New rule: Hire passionate people.
Old rule: Rank your players; go with the A's.
By Betsy Morris, Fortune senior writer

NEW YORK (Fortune) -- At GE under Welch, employees were ranked as A, B, or C players, and the bottom group was relentlessly culled.

"We're an A-plus company," Welch told his executives in 1997, according to Robert Slater's book, "Jack Welch and the GE Way." "We want only A players. Don't spend time trying to get C's to be B's. Move them out early."

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Pretty soon places as diverse as Charles Schwab and Ford (Charts) began ranking employees. But as with Six Sigma, the practice became overdone. Welch's "vitality curve," in the hands of less deft managers, became the "dead man's curve," or "rank and yank."

Everybody, it seemed, was expendable. There was a price to pay. According to a Rutgers and University of Connecticut poll in 2002, 58 percent of workers believed most top executives put their own self-interest ahead of the company's, while only 33 percent trusted that their bosses have the firm's best interests at heart.

"All of a sudden, when big companies had to change and respond to the marketplace and move quickly, they found out they couldn't, because they didn't have people engaged and aligned around the corporate mission," says Xerox (Charts) CEO Anne Mulcahy. "Then being big is a disadvantage. If you're not nimble, there's no advantage to size. It's like a rock."

While studying companies trying to transform themselves, Christopher Bartlett of Harvard Business School and a colleague found the major obstacle was inefficient use of increasingly disenfranchised employees.

"People don't come to work to be No. 1 or No. 2 or to get a 20 percent net return on assets," Bartlett says. "They want a sense of purpose. They come to work to get meaning from their lives."

Steve Jobs has emphasized that Apple (Charts) hires only people who are passionate about what they do (something that, to be fair, Welch also talked about). At Genentech (Charts), CEO Art Levinson says he actually screens out job applicants who ask too many questions about titles and options, because he wants only people who are driven to make drugs that help patients fight cancer.

GE (Charts) still ranks employees, but Immelt has also added a new system of rating - red, yellow, or green - on five leadership traits (including creativity and external focus). Employees are rated against themselves, not one another.

Immelt doesn't talk about jettisoning the bottom 10 percent. He talks about building a team.

"When you're 18 years old, you say, 'The iPod is neat,' " Immelt explains, "but people don't dream about making a gas turbine. If we can recruit the best 22-year-olds, we can double and triple in size. If not, then we're already way too big. You've got to be pragmatic about what turns people on."

Next:

6: Old rule: Hire a charismatic CEO New rule: Hire a courageous CEO.

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The new rules

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REPORTER ASSOCIATE Patricia Neering Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.