From FAQ
Power Ratings - How they work
Probable Skill - (K * Variance) = Points
Probable Skill - The average skill level of the player before the game.
Points - Your points represent where you are on the skill ladder. You get points for wins and lose points for losses. The number of points that you win or lose for a specific game depends on several factors below, including the ranking points of the player(s) you are playing against. Similar to other rating systems, high level players gain very few points for defeating players of significantly lower level and therefore will advance in rank very slowly if these are the types of players that they seek out.
K - This variable determines how much of an impact you want Variance to have.
Variance - Each player is assigned a level of variance when they start playing. This number starts high, representing the system's lack of familiarity with your actual skill level to start with. As you play more games, this number will get smaller as your rating is refined. This number is largely responsible for the big jumps up or down that your rating can initially take. These jumps decrease as you play more games.
Home City Level - Home Cities are divided into three tiers, much like the cards in your deck. A player using a level 1 Home City is at a disadvantage when playing against a level 40 Home City, so he should earn more points if he wins. The reverse is also true, so the player with the level 40 Home City will lose slightly more points if he loses this match-up. The tiers are broken down like this:
Tier / Home City Levels
Tier 1: 0-9
Tier 2: 10-24
Tier 3: 25-100+
The players in each of the tiers have access to cards that are considered equally powerful. The Home City factor cancels out if you are playing someone who is using a Home City is in the same tier as you, as we assume you have the best cards for your level.
Civilization Tiers - The Power Rating system rates the civilizations in tiers. When playing a multiplayer game, the civilization you use is also rated in that game. All Spanish players, for example, will affect the ranking of the Spanish civilization by winning or losing games. The civilization ranking looks something like this (only two civilizations are used to keep the example simple):
Spanish Tier 3 (level 25+)
Spanish Tier 2 (level 10-24)
British Tier 3
British Tier 2
Spanish Tier 1 (level 0-9)
British Tier 1
This ranking is dynamic and is updating constantly throughout a day, adjusting to game results.
In the example above, Spanish tier 3 (levels 25+) is rated the highest while British tier 1 (levels 0-9) is rated the lowest. A player using a higher ranked civilization who defeats a player using a lower ranked civilization will gain slightly fewer points, and vice versa. The idea being that players that use the civilization that wins the most will be more likely to win the game, and so will earn fewer points.
Ranks - We use your skill level, which is points rounded up to the nearest Integer, to assign you a rank title that represents your skill. The rank ladder looks like this:
Skill Level / Rank Title
50 Field Marshal
47-49 General
44-46 Lieutenant General
41-43 Major General
38-40 Brigadier
35-37 Colonel
32-34 Lieutenant Colonel
29-31 Major
26-28 Captain
23-25 1st Lieutenant
20-22 2nd Lieutenant
17-19 Master Sergeant
14-16 Sergeant
11-13 Corporal
8-10 Lance Corporal
3-7 Private
0-2 Conscript
Why not use the ELO system? - We have used a 1600 based ELO rating system for our past games and have switched to the new Power Rating system for Age of Empires III. Why the change? The ELO system starts players at 1600 points, and below average players end up dropping below that mark right away. This can be very discouraging to players who may improve over time and turn them off of competitive play completely. Additionally, the number of points lost by a player who is rated 2000+ on ELO when he plays against someone who is one-hundred points below is substantial, however, a difference of 100 points often does not mean a substantial difference in ability, so high rated players have nothing to gain and everything to lose. With the Power Rating system, high ranked players will still lose ground, but the results are not nearly as catastrophic to their ranking.
Note:
A player who goes into negative points is still displayed as a Conscript and is still level 0 though. He's not making progress, but he isn't being visibly set back. (Unless he happens to figure out what the points mean in his HC tab) Looking at it another way, you have to work your way up to be average in the Power Rating system, so for less skilled players it still rewards them, unlike ELO. So the majority of players will be gaining levels, not going into negative points.