Setting goals and achieving them is every business’s core, or at least, it should be. As a small business owner, you need to be constantly aware of how effective your activities are, be it marketing, accounting or projects.
There are several quantifiable ways to tell whether your sales are increasing or how good your cash flow is. However, when it comes to measuring employee productivity, there is no obvious way to evaluate the effectiveness of their work. A frequently asked question by team leaders is, “How will I decide if my employees are using their skill sets to the fullest, so as to achieve the company goals?”.
What is a KPI (Key Performance Indicator)
The answer to this burning question comes from Key Performance Indicators. In simple terms, a sum of ways to measure employee performance in the workplace.
There are a number of metrics to keep track of employee productivity and better manage your teams, depending on your needs and the nature of your work.
For example, if you want to measure how a sales employee is performing you can easily do so, by evaluating their total sales and comparing it to their salary and expenses. However, monitoring and assessing the performance of an employee whose duties are less quantifiable gets tricky!
This is where methods to measure employee performance come into play. We have previously discussed how to create effective teams and in order to be a good leader, you need to adopt some effective evaluation techniques as well.
Why use key performance indicators for employee evaluation
KPIs offer valuable insights when it comes to assessing your employees’ performance. A common mistake made by managers is that they use them to actually measure the value of their employees compared to profit margins. This is not only inaccurate but, also tells little about their true overall performance. After all, monitoring performance only numerically is a one-sided way of looking at your employees’ productivity.
Of course, you want to measure their performance in quantity as well, however, the qualitative data you can extract by using performance KPIs will help you discover new ways to motivate them, delegate the tasks properly and according to each one’s capabilities. Furthermore, using an employee work performance review process is going to enable you to better understand your employees’ motivation triggers and weak points, thus boosting your project management success!
You may use KPIs to adjust your team management, pricing policy and project management strategies to an optimal level. This is because they allow you to identify problems on time.
Last but not least, KPIs are useful in assessing payroll operations; how well your employees’ salaries reflect their performance and potential that is.
How to decide on metrics to measure employee performance
There is a wide variety of different versions of employee performance evaluation systems available. Depending on your needs, what attributes you deem important or the scope of your evaluation, you can choose between metrics that focus on:
- Quantity: This could mean sales, number of products manufactured, number of invoices processed - virtually anything that can be quantified and presented in a report.
- Quality: Number of defective products, performance errors, customer feedback etc.
- Speed: Project completion times compared to estimated times of delivery, everyday tasks completion time, units manufactured per day etc.
- Cost: Payroll costs per employee compared to annual revenues or per project.
As one might easily understand that using a combination of those employee performance indicators will give you more comprehensive insights.
KPIs for employee performance examples
Below we have some of the most commonly used KPIs that will help you increase employee engagement and development.
Profit per employee
This is a basic indicator of how much profit each employee brings to your company. You can calculate it by dividing total profit (minus expenses) by the number of employees.
Profit per employee = Total profit / Number of employees
This KPI is especially useful for companies that outsource tasks to freelancers or remote workers who don’t incur the same amount of expenses as in-house employees. If this metric is high, it translates to robust organizational finances!
Utilization rate per employee
This performance indicator gives you the ratio between billable hours logged and total hours logged per employee. Put simply, it can give you a clear image of the profitable work of your employees with respect to their internal cost.
Utilization rate (%) = (Total monthly billable hours/total monthly hours logged) x 100
In order to use this valuable indicator, make sure you have a time tracking software that will enable you to distinguish billable from non-billable hours. Different companies tend to have different views on what is a billable hour or not.
However you choose to view it, this metric will give you useful insights on non-billable time so you can spot the activities that take it up and do necessary time management changes!
Average time for task completion
If you want to look into project efficiency in a more practical, rather than financial, way this KPI is ideal.
Average task completion rate = Total time to complete task (within set time frame) / number of times performed
It will inform you about your team’s efficiency and it is particularly useful in understanding how long the different aspects of a project take to be completed.
This can either be perceived as an employee engagement kpi or as an indicator of employee wellbeing. Essentially, it’s the average overtime each employee puts in monthly.
Overtime rate = Total hours overtime / number of employees
If this rate is high it means that perhaps you need to hire more personnel, as the workload might be wearing out your employees.
Also, remember that it doesn’t necessarily say much about your employees’ quality of work or engagement. Therefore, you should keep an eye on it if you want to keep your employees happy and strong.
Customers’ positive feedback
An employee performance monitoring system is incomplete unless it has a way to get customer feedback about your employees’ communication skills and effectiveness.
The most effective way to get their feedback is by asking them - It’s as simple as that!
You can send out customer satisfaction surveys or place conversation ranking widgets to your customer service or sales management tools. However, keep in mind that this process is a moving target; customer satisfaction shifts due to changes influenced by internal factors (e.g. pricing policy, product) and external as well (e.g.marketing trends).