This paper investigated the effect of grade dropping on students’ performance, engagement, and satisfaction. In three different engineering courses that were taught by the author, an optional second midterm exam was offered near the end of the semester. The optional second midterm exam covered materials that were not covered by the first midterm exam. The lower mark of the two exams would be dropped for students who chose to take the optional second midterm exam. Both observational assessment (by using two-tailed
-tests to measure the improvements in students’ performance, engagement, and satisfaction) and students’ feedback (through an online survey) were utilized. It was found that grade dropping led to significant improvements in students’ performance on the comprehensive final exam, class attendance rates (due to the increased motivation), and students’ satisfaction (as expressed in students’ evaluation for the adequacy and fairness of the grading policy). The lowest-performing and highest-performing students did not significantly benefit from grade dropping. Furthermore, the effects of grade dropping were more significant for male students than for female students.