Pros and Cons of Performance Review Ratings

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The traditional performance review, evaluation or appraisal form always ends with an overall performance rating.  So what should happen when making a significant change to a performance review process or document?  Should employees be rated or given a grace period?  During a recent webinar on Breakthrough Performance Management that is Simple, Effective and Easy hosted by the Northeast Human Resources Association the following recommendation was made: 

Provide a Ratingless Grace Period When Making a Significant Change 
When making significant changes to the performance review process and related forms provide a 1 year grace period on assigning performance ratings.  

Predictably this recommendation elicited some questions. 
The main question being, "if we don't assign a rating then how will we determine pay increases?"  This is a valid concern because traditionally pay increases have been decided based on comparative performance ratings (a good reason to conduct focal reviews as opposed to reviews spread throughout the year and based on hire date).  Naturally, the employee who is rated as Outstanding would be eligible for a larger pay increase than the person who is rated as Meets Expectations. 

The Known Problem With Ratings and Pay Increases
We all know that the problem with this common practice is that managers and employees know the rating correlates directly with the pay increase. 

• What heartless manager wants to label someone a "Meets Expectations" and hurt the employee's ability to get as much money as possible, especially nowadays where if there is money to go around there's very little of it? 
• As the manager am I really going to give an accurate rating for the mediocre employee and have them wind up with a 1.5% raise and suffer the consequences of being seen as the bad guy? 
• Not likely, instead I'm going to inflate that person's rating and give them a Meets Expectations so that they can get the 2.5% increase. 
• Let's not forget the propensity to sweep performance issues under the rug to avoid a confrontational exchange between manager and employee.  Yet another aspect of performance management that leads to inflated performance ratings.

Not only is the rating inaccurate it also encourages the rater to tailor the review comments and content to reflect a rosy picture of how this employee is performing.  Rating inflation cancels out the rationale for the performance conversation which is to cover what is going well, the TRUE area for growth and development and the resulting goals and milestones that will help the employee make progress towards the area for development. 

It's time to rethink the performance rating system. 
It doesn't work and we know it.  Why continue with something that is known to be ineffective?  It still begs the question of how to compare employee performance and how to dole out the dollars based on performance effectiveness.  A better approach is to conduct a talent review.  Simply use the Employee Performance Continuum four square model and plot your employees and discuss the overall effectiveness and value of each person.  Your top, high potentials, mid-level, developing and low performers will quickly become apparent.  The pot of money can then be divvied up accordingly.