The many uses of performance ratings

As we are in the middle of the busy performance review season, I’d like to get back to basics as to why so many companies give performance ratings to their employees. Performance reviews can serve as a good developmental and retention discussion, but that aside, the rating itself has many purposes. Some managers think that just by giving a rating, they can motivate someone to improve their behavior. That is false. However, having clear visibility to talent has many indirect ways to impact organizational performance.

The most common purpose for performance ratings is to create a consistent way to implement a pay for performance philosophy. The company can differentiate rewards based on performance levels using company-wide guidelines. As an increase in compensation has a significant impact on retention, the organization is essentially investing in retention of its best performers. Pay for performance is a retention strategy.

However, performance ratings can be used for many other purposes as well, if the organization has an effective talent management function. When high performers can be tracked, it is easy to place them into succession planning and accelerated development plans. Various performance levels can receive the most suitable developmental investment. Low performers can be tracked to ensure that their managers actively coach them or put them on performance improvement plans.

If the company decides to go through restructuring, performance ratings can be helpful data points in addition to other considerations in moving or eliminating positions. Organizations often spend extra effort to maintain their top talent, while low performers are most at risk of getting removed.

When organizations develop assessments and business impact studies, many of them analyze the top performer profile to create guidelines for selection, training and other areas of business. Performance ratings make identifying this group very easy.

For all these reasons, it is critical that managers assess the true performance of their employees. The performance ratings should reflect how they stand against their organization’s performance standards, and also how they compare against the rest of the population. Calibration sessions where managers meet to discuss and compare the performance ratings they have given to each others’ direct reports can be helpful in creating more consistent standards and reducing rater bias.

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