Our school does it by grade, like this: Just entering 3rd grade level? 3.0. almost at fourth grade level? 3.9. Of course it doesn't mean that IF you are in third grade you automatically are in the 3rd grade level. It is based on your personal progress.
It makes sense, and can be carried on year after year of progress.
I honestly think ANY effort to try and "equalize" kids will not work. Whether or not their grade level is high or low, kids will still know due to performance in class where kids are in their progress. ...and I haven't noticed any kids making a problem with knowing that.
Kids should be taught to be respectful and tolerant- it is the PARENTS' job to do this. I'm sick of things changing cause nobody wants anybody to get their feelings hurt. Truth is, no one will be at the same level all together regardless. That is life, and they need to know from a young age how to deal with it without being used to their environment changing to cater to them as IF being different is a bad thing. Diversity is great, and the more we try to change the way things are to try and make them EQUAL or neutral... the more confusing things will be AND diversity will still remain.
Um, think I went off on a tangent that could very well have been 100% irrelevant to the subject matter! oops! I am guilty of this majorly, I know.