Citi's annual review process is kicking off. Here's an inside look at its unpopular method.

• Citi rates its 200,000 employees on a forced curve that assesses peers from best to worst.
• These rankings influence who gets promoted and who loses their bonus — or worse.
• Managing directors told BI how the process works and why it can pit employees against each other.

Citigroup welcomed 344 new managing directors earlier this month, marking its biggest class in years. Behind the scenes, the promotion process can be political and fraught, pitting employees against each other, four current and former managing directors told Business Insider.

Citi evaluates employees on a forced curve, requiring managers to rank them from best to worst using a four-level scale with a certain percentage in each bucket. This system means there's a finite number of top ratings, so employees could exceed all the requirements of their role and still receive a middling grade, said the employees, who spoke on the condition of anonymity.

"We are a company filled with hardworking, achievement-oriented colleagues and we embrace meritocracy," a Citi spokesperson told BI in a written statement. "Our process aims to ensure that colleagues across Citi are held to consistent standards and are assessed by those who have the most direct knowledge of their contributions."

Over the years, the percentage ranges for each bracket have shifted slightly. A managing director said this year each business line could assign top ratings of 1 ("exemplary") and 2 ("exceeds expectations") to 5% to 10% and 15% to 30% of staff, respectively. The lion's share of employees — 50% to 65% — are labeled as "valued contributors." The remaining 3% to 7% who receive a 4 rating ("needs improvement") may face consequences such as being put on a performance improvement plan or losing bonus eligibility.

"It creates an air of distrust inside of cultures and a lot of anxiety for employees that are high performers but may not be recognized for the work they do," John Frehse, a senior managing director at the management consultancy Ankura, said about the ranking practice.

The same morning the new class of managing directors was announced, Citi held a virtual town hall for employees. During the Q&A session, human resources addressed an employee's written question that noted the forced distribution system could be unfair to small, high-performing teams. Sara Wechter, Citi's head of human resources, replied that there was no forced bell curve.

A senior Citi executive familiar with the process told BI that Citi's curve is not forced as it uses brackets rather than fixed percentages.

"We have guidelines associated with ratings, which is different from a forced curve," he said.

That reasoning is of little comfort to employees BI spoke to who assign those ratings.

"They are playing with words," said a managing director in the wealth division. "We were mandated to strictly follow the prescribed curve."

This season's annual reviews, which began last week, play a key role in bonus allocations and promotions, including to managing director.

They come at a tense time for Citi's workforce. As part of CEO Jane Fraser's mission to turn around the bank, Citi has laid off 7,000 employees and divested from several businesses. The overhaul isn't over, with the bank planning to cut 20,000 jobs from its workforce of more than 200,000 employees by 2026. Amid these changes, the managing director said there's more anxiety about the review process and uncertainty about bonuses.

Here's how Citi's forced curve works

Grading on a forced curve is not unique to Citi. The practice, otherwise known as stack ranking, was popularized in the 1980s when General Electric's former CEO Jack Welch used it to cut bottom performers. However, this "rank and yank" tactic has fallen out of fashion with many major companies such as Microsoft and Amazon. Most banks engage in some form of stack ranking but the details differ, such as how strictly they adhere to a curve or the grading criteria they use. Morgan Stanley uses a five-point scale. Goldman Sachs has changed its system several times and, beginning in 2020, it's used a three-level system.

"Good companies try to distinguish between the higher and lower performers and do that in terms of how people get raises, what their total compensation would be," said Anthony Nyberg, a professor of management at the Darla Moore School of Business at the University of South Carolina.

Citi employees receive two main ratings with each one graded on a curve, two ex-managing directors said. The two criteria are the "what," which measures an employee's results, such as revenue metrics, and the "how," which evaluates their approach and leadership abilities. This means employees get a combination score such as 1-2.

While it is not a hard and fast rule, Citi employees are usually expected to earn top ratings for two to three consecutive years to receive a promotion, so the review process puts aspiring directors and managing directors under enormous pressure, three of the managing directors told BI.

Direct managers submit their ratings for review before having a so-called "calibration" meeting with their fellow managers, the top manager of their business unit, and an HR representative, the two former executives said. At these meetings, direct managers review an employee's scores and make a case for why the employee deserves a coveted 1 or 2.

After these calibration meetings, the top manager makes the final call on rankings. The outcome often disappoints managers and their reports, who may have never worked directly with the decision-maker, the managing directors said.

The senior executive said that small teams of three or four employees can secure exemptions to the curve. As for large teams with high performers, he said there might be exceptions on a year-to-year basis but he wasn't aware of any ever happening.

MDs said the process pits employees against each other

The evaluation process was described as contentious and stressful by the current and former managing directors, all of whom were responsible for rating employees. The calibration meetings were especially heated, with managers butting heads over which employees received the limited high ratings.

Given the number of top rankings is fixed, managers were typically unwilling to budge on the 1s and 2s they were allotted, even if another manager argued they had more high performers. "No one was like, 'You can take mine,'" said one of the ex-managing directors, who left Citi this year. "We fought."

The managers took issue with other aspects of the grading process. By implementing a curve on the team level, employees were sometimes compared to others with vastly disparate roles or responsibilities. Two of the ex-managing directors described some of the grading criteria as nebulous. For instance, they said, for employees with non-revenue-generating roles, the "what" score is effectively up to the manager's discretion.

Frehse told BI that the biggest flaw with stacked ranking is that performance reviews are inherently subjective.

"Stack ranking is inaccurate from the start," he said. "You're either only looking at the quantitative side, forgetting about the other side, or you're looking at both. And we know that the qualitative side is flawed and subjective."

Frehse said that leaves room for employees to believe favoritism is at work. Three of the managing directors told BI that they believed internal politics played a role in how employees were ranked and which managers received top ratings for their direct reports.

"When you use such a system, it tells you you can't trust different managers to be good managers," said one of the former managing directors.

The senior executive said that the many calibration meetings he attended were productive.

"It's just a way to get together, get out of the silos, and make sure that there's fairness and perspective that goes beyond your own team," he said.

While he maintained that he had not seen hostile calibration meetings, he said that some conversations could get heated.

"This is a very human thing when you have finite anything, and obviously we have finite compensation," he said. "Of course, people are aware of that, but I don't think it's a flaw in the design. I think that's just part of being human."

At its best, stacked ranking should reduce anxiety among employees, Nyberg said.

"People get very upset when things appear to be arbitrary, and the ranking system should actually reduce some of that as long as people can believe that you're doing those rankings in some sort of objective way," he said.

However, it's hard for employees to trust the system if they lose trust in their employers, which often happens after layoffs, Nyberg said.

"It's that contract between the organization and the employees starts to feel really violated that way, and then that permeates everything about it," he said, "then you wouldn't believe anything they say."