Many companies rate their talent well above average. Besides being untrue, this is a dangerous strategy as your top performers will leave you if you do.In the mythical town of Lake Wobegon, made famous by Garrison Keillor on National Public Radio, it is said that all the children are above average.While you might laugh at that joke, it’s worth asking: are all the people in your organization rated above average and how do honestly assess the talent in your organization? 
In my work with the Inc. CEO Project, we’ve actually found that most of the CEOs we work with tend to hand out inflated grades – especially to the members of their executive team, all of whom tend to receive above average appraisals.
In the HR world, this is called a “central tendency problem.” In other words, it’s statistically unlikely that every member of an executive team is delivering above-average performance. No doubt some of them are. But all of them?
Consider a recent report released by the Government Accountability Office, or GAO, which said that some 73% of 1.2 million high-level federal workers received performance scores of outstanding or fully successful. Just as surprisingly, just 0.5% of these employees delivered minimally successful or unacceptable work – which, if you do any work with the government, you know is not the case.
This helps illustrate the point about how crucial it is to take an honest and objective look at how the talent in your organization is performing. But how do you do that?
One approach is what GE famously took under Jack Welch when it placed people into performance bands: 20% of the company was exceeding expectations (A players); 60-70% was meeting expectations (B players); while the bottom 10-20% performed below expectations.
What this model told us was that most of the people in an organization perform at an average level, which makes sense. But what turned people off about this approach was that GE also fired the lowest performers each year with the idea that they could then hire A and B players to replace them.
The key lesson we can learn from this system of defining who is an A, B, or C player, is that there is value in seeing how the talent in your organization stacks up. So next time you conduct performance reviews, have your HR team make a list of how many people performed at each level. Clearly, if you find that you have a bunch of low achievers, you have a big problem on your hands! But if most everyone falls into the over-achieving bracket, you also need to reassess how you’re evaluating your talent.
One key reason why this is so important is that if you allow a central tendency problem to persist, you will quickly alienate your true A players. If your truly exceptional performers feel like they are being lumped in with lesser players and being rewarded the same way, they will leave and look for an organization that will recognize and reward their capability.
That means you will be effectively downgrading your talent across the board; something no organization can afford to do.
What you can do instead is that if you have a problem with honestly assessing your talent, it’s time to reboot the system and reset expectations. Make it more demanding by shifting the entire curve downward. What used to be outstanding should now be considered average. What used to be considered good is now below average. Doing this allows you to be more discriminant about how you allocate everything from raises and promotions to stock options to your true top performers.
While it might be nice to live in a place like Lake Wobegon, be wary if you find that everyone in your organization thinks they are above average. It probably means your performance appraisal system is broken – and your company’s long-term performance might be at risk because of it.