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Teacher assigned grades are well-known to be highly predictive of high school graduation, college enrollment and college completion, but there has been little research as to why. This study examines the extent to which grades in high school are a systematic measure of student effort, participation and behavior that is a different and useful measure for schools and school leadership beyond standardized test scores. Using hierarchical linear modeling to analyze the ELS:2002 dataset, this study demonstrates that a significant percentage of the variance in grades is between schools, with teacher ratings of student engagement accounting for a large proportion of grades, which has important implications for the policy and practice of standardized assessment and grade use in schools.