Every manager and CEO knows that people make businesses succeed or fail. But managing employee performance is still too often an afterthought. In reality, if you want to make the most out of your business practices, you need to know the ROI in performance management.
Performance management systems can be the key to unlocking the most out of your employees. A LinkedIn study showed that over 90% of employees would stay in a company if the organization helped them to grow. Furthermore, goals can be a powerful motivator to teams of all types. By setting up sound performance management systems that you can measure and analyze, you can get a hungry squad ready to take on the world.
So what should you know about performance management metrics and how they can impact your business? Let’s take a look!
Performance Management Metrics: What Matters and What Doesn’t?
There is another reason performance metrics can seem daunting and even confusing. Many companies end up measuring the wrong things, unaware of what the key performance metrics are.
One of the main points to understand is that performance management metrics are measured against established goals. It gives these metrics a broader scope. Performance management metrics are commonly used to track various things within a business, from business activities to employee productivity.
You should keep an eye on four common areas when you want to track metrics. These are:
Metrics around business performance include metrics such as ROI indicators, profitability, and employee productivity.
Metrics around sales performance: these consist of metrics like daily activities of sales employees, lead generation, and revenue.
Metrics around project management: these metrics include things such as cost, gross margin and productivity.
Metrics around employee performance: these can consist of quality and quantity assessment and productivity metrics.
If you want to narrow it down further and condense your ROI to three key metrics to focus on, you should use these essential metrics:
Your staff turnover rate – Consider how your performance management processes can reduce turnover rates. If you can reduce turnover rates, you can improve the company’s bottom line and efficiency within the organization.
Productivity – Goal-setting and alignment can help your performance management systems and lead to higher productivity. A recent Gallup research found that employee engagement can boost customer engagement, productivity, retention, and profitability!
Time saved – You should also measure how much time you can save with automation. There are numerous areas of HR that automation can help with, and performance management is one of those. By automating performance management, you can reduce many menial tasks and free your employees to be more productive.
These three metrics are the key to understanding your performance management’s impact on the organization. You want to measure them in many ways and understand their relationship with the investments you make in performance management.
Performance management metrics: the common pitfalls
You should be careful when you start using metrics to measure performance. The ugly truth is that many metrics don’t matter and behaviors that could harm your business.
So what are the common pitfalls to avoid:
Don’t get into a trap of looking backward. Sure, you want to improve from the previous year to the next. But performance management shouldn’t be about comparing with past performance. It’s all about knowing your actions now have a benefit.
Don’t become solely numbers-driven. You need to ensure you keep the metrics from controlling your business. Consider the example of performance reviews that aren’t anonymous. Studies have shown that customers are more likely to provide positive feedback if they know they’re not anonymous. Use your ROI but keep it from controlling your business!
Don’t keep adding metrics but forget the people. Numbers are, at the end of the day, not just numbers. There are real people behind those figures and metrics. Therefore, you must include the people behind the numbers in your performance management. Make sure people feel they are part of the process instead of just figures on a piece of paper.
You can make the most of your metrics by keeping these pitfalls in mind and actively working to avoid falling into them.
How to Calculate Basic ROI in Performance Management
Measuring performance management will require you to understand what an ROI can give. It should be something other than the end-all metric that you use, as forecasting is difficult. You will need to make certain assumptions and use retrospection. The different variables will give you a vague truth but a good evaluation of whether your expectations are correct or in the right ballpark.
Bayzat’s performance management tools can be a lifesaver in calculating ROI in performance management. These systems often have in-built analytics and calculators that can do the work for you. It’s worth investing and looking into a system like this to ensure you can calculate your investments.
When you want to calculate the three cores of performance management: productivity, time saved, and turnover. You want to use these calculations:
Take your time saved in hours and multiply it by the hourly cost to the company for the manager/employee.
So, if you save five hours every month, you’ll save 60 hours a year. If the hourly compensation for a manager is UED100 an hour, you will save 60 x 100 = UED600.
To understand the reduction in turnover rates, you can calculate the cost of attrition. The average cost of attrition for employees is typically 50 to 250% of the annual salary. The total cost of attrition is then calculated by taking the salary of the employee and multiplying it by the attrition rate.
For example, if the salary is UED200,000 and the cost of attrition is 200%, your total cost would be 200,000 x 200 = UED40,000,000.
Implementing an ROI-Focused Performance Management System: Best Practices and Considerations
How do you go about implementing an ROI-focused performance management system? There are five clear steps you should take to ensure best practices and avoid common pitfalls.
1. Research effective performance management system
The first step is big, but by reading this article, you are already on the right path. Knowing what effective performance management looks like in terms of ROI calculations is vital. You want to get a good grasp of the field before you begin implementing it in your business. There are many resources out there to deepen your understanding, and gaining insight from other organizations can be a great idea.
2. Evaluate your current performance management
With a clear idea of what an effective performance management system looks like, you can set about understanding your current system. Your organization undoubtedly already has some way it measures and manages performance. Please go over the different ways you are doing it and start collecting data on your system. This will help you understand what you are doing right and can help you identify the areas that require fixing.
3. Set objectives for your performance management
Approach measuring performance management with clear business goals. You need to set objectives you want to achieve to make it easier to measure success and focus on the essential things. Objectives give clarity to your mission, and they can help employees as well.
What goals look like depends on your business. Some common goals are things like improving performance, improving individual employee performance or identifying employee development needs.
4. Identify what success looks like
As well as having objectives, you need to define what success looks like. A goal of identifying employee development needs should come with success measures. For example, success with the goal could mean identifying the suitable courses to use or linking development to bonuses and so on.
5. Introduce your system to key stakeholders
A successful ROI in performance management is something the organization understands. You don’t want the system to be designed and managed by a handful of people. The more everyone is on board of what you’re trying to achieve and how, the smoother and more effective your system will be.
Make sure you take action and start your implementation by introducing all the stakeholders to the new system. You want employees, managers and senior managers to be part of the process. The more actively they engage with the system, the better it will be for the system.
Measuring performance management isn’t just good practice, but it’s vital for business success. By defining the goals for your performance management system, being clear about the metrics that matter, and involving your whole organization in the effort, you can create a happier and healthier workforce that’s more productive and profitable.
So assess your organization’s performance management practices and implement an ROI-focused system today!