A key challenge for managers has always been to accurately measure their team’s performance so they can compare it with resource costs and outputs to determine ROI. Measuring team performance is also critical to duly reward the top performers and work on members who are struggling with their tasks.
The point is, measuring each employee’s performance is important if you want to ensure better productivity and scalability. So, how do you do it?
Well, by setting Key Performance Indicators (KPIs).
What is a KPI?
The simplest way to measure anything is to make it quantifiable. But the term performance is subjective, which means there is no one way to measure it. You need a baseline, which you can use to label performance as good or bad. Key performance indicators offer you that baseline and a means to make outputs quantifiable.
You can consider KPIs as milestones, thereby creating a baseline. For instance, completing 3 or fewer milestones in a month can be identified as bad performance whereas completing 6 or more milestones can be categorized as good performance. That’s the gist of it.
Employee key performance indicators vary from one industry to another. In fact, you can even create business-specific KPIs that help highlight employee performances based on your company processes and workflows.
How do you Measure Employee Performance with KPIs?
There are countless ways to measure employee performance using different KPIs. Here are some of the most commonly used ones by managers:
- Profit per employee
Calculating profit per employee is probably among the most common ways of gauging employee performance. Its formula is:
Profit / number of employees
You can compare the profit per employee with cost per employee to identify each individual’s contribution towards company profits. But there is a minor flaw; this KPI generalizes all performances.
The profit/employee formula states that each employee (despite their varying inputs) has the same contribution towards company profits. However, in the real world, some employees will always have a greater profitability than others based on the kind of work they are assigned and the value it adds to the bottom line .
- Capacity utilization rate
This is an excellent KPI to measure employee performance as it allows you to determine how much of an employee's capacity is being utilized against the potential. Here’s the formula for this KPI:
(Actual output / Potential output) x 100
Ideally, the equation should always result in 100% which denotes that you are using your team to its full potential. This KPI is calculated in billable hours.
For example, let’s assume you have a team of two people, each working 40 hours per week. This means that your potential output per week is 80 hours. Now if employee #1 delivers 35 hours whereas employee #2 works for 30 hours a week, which means that your actual output for the week is 65 hours. Now, putting these figures into the equation, you get:
(65 / 80) x 100 = 81.25%
This means that your team has used up 81.25% of its capacity, which means that you still have room to get more tasks done.
- Capacity per employee
One of the most common ways to gauge employee performances is by monitoring the capacity of an employee. The idea is simple: You find out the number of hours an employee was supposed to work and the hours that the employee actually delivers.
The formula to calculate the capacity per employee is:
Total estimated capacity (in hours) – actual capacity (in hours)
- Total estimated capacity: the total number of hours an employee will work
- Actual capacity: the number of hours an employee actually delivers
If an employee is expected to work 40 hours a week but only ends up working 35, you can immediately determine that the employee underperformed by 5 hours. This KPI comes in-built in most time-tracking apps where you can set working capacities of each individual and then compare them with the actual output at the end of the day.
- Task completion rate
Task completion rate is another great performance metric for employees where you can identify the number of tasks completed by an employee in a given time period. The more tasks an employee completes in a week, the better their performance will be.
For example, let’s assume you assigned 10 different tasks to each team member for the week. Jane completes 8 of them while Sarah is able to check off all of the 10. This means that Jane’s task completion rate is 80% while Sarah’s is at 100%.
You can set an acceptable task completion rate per month that your team needs to accomplish. Let’s assume you keep it at 80% (an ideal task completion rate). This would mean that your employees need to complete at least 80% of the total tasks assigned in a month. You can also factor in these rates into the performance appraisal cycle for employees.
You can also use time-tracking tools that provide accurate insights about the task completion rate of your team.
- Absenteeism Rate
Although this is every employee’s legal right, some of them begin to misuse it, which is why you need to keep the absenteeism rate in check. It is the rate of how frequently an employee is skipping work. Evidently, the lower this rate is, the better since it denotes that the worker is not taking a lot of unwarranted leaves.
On the flip side, a higher rate of absenteeism means that employees are taking more time off than usual, which will reflect badly on their productivity scores. Here’s the formula to determine the absenteeism rate of individuals or teams.
(Number of absent days / number of workdays) x 100
If Jane has 24 working days in a month, and she works for 20 of those days, then putting the values in this formula will give you:
(5 / 24) x100 = 20.83%
This means that Jane’s absenteeism rate is 20.83%. However, this formula needs context to make more sense. For instance, if Jane has pre-approved leaves for legitimate reasons, then those 20% shouldn’t reflect on her productivity report and vice versa.
You can also create an ideal range. For instance, a rate of below 2% is acceptable in most organizations, while anything above 4% is considered bad. Again, this requires context since an employee with over 4% absenteeism rate may be down with high fever or may have lost a loved one recently.
You can also keep a mandatory attendance rate for teams, which they have to maintain to make sure their off-days don’t reflect badly on their performance reports.
A few more examples
Here are a few more KPI examples that you can use to gauge employee performances:
- ROI of an employee: the cost you bear for a resource vs how much you earn from it
- Number of sprints completed: time-bound periods to complete a list of task(s)
- Number of sales made per month: New revenue influx every month
- Number of monthly leads generated (but not converted): people interested in making a purchase in near future
- An increase in social media engagement: new impressions, reacts, and shares on your social media page
These are some basic KPIs, but ou can also create business-specific KPIs down to the departments.
How do I Write my KPI??
If you want to create business-specific KPIs to analyze employee performances, you need to answer the following:
- How will that KPI reflect business performance?
- How will you measure it?
- Can it be quantified?
- If it is actionable or can be evolved later?
- Is developing or implementing the KPI a cost-effective measure?
- Is it aligned with your business processes and goals?
Having accurate answers to all of the above-mentioned questions will allow you to create an effective business-specific KPI to measure employee performances.
What are the 4 main KPIs?
There are hundreds of KPIs that you can use to determine and analyze employee performance.But here are 4 of them that are vital and can be used in any industry:
- Customer satisfaction rate: How satisfied your customers are with the product or service. This can be acquired through surveys, feedback at different touchpoints, etc.
- Total cycle time: how much time on average does it take to complete a cycle in your workflow
- Production efficiency: how much cost did you incur against the total output of an employee
- Revenue per client: your average revenue per client (divide total revenue by the total number of clients)
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What are good KPI examples?
Some good KPI examples for sales teams are:
- Lead conversion rate
- New signups
- Pipeline value
- Average order value
3 good KPI examples for team leads and managers are:
- Customer acquisition costs
- Revenue per customer
- Total projects completed
A few good KPI examples for project management are:
- Milestones completed
- Total capacity Vs. Actual outputs
- Resource utilization rates
- Average project value
Is employee satisfaction a KPI?
Employee satisfaction rate is an excellent KPI to boost the productivity levels of your team. It tells you how content your employees are. A high employee satisfaction rate is inversely proportional to employee turnover rate (how frequently employees leave your organization). It will also reflect in your team’s overall productivity as happier employees are proven to be more efficient with work.
Which KPI is most important?
KPIs vary from one department to another. For example, lead conversion rates may be an excellent KPI for sales teams while project completion rates can be more useful for team leads and managers. Ideally, your main KPIs should be directly associated with individual and team outputs.
What are the 5 characteristics of a good KPI?
The characteristics of a good KPI are:
- Clarity: know what the KPI achieves for your business (it brings more revenue)
- Actionable: it should be realistic (Sell 2-3 cars in month)
- Relevant: it should be relevant to your business (number of subscriptions sold of your SaaS product)
- Measurable: it should be specific and quantifiable (sales should increase by 20% in the next quarter)
- Scalable: you should be able to improve it (annual subscription rate should increase by 15%)
Whether you’re following a KPI or creating your own, make sure your key performance indicators have all of these characteristics to make them effective.