, the most important one is that linking pay to performance must not have the effect of demoralizing a large portion of the employee population or your organization will be winning a battle but losing the war.