Many companies today are changing the way they do performance ratings. It’s clear that while you don’t necessarily have to remove ratings completely, current policies of ranking employees need to be updated.

A lot of companies rely on performance ratings to assess an employee’s compensation. However, studies suggest that “more than half of a given performance rating has to do with the traits of the person conducting the evaluation, not the person being rated.” Luckily, with a connected approach to continuous performance management, managers can better inform performance ratings by using data from previous check-ins and evaluations.

The first step towards doing ratings more effectively is making it easy for managers to shift their focus from individual employees to employees’ individual competencies, such as leadership skills or cross-functional collaboration, to supplement their compensation decisions.

Rating the Individual Isn’t Enough

Rating individual employees annually, without any context from the work they’re doing, can result in a variety of problems. First, a rating is often vague in what it refers to. In many companies, ratings are based solely on a scale of 1 to 5, where 3 means “meets expectations” and 5 means “exceptional.” But what do those definitions really mean? Rather than thinking about the employee’s actions, this policy of rating requires for managers to assess their employees subjectively.

Worse, using the same scale to rank employees across the company means you’re comparing apples and oranges. For instance, a sales employee who’s ranked a 3 may be different from a marketing employee who’s ranked a 3, but the same as a support employee who’s ranked a 4. When these ratings are standardized across an entire company and across different teams, decisions on who gets compensation adjustments can become ill informed.

Plus, with only “you’re a 3” for guidance, managers don’t have a framework for coaching their employees and employees don’t have the feedback they need to improve. In many cases, employees will focus solely on their rating and compensation, but it does nothing to help them improve. They don’t have an idea of what it takes to move from one rating to the next, which means they can’t control their own development.

Focus on Competencies Instead

To upgrade the way your company does performance ratings, managers and HR should define individual competencies for each role, use data from check-ins and feedback throughout the year to inform ratings and use those ratings as a way to coach their employees and help them succeed.

Quantitative feedback is actually extremely valuable, if done correctly. Instead of trying to give every employee in the company one individual rating based on the same scale, try doing the following:

  • For each employee position or role, define 3-5 key competencies needed to be successful in that role. These can can be behaviors or skills, but not personality traits. For instance, the marketing team can define quality of writing, speed of delivery, cross-functional capability and teamwork as four competencies to rate their associates on.
  • For each competency, define a four-step rating scale. Choose whatever scale works best for your organization, though we recommend a 1-4 metric, rather than 1-5, because it’s often too easy to settle on the midpoint on a five-step scale. A 1-4 scale provides more clarity for each rating a 1 or 2 gives room for employees to understand what to improve on, while a 3 or 4 lets employees know what they’re doing well.

Once you’ve defined competencies and a rating scale, be sure to base your ratings on relevant data. There’s no question that only doing reviews annually, without any other type of feedback, isn’t enough. This 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.

Finally, 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 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. The tough reality in today’s workforce is that many managers aren’t skilled at providing good feedback, and they need additional signals to figure out where their teams need development. Having a quantitative aspect around competencies gives them more direction.

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 and using those ratings as a basis for encouraging feedback, manager coaching and employee growth.