The article was initially published in May 2018 and updated on March 15th, 2023, for accuracy and comprehensiveness.
Setting and achieving goals 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 measuring employee productivity, there is no obvious way to evaluate the effectiveness of their work. So, a frequent question in the minds of team leaders is the following. "How will I decide if my employees are using their skill sets to the fullest to achieve the company goals?". If you, too, are wondering how to evaluate employee performance, here you'll find all the metrics and key performance indicators for employee evaluation!
What is a KPI (Key Performance Indicator)?
A KPI is a way to measure employee performance in the workplace. There are several metrics to keep track of employee productivity and better manage your teams, depending on your needs and the nature of your work.
For example, you want to measure a sales employee's performance. In that case, you can quickly evaluate their total sales and compare it to their salary and expenses. Monitoring and assessing the performance of an employee whose duties are less quantifiable gets tricky, though.
This is where methods to measure employee performance comes into play. We have previously discussed how to create effective teams and be a good leader; you also need to adopt some effective evaluation techniques.
Why use KPIs for employee evaluation
Many companies use KPIs to measure employee performance for a good reason. KPIs offer valuable insights. A common mistake managers make is using them to measure the value of their employees compared to profit margins. This is inaccurate and tells little about their actual overall performance. After all, monitoring performance only numerically is the wrong 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 using key performance indicators for employee evaluation will help you discover new ways to motivate them. Not only that but also delegate the tasks properly according to each one's capabilities. Furthermore, an employee work performance review process will enable you better to understand your employees' motivation triggers and weak points. Therefore, boosting your project management success!
If you are wondering how to measure employee performance effectively, the answer is using applications that automate the logging of working hours and projects. Most of them, like Elorus, offer you analytics to use in reports and to make decisions.
You may use key performance indicators for employee performance evaluation, team management issues, 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 help assess payroll operations. How well your employees' salaries reflect their performance and potential.
Challenges of using KPIs for employee evaluation
While KPIs can be a valuable tool for employee evaluation, several challenges are associated with their use. Here are some of the challenges of using KPIs for employee evaluation.
1. Data accuracy issues
KPIs are only as good as the data used to measure them. If the data is inaccurate or incomplete, the KPIs will not accurately reflect employee performance, resulting in wrong business decisions.
2. Over-reliance on metrics
Over-reliance on business metrics can lead to a narrow focus on short-term goals, which may not be aligned with the organization's long-term objectives. KPIs are just one tool for evaluating employee performance and should not be used in isolation.
3. The limited scope of KPIs
KPIs typically focus on measurable outcomes, such as productivity, sales, or customer satisfaction ratings. However, this limited scope may only partially capture employees' many other vital organizational contributions.
Except for quantitative factors, business decision-makers should also consider innovation, teamwork, problem-solving ability, or communication skills, which are qualitative and, in most cases, can be challenging to measure.
4. Difficulty in setting appropriate KPI targets
Setting appropriate targets for KPIs can be challenging. If the targets are too low, employees may not be sufficiently motivated to achieve them. If they are too high, employees may become discouraged and disengaged. Below in this article, we have gathered some practical tips to help determine the correct KPI targets for your business.
How to decide on metrics to measure employee performance
A wide variety of different versions of employee performance evaluation systems are available. Depending on your needs, what attributes you deem essential, or the scope of your evaluation, you can choose between metrics that focus on the following:
- 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.
Combining those key performance indicators for employee evaluation will give you more comprehensive insights.
Top 5 KPIs for employee performance examples
Below are some of the most commonly used key performance indicators for employee evaluation. They will help you increase employee engagement and development.
Profit per employee
This is a primary 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 benefits companies that outsource tasks to freelancers or remote workers who don't incur the same expenses as in-house employees. If this metric is high, it translates into robust organizational finances!
Utilization rate per employee
This performance indicator gives you the ratio between billable hours logged and total hours logged per employee. It gives you a clear image of the profitable work of your employees concerning their internal cost.
Utilization rate (%) = (Total monthly billable hours/total monthly hours logged) x 100
To use employee utilization rate, 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 a billable hour is. However you view it, this metric will give you valuable insights on non-billable time. This way, you can spot the activities that take it up and make 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 a task (within a set time frame)/number of times performed
It will inform you about your team's efficiency and help you understand how long different aspects of a project take to be completed.
This can be perceived as an employee engagement KPI or 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, you may need to hire more personnel, as the workload might be wearing out your employees. Also, remember that it only says a little about your employees' quality of work or engagement. Therefore, you should watch it to keep your employees happy and robust.
Customer's positive feedback
An employee performance monitoring system is complete if it can 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 customer satisfaction surveys or place conversation ranking widgets on your customer service or sales management tools. However, remember that this process is a moving target; customer satisfaction shifts due to changes influenced by internal factors (e.g., pricing policy, product) and external (e.g., marketing trends).
Tips on how to set KPI targets for employee evaluation
Setting targets for KPIs is an essential step in employee evaluation. The KPI targets can help the business management team to provide clarity and motivation to employees, align individual performance with organizational goals, and provide a basis for measuring performance and progress.
Following, we've gathered the core tips to help you set up KPI targets that will genuinely impact your business.
1. Setup S.M.A.R.T. KPI targets
Your targets must be specific, measurable, attainable, relevant, and time-bound. This means that they should be clear and concise, able to be measured objectively, achievable, aligned with organizational goals, and have a specific timeline for completion.
2. Consider the employee's current performance
Before setting up the exact target, it's essential to look back for at least a year, check the average performance (growth, drop, etc.), and determine a reasonable target.
Also, ensure that something significant hasn't happened in previous years that has suddenly changed people's buying habits and may cease to exist next year. For example, during the COVID-19 period, you may have a rapid increase for a service that could be less relevant to the current or future circumstances. As a result, if this was the case with your business last year, you should be more restrained for your sales KPI target, setting a more reasonable number.
For sure, your targets should be challenging but also achievable. Otherwise, employees will lose their motivation.
3. Collaborate with the employee
During the target-setting, your employees should get involved to share their ideas and suggestions. This can increase buy-in and engagement and ensure that targets are relevant and achievable.
4. Align KPI targets with your business goals
Your KPI targets should be aligned with the business'sbusiness's overall goals and objectives. This helps ensure that employees work towards the same goals as the business. In addition, that way, employees feel they can contribute their work to the business's growth in a tangible way.
5. Communicate clearly to employees
Targets should be communicated clearly to the whole team. This means providing them with a clear understanding of what is expected of them and how their performance will be measured. This information should be written down in a shared document, and ideally, employees should be able to track the progress of the KPIs relevant to their profession.
As you see, many Key Performance Indicators exist for employee evaluation. There are also facts about employee evaluation. They can give you a better understanding of what is happening in the market. However, you should use KPIs in a broader framework for evaluating employee performance and consider a range of qualitative and quantitative factors when assessing employee contributions to the organization.