Microsoft has finally abandoned its ill-conceived performance review system that pitted employee against employee. It would be easy to conclude from this that rating employees is a bad idea. Nothing could be further from the truth.

The problem at Microsoft is that performance ratings were tied directly to pay. So when the manager was saying to an employee, “You are not performing,” the employee was hearing, “We want to pay you less.”

I have never known any employee who thought they were paid too much, so when performance ratings directly determine pay, problems will naturally follow. The right answer is to separate performance reviews from pay. Pay should be determined by fair market rates for the skills the employees possess. They should know that two employees with the same skills and experience will receive the same pay. Performance ratings should not be based upon the performance of other employees but compared to the competitors in the market place.

The 26^th best point guard in the world is a really good basketball player, but if you own an NBA franchise do you want him starting for you? No, because most nights this puts you at a competitive disadvantage.

I have always used a simple rating system of A, B and C to rate employees. While “A” employees give you a competitive advantage, “C” employees give you a competitive disadvantage. Everyone else is a “B.” It is critical that companies not tolerate “C” performers. They must either be moved into a role where they can potentially be an “A” performer or they should exit the organization.

On the flip side, “A” performers should be treated like gold. When I was making decisions that concerned employees, I always asked myself what the “A” performers would think of my decision. Too many CEOs – and companies as a whole – worry about what the “C” performers might think.

Related article:

‘Rank-and-Yank’? That’s Not How It’s Done (by Jack Welch on LinkedIn)