There are many reasons why it is important to have consistent, well-defined methods to measure employee performance in and of itself.

This includes things like tracking turnover of high vs. low performers, or correlating pay decisions with performance ratings to ensure managers are investing more in those employees who contribute more to the company.

Allowing managers to make compensation decisions without using some form of performance rating to guide these decisions can create a host of other problems including:

• Confusing pay variance for accuracy. Some companies that eliminated performance ratings have noted that there is still a lot of variance in how managers allocate pay. They use this as justification that the process is working since managers are not paying everyone the same. The risk is these companies do not know why the managers have chosen to pay some people more than others. Paying people different amounts is not the same as paying people fairly.
  
• Allowing poor pay decisions. One reason people advocate getting rid of ratings is because managers may struggle to accurately evaluate performance. If a manager doesn’t know how to evaluate performance, then they probably don’t know how to make equitable performance based pay decisions either. Allowing managers to make compensation decisions without any performance data to validate these decisions can lead to ineffective and unfair allocation of pay. But the company will never know how bad these decisions are because they have no way to effectively compare manager pay decisions to job relevant performance criteria.
  
• Increasing bias against women. Research suggests that compensation decisions made without performance ratings are likely to be more biased than processes that link compensation increases to performance metrics. A recent study looking at gender bias in pay and performance decisions found that “the mean sex difference in rewards was 14 times larger than the mean sex difference in performance evaluations.” One way to reduce unfair and potentially illegal biases in pay decisions is to ensure they are based on clearly defined performance criteria. This may be hard to do across large populations of employees without using some form of performance ratings.
  
• Implicitly pressuring managers to make compensation decisions based on gender. Companies often monitor whether pay decisions systematically favor one gender over another. But gender based pay differences by themselves do not necessarily imply biased pay decisions. From a statistical standpoint, by chance alone one will occasionally encounter teams where women tend to perform at lower levels than men, or, where men tend to perform at lower levels than women. If managers of these teams feel pressured to ensure compensation decisions are equal they may change pay solely to decrease perceptions of gender bias even if the differences are justifiable based on performance differences. People may start assuming that “pay decisions depend in part on employee gender.” Such beliefs generate even greater issues related to gender equality.
  
• Enabling weak managers. One thing managers think about when making a pay decisions is how employees will react to the increase. Difficult conversations can result when employees discover they are not getting what they feel they are entitled to receive. Strong managers accept these conversations as a necessary part of being a good leader. They are prepared to deal with the reality that all employees are valuable but some employees are more valuable than others. Weak managers try to avoid these conversations whenever possible.
  

If weak managers don’t have to explain their pay decisions, then they are prone to pay decisions that make their lives easier in the short-term but that lead to bad long-term outcomes.