Is it beneficial for a company to evaluate its employees? A former Amazon executive argues that 'stack ranking' can be effective when implemented correctly.

The controversial "stack ranking" system has its advantages in terms of employee evaluation and layoffs.

According to a former Amazon attorney who worked for the company for almost nine years, the technique has been "helpful" to his own career.

During a video call with CNBC, Alykhan Sunderji, now a managing partner at law firm Sunder Legal, explained the process in detail.

What is ‘stack ranking?’

The "stack ranking" system, introduced by CEO Jack Welch of GE in the 1980s, involved categorizing executives as "A," "B," or "C," with "C" performers at risk of being laid off.

During Sunderji's tenure at Amazon, managers would conduct talent reviews twice a year, categorizing employees into different performance bands such as "top tier - high value" and "least effective," he stated.

Sunderji stated that the collaborative process of multiple managers evaluating an employee's performance helps to eliminate implicit bias.

If someone were to make a decision unilaterally in an alternate situation, it could be arbitrary. In a stack ranking system, I must defend my decision, consider new data, listen to others' opinions, and force the manager to make a better decision, he stated.

Sunderji served as lead attorney at Amazon Pay and head of legal for Amazon's Canadian operations. He also led the legal team for Amazon's fashion and apparel business before establishing Sunder Legal in 2021.

Amazon's culture is focused on fixing issues and improving performance, with managers being evaluated on their ability to coach poor performers and turn them into good performers.

Sunderji stated that Amazon staff were eager to learn their rank, but managers did not reveal those details. Nevertheless, there is a compensation range for every role. "You can determine your position on the rank based on your salary range," Sunderji explained. "Although employees do not have access to the full range, they can figure it out by talking to others."

An Amazon representative stated via email to CNBC that the company has a performance management process to identify employees' strengths, areas for improvement, and suitability for Amazon. While most employees meet or exceed expectations, a small number do not, and Amazon provides coaching and opportunities for improvement.

"Amazon is one of the most sought-after places to work in the world because we maintain a high performance bar," the spokesperson stated.

In December 2022, Google unveiled new details of its performance system, resulting in a higher proportion of employees being categorized as low-performing. In January 2023, Alphabet, Google's parent company, announced layoffs of 12,000 staff.

This year, thousands of bank employees have been let go, including those at Goldman Sachs who underperformed in 2022 reviews.

Does stack ranking work?

Sunder Legal assists clients in establishing companies, securing funding, and purchasing or selling businesses. Sunderji stated that many of its clients, who have previously worked at firms such as Amazon, Microsoft, and Blue Origin, are familiar with the concept of stack ranking.

Microsoft and Blue Origin spokespersons were not immediately reachable when contacted by CNBC.

When clients sell themselves or take on investment, it is necessary to investigate their HR practices to ensure compliance. A stack ranking system can be helpful in many cases because it provides an objective, collaborative process for evaluating employees.

Sunderji stated that companies that utilize these processes are more successful because they comprehend the importance of continually assessing their talent to have an 'A' team.

Why is stack ranking controversial?

In response to a 2015 New York Times article that criticized Amazon's people management practices as "bruising," the company temporarily halted the process of its "Organization Level Review," which involved managers presenting evidence of subordinates' performance during meetings where staff were rated in a competitive manner between managers of different teams, as described by The Times.

According to Sunderji, the pause resulted in a negative outcome for Amazon. He stated that anecdotally, poor performers did not leave the company, which negatively impacted the company for a few years.

Sunderji stated that not every company is suitable for every individual, and working for a company is similar to dating, requiring mutual satisfaction. He believes that some people excel in this environment, while others do not.

McDonald's introduced a Performance and Customer Excellence System in 2022 to evaluate the performance of its franchisees. However, franchise owners raised concerns that it may harm worker morale, and CEO Chris Kempczinski acknowledged the need to address feedback on the system in April.

How to work the review system

Sunderji advised that individuals who work for companies that use a stack ranking system should strive to maximize their contributions and benefits while working. This includes both financial gains and personal growth opportunities such as training, development, guidance, and advice.

"Amazon provided great training for some successful individuals who later left to make other companies great," he stated.

Nine years ago, during his own performance evaluation at Amazon, Sunderji was advised to be more patient with his team and to write more concisely. He still reflects on those lessons today and believes that the feedback he received has made him a better lawyer.

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