Researchers reveal the hidden peril of ‘labeling’ employees

This article was originally published on Fast Company.

In today’s hyper-competitive business landscape, the quest to quantify and categorize employee performance is more aggressive than ever. Consulting giants like McKinsey offer provocative frameworks that promise to neatly sort your workforce into boxes, “amplifying the impact of star performers” by identifying six distinct employee groups, or archetypes.

Such categorizations echo the controversial strategies of yesteryears, notably Jack Welch’s “Rank and Yank” policy. Remember how that worked out? Welch’s system had its moment in the sun, but it eventually fell from grace, proving to be a divisive and morale-crushing strategy.

Before you sign that consulting agreement and begin using their employee filtration tools, it’s worth pausing to consider the powerful psychological implications of labeling. We need to talk about the Pygmalion Effect—a concept that suggests these labels could be doing more harm than good.

The Pygmalion Effect refers to the concept that the labels we attach to people can influence their behavior in ways that confirm these labels. Imagine you label someone as a “disruptor.” Over time, not only will they start acting the part, but their managers and colleagues will treat them as such, reinforcing the behavior. In other words, the label becomes a self-fulfilling prophecy, locking individuals into roles that may not reflect their potential or future performance.

For instance, a sales manager who labels a team member as “low potential” might unconsciously offer fewer growth opportunities, affecting the employee’s performance and motivation to step up. Or consider how many talented employees might be pigeonholed into roles that don’t fully exploit their skills, simply because of a label slapped onto them during a performance review.

Here’s the kicker: Employees aren’t static entities. Their performance and engagement levels can change, often dramatically, in response to various factors like work environment and personal circumstances. Management practices alone are shown to affect productivity by around 20%. We’ve seen firsthand how an employee branded as a “value destroyer” turned into a key asset when engaged and motivated properly. To think that an employee’s worth can be permanently categorized is to misunderstand the dynamic nature of human capital.

We have seen how eschewing labels propels results for hundreds of consulting clients, including:

• A U.K. manufacturer’s owner had labeled the head of their model shop a troublemaker, or “value destroyer” in McKinsey terms. Ignoring this, the owner solicited his input on how to improve the business. The model shop head generated profitable ideas, leading to increased earnings. He emerged a leader, or “thriving star” in McKinsey terms.

• A Kentucky landscape company viewed its employees as hired hands, or “mildly disengaged” in McKinsey terms. Treating them like trusted partners, with a shared focus and an incentive to increase job margin per month, drastically improved productivity and profits, as well as innovation. One truck driver, running a snowplow, generated a new client on his own by plowing an unplowed parish parking lot, asking only that the pastor take a call from his company sales team. No one told him to do this. With focus and incentive, he transformed from disengaged to “reliable and committed.”

• An urgent care business had come to assume they were stuck with debilitating turnover; “quitters,” McKinsey might suggest. But after examining exit interviews and addressing the common issues (particularly lack of management listening and acting on provider input), the “quitters” stopped quitting. Patient NPS scores soared, as did profits.

The real cost you pay when working with imprudent consultants isn’t their expensive fees, it’s the potential stifling of employee growth and innovation. When you label people, you’re not just putting them in boxes; you’re putting a ceiling on what they can achieve. And in today’s fast-paced business world, that’s a luxury no company can afford. It turns out, employees can and do change over time, something you can either enhance or stifle.

To be sure, there are some employees who are simply poor performers and not right for the job even when you work with them to explore a change in responsibilities.

Of course, one solution is to screen employees better. Some of our prior research, for example, has found that employees who demonstrate greater intellectual tenacity tend to perform much better than their counterparts, and their advantage in the labor market has grown over time as work has become more complex. One way to think about this result is that persistence and curiosity in the workplace are quintessential characteristics for not only problem solving, but also interpersonal dynamics. But hindsight is always 20-20 and the wrong candidates might pass through the screening.

Instead of spending resources on categorizing employees, why not invest in creating an environment that promotes positive behavior change? By focusing on behaviors rather than labels, companies become more growth-oriented and attentive to what can change.

This fosters a culture where employees are empowered to evolve and adapt, driving not just individual success but also organizational excellence. Our multiple waves of survey research—on what we broadly refer to as Economic Engagement—shows that when companies partner with employees to serve their customers profitably, behavior changes, and that in turn leads to greater profitability.

Economic Engagement isn’t your run-of-the-mill, feel-good company culture. Instead, it’s a well-structured, results-driven management system underpinned by transparency, a deep understanding of economics, and active employee involvement.

Employees aren’t just taught how to read a balance sheet. They’re immersed in the operational economics that power profitability, metrics like product shipments, monthly job margin dollars, and the acquisition of new customers. Employees learn to track and forecast these key numbers on a weekly basis. They’re empowered to steer these numbers in a positive direction, while also reaping the rewards of enhanced performance.

Employees at an economically engaged company are likely to forge a long-lasting and fruitful career there, as well as a source of quality referrals. The environment elevates the participation of the employee to a level that transcends categorization and engenders true engagement.

Before you take any steps to classify your workforce, consider other avenues for understanding and unlocking their potential. Sometimes, the smartest decision is to sidestep the labels and focus on cultivating a culture that brings out the best in everyone.

Christos A. Makridis is the CEO and founder of Dainamic, a financial technology startup, and a research affiliate at Stanford University. He holds doctorates in economics and management science and engineering from Stanford University. Follow @hellodainamic.

Bill Fotsch is a business coach, investor, researcher, and writer. He holds an engineering degree and an MBA from Harvard Business School and is the founder of Economic Engagement.