Every year, as December turns into January, managers around the world face a familiar pressure. It is time to set annual goals and to grade last year’s performance. Leaders gather in offices, boardrooms and Zoom meetings and wrestle with the same challenge. How do we fairly evaluate the people on our team?

One firm I worked with introduced a new scoring system. There were clear instructions to give only whole number scores and to aim for a team average of 3 out of 5. Despite this, managers entered fractional scores and clustered team members just above average.

This resulted in extra work for executives when deciphering the ratings to award bonuses and promotions. Still too much time was spent discussing the obvious outliers. The executives fell into the same conflict avoidance trap as the managers. The middling performers became invisible, despite being the majority of the firm.

The primary reasons were vague goals, an absence of hard metrics and a default to subjective grading. Emotional proximity led to rating effort rather than outcomes and developed a culture of “we don’t give bad grades here”. Managers also worried that low scores would trigger HR processes, with more scrutiny, documentation and escalation of their own performance.

My solution was each person having a handful of clear goals with measurable metrics to match. Transparency and clear communication were critical to staff buying into the process. An essential part of this was cross-team calibration. Managers who grade in isolation tend to inflate results. Calibration turns a 1 to 5 scale into a shared language and common purpose.

There are three reasons why is it necessary to rank people evenly and fairly rather than inflate grades.

Your best employees want fair treatment. Inflated evaluations and high grades for underperformers erode trust. When ratings are fair and transparent, they strengthen credibility. People accept the outcome because they see it is based on clear standards. They know what is expected and how to improve.

Not all performance is the same. Treating outstanding performance as equal to average tells high performers that their extra effort does not matter. It tells average performers that good enough is sufficient. When you differentiate appropriately, you build a culture where excellence is recognised and rewarded.

Finally, honest grades guide growth. If you tell everyone they are above average, no one knows where to invest effort. But if someone receives a 2 on customer support response time, they know exactly where to focus. They can work on specific behaviours and skills. The team becomes stronger because development is targeted.

This approach is about being honest, giving people information they can use and aligning effort with outcomes that matter to the business.

Many leaders worry that a strict rating curve will demotivate people. They think that giving a 1 or a 2 will hurt morale. The opposite is often true. Ambiguity saps morale and people want signals that help them get better.

I inherited an analyst called Marco on a team I took over. He was rated 49^th out of 50 among vice presidents at the bank. Being thick-skinned, he assumed this meant he was one from the top. I had to explain what his colleagues expected and why he was nowhere near delivering. The result was a transformation. With a clear understanding of what was required, Marco delivered a top ten performance the next year.

Great companies set clear goals and objective metrics. They grade people on a scale from 1 to 5 and expect an average of 3. This creates a performance distribution that is honest and useful.

Too often goals are vague. “Improve client relationships”, “Be a team player”, and “Support revenue growth” feel positive but say nothing about what success looks like. If you cannot measure it, you cannot judge it.

To avoid inflated grades, start with specific, measurable objectives. Here are three examples of clear goals:

1. Sales Efficiency: Set a target for sales conversion rate. For example, increase conversion from lead to closed deal from 20 percent to 28 percent by the end of Q4. This is quantifiable and allows a manager to say with accuracy whether the person hit the goal or not.

2. Customer Support Response Time: Define a clear service level agreement such as 95 percent of customer inquiries responded to within four hours. This removes ambiguity about what good performance looks like.

3. Project Delivery Accuracy: Establish a metric for on-time and on-budget completion for projects. For example, complete 90 percent of assigned projects within the agreed timeline and budget. Again, this is measurable and produces a data point that can be reviewed.

When you judge performance against these kinds of clear metrics, the review conversation is grounded in fact. You can show the difference between a 5 and a 3. A 5 on sales efficiency might mean the person exceeded the conversion target and improved team processes. A 3 might mean the target was met but with room for improvement. A 1 or a 2 means the target was missed and corrective action is needed.

As we approach the New Year, take a hard look at your grading process. Ask yourself these questions:

If you cannot answer yes with confidence, you are at risk of repeating the same cycle of inflated grades that hide the truth rather than reveal it.

Setting clear goals and honest evaluations is not easy. It requires discipline and integrity. But it is the only way to build a team that learns, grows and delivers results year after year.

Start 2026 with clarity. Set the metrics, grade fairly and your people and your business will be better for it.