The Leading Way to Do Performance Ratings

By Alex Larralde
July 1, 2022
9 minute read

Numerical performance ratings provide important data points for improving performance, both at the individual and organizational levels. But how we’ve historically determined those numerical values hasn’t always been effective or accurate.

And when compensation decisions are at stake, developing performance ratings that are fair and equitable is of the highest importance. 

The process traditionally used to assign performance ratings can be arbitrary, with managers rating employees based on their own experiences rather than an objective rating system. Job architecture and organizational charts are increasingly complex, making it nearly impossible to apply a standard rating system across the organization.

It’s time to upgrade how we assign value to employee performance in order to take advantage of the benefits of performance ratings. Here’s how to redesign and implement an improved, individualized performance rating process at your organization.

What Are Employee Performance Ratings?

Employee performance ratings are a performance appraisal tool used to rank employee performance, typically when determining how to allocate raises and bonuses. 

Managers usually assess employee performance as part of the annual performance review process, assigning a number on a one-to-five scale to rate an employee’s performance quality during the preceding months. According to the standard scale used in many companies, assigning a three means the employee’s performance “meets expectations,” and a five means their performance “greatly exceeds expectations.”

Employees can be rated in a number of different ways. Most employee rating systems factor attendance, productivity, competencies, and time management into the composite score.

Why Rate Employee Performance?

Performance ratings can provide tremendous value to your HR team. When faced with human capital management decisions, the ability to view each employee’s performance at a glance helps you collect the information needed to produce the best possible outcome.

From individual compensation to organization-wide talent management, here are five ways performance ratings support your talent strategy.

Support Compensation Decisions

The original purpose of performance ratings was to provide a benchmark when making compensation decisions. Theoretically, employees who rank higher should be eligible for higher pay. But financial compensation linked to employee performance can get complicated. Without a fleshed-out pay philosophy and transparent processes for making compensation decisions, the risk of pay discrimination goes up.

An updated rating system, however, can provide greater nuance and value to compensation conversations. Assigning a numerical value to employee performance can provide vital context for a variety of talent decisions and make your justification for those changes more transparent.

An effective rating system can inform larger decisions that influence compensation, too, such as rethinking an employee’s schedule and workload or assessing their potential for promotion.

Offer Context for Formal Performance Appraisals

Understanding each employee’s performance based on their individual role sets the stage for authentic and productive performance appraisal conversations. Performance rating conversations typically occur before or during formal performance appraisals and can provide helpful context to align managers and employees before progressing. 

When employees understand exactly how their performance is being evaluated, they can engage with managers in a common language for discussing accomplishments, lessons learned from failure, and growth opportunities.

Provide Direction for Growth

Many managers aren’t skilled at providing good feedback and may need additional signals to figure out where their teams need development. Managers may also have difficulty distinguishing between the individual and their performance, which can take its toll on employee growth. 

Rating the individual suggests that their score is a component of their identity rather than something they can change. Rating the individual’s performance, on the other hand, offers room to grow. When you rate employee performance (actions, productivity, competencies), you give that employee a benchmark to measure their growth against in the next performance review process.

Performance ratings empower growth, and applying a numerical value to competencies gives managers and employees more direction. Performance ratings make it clear where employees’ performances are strongest and where they’re deficient. Knowing these aspects of employee performance makes it easy to tell where employees need to devote time and energy to continuous improvement.

Identify Top Performers

While performance ratings shouldn’t be used to compare employees to each other, they can help managers spot the high performers on their teams. Assigning a simple numerical value makes it easy to see, at a glance, which employees are at the top of their game — and that’s key to maintaining employee engagement. 

Employees who consistently receive high ratings may be hitting their plateau in that role, which can lead them to disengage. Based on their ratings, managers can coach employees regarding the next steps in their careers.

Performance ratings can also highlight when a team member is ready to move into a different role or receive a promotion. And because these ratings will remain a part of their permanent file, you can easily access them whenever you need such information to make decisions regarding talent mobility and placement.

Collect Data to Make Better Talent Decisions

When aggregated across the workforce, you can use performance rating data to inform your people analytics strategy. Visualizing the aggregated data can reveal countless crucial insights into the quality of your workforce and the strength of their collective performance.

Aggregated performance ratings can help your HR team assess the workforce competencies your organization possesses, for example, and which competencies you need to build to achieve business goals. You can apply this data to determine the effectiveness of your workforce development programs and to inform future learning and development programs.

Rethinking the Performance Review Process

In the past, performance ratings and reviews haven’t been well-received by employees, Gallup’s research shows: Only 14% of employees surveyed strongly agreed that performance reviews inspired them to improve their performance.

Basing compensation decisions on this type of system can lead to significant differences in pay across the organization. For instance, a sales employee who’s ranked three out of five may be different from a marketing employee who’s ranked a three but the same as a support employee who’s ranked a four. And with only “you’re a three” for guidance, managers don’t have a framework for coaching their employees — and employees don’t have the feedback they need to improve.

The first step toward redesigning ratings to be more effective is to make it easy for managers to shift their focus from individual employees to employees’ individual competencies. These competencies could include leadership skills, cross-functional collaboration, or countless other areas relevant to job performance. The key is keeping the process focused on competencies instead of people.

The language we use must be very intentional when carrying out something as sensitive as evaluating employee performance. Sending the wrong message can harm employee engagement and retention.

It’s important to differentiate between rating an employee’s performance versus rating the employee as a person. While this distinction may seem obvious, it’s easy to slip and suggest that you’re rating the employee rather than their output

Shifting to a competency rating model also drives home the individuality inherent in each employee’s performance score. 

Using the same scale to rank employees across the company can cause problems with equity since it’s impossible to grade each role on the same terms. And without clear criteria for defining what each notch on the scale looks like in terms of behaviors, skills, and competencies, managers are left to interpret them individually. That type of subjectivity can produce widely disparate results.

By contrast, grading each employee’s performance in their specific role makes it possible to assess performance objectively — and to dole out rewards fairly.

5 Steps for Rating Employee Performance

Today’s performance rating process is more nuanced and individualized than rating processes of the past. Here’s how to rate employee performance objectively while accounting for differences in roles and expectations.

Define Competencies for Each Role

One of the primary reasons why you can’t apply a one-size-fits-all rating system to the workforce is because each job in your organization has vastly different needs. But you can apply the same process to rating performance across different roles, as long as the competencies you base your ratings on are differentiated.

For each employee position, define three to five key competencies needed to be successful in that role. For instance, the marketing team may rate its content marketing writers’ performance on the quality of their writing, their speed of delivery,  their cross-functional capabilities, and their ability to work as a team.

Defining competencies offers a great opportunity for you to revisit job descriptions every year. Today’s business climate prizes agility, so it’s important to be flexible and review job descriptions as often as the business changes direction.

Develop an Appropriate Rating System

For each competency, define a four-point rating scale. 

A four-point scale is preferable to the traditional five-point scale simply because there’s no room for managers to be noncommittal. Managers are tempted to settle on the midpoint of a five-point scale, leaving employees without any real sense of how they’re performing. 

A four-point scale provides more clarity for each rating: Scoring a one or two on competencies signals that employees have room to grow, while scoring a three or four lets employees know what they’re doing well.

Gather Data During Continuous Feedback

Of course, without a comprehensive record of each employee’s performance in previous months, you have nothing to rate. Attempting to rate an employee’s performance without data puts managers at risk for recency bias, which occurs when recent events color their overall perception of an employee’s performance.

Shifting from a traditional performance management process to a performance enablement model can help you set standards for continuous feedback. When managers provide feedback to employees in the flow of work — and record those interactions in a performance management system — they build up a bank of data points to inform performance ratings during formal appraisals.

Rate Individual Competencies Based on Data

Once you’ve defined competencies and a rating scale, be sure to base your ratings on relevant data. 

There’s no question that restricting reviews to an annual basis, without any other type of feedback, isn’t enough.

This annual conversation should take into account evaluations and feedback employees receive throughout the year — from their manager and their peers — so the manager can make a more informed decision on ratings, career, and compensation adjustments.

It’s important for managers to use these conversations to coach their employees by discussing each of the ratings, so employees understand what they’re doing well and where they could improve. With this kind of information, conversations between managers and employees can focus on developing particular competencies and creating plans for that development as part of an employee’s goal setting.

Set Goals for Improving Overall Performance

After managers have rated employee performance, managers and employees will each gain clarity on which direction the employee’s growth should take. The competencies that employees score lowest on are the ones to prioritize in continuous learning. Alternatively, consistently low scores could signal that the employee may be a better fit for a different role.

Whichever direction managers and employees choose to take, be mindful of setting achievable goals with a firm time frame to help employees fill gaps in their job-related competencies.

When completing the next performance review process, managers may return to these goals to see how each employee has progressed. Last year’s performance ratings and goals can help inform each employee’s plan for future growth.

3 Tips for Better Performance Rating Meetings 

There’s much more to the performance rating process than adding numbers to an employee’s professional record. Making the most of the performance rating process requires trust between managers and employees, a strategic outlook, and effective communication habits.

Here’s how to deliver performance ratings with purpose.

Approach the Meeting Collaboratively

Performance rating conversations must be collaborative. If everything is coming from the manager with no input from the employee, the risk of disengagement or feeling talked down to increases. But including employees in the rating process can help employees focus and generate valuable insights into their performance.

Share the rating scale for each competency their performance is being graded on, and encourage employees to take a crack at rating their own performance first. This can help open a productive conversation and create a sense of ownership for the employee. Prepare your employee performance ratings before the meeting, but be open to learning from their insights, too.

Performance rating meetings are also a great opportunity to realistically address growth potential.

Some employees aren’t perfectly suited for the roles they end up in, and assessing where employees are strongest can create dialogue about roles that may suit them better. These conversations can be difficult for employees to begin, but when managers and employees trust each other to have an honest conversation, employees may feel more comfortable speaking up.

Align Employee Performance With Company Goals

To keep the meeting positive and drive employee engagement, help employees connect the dots between their performance and the impact they’ve had on the business. Make sure that managers understand those connections so they can drive them home during one-on-one performance rating conversations.

Matching the employee’s role, and their specific performance within that role, to business goals can help them feel more confident during these conversations. Once those connections are made, employees can begin to think more like business owners and link future work with business goals, creating a sense of purpose and driving higher engagement.

Set a Review Cycle Cadence

The evaluation of employee performance should never come as a surprise. Employees need time to reflect on their performance in the previous months so they can come to the meeting with constructive ideas for moving forward.

Set a schedule for formal performance reviews where managers and employees sit down for a one-on-one conversation. You can schedule these for every quarter or every six months, depending on managers’ workloads.

To help managers better handle their schedules, consider staggering these meetings throughout the year. Expecting managers to conduct several back-to-back meetings with covering everyone on their team can easily lead to managers becoming overwhelmed and not completing the process. Spreading out scheduled performance ratings meetings can make the process more accessible for busy managers.

Leading the Way With Better Performance Ratings

By evolving your approach to ratings, you can move beyond the ambiguous, divisive practice of scoring people. Instead, your organization can take a more comprehensive approach to employee development by evaluating skills, abilities, and competencies. 

So why rate employee performance at your organization? Beyond compensation decisions, your HR team can use these ratings as a basis for encouraging feedback, manager coaching, and employee growth. And each of these outcomes drives better business performance. An effective system for  performance ratings empowers you to close the loop on people, strategy, and results.

Discover the impact of goal setting on employee performance.

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