Organizations need to periodically assess their performance to determine if they are performing to the best of their ability and whether any strategies they are implementing to improve performance are producing the desired results. In the 2011 paper “Metrics pave the path to world-class organziations” Anderson stressed the importance of measuring performance saying that unless the performance is measured and benchmarked, companies will not know how they are performing and which areas need improvement. Such blindspots restrict them from identifying and focusing necessary corrective strategies and efforts on the areas that require improvement. Also, once these strategies have been implemented, companies need to be able to track their performance so that they may ascertain which strategies have been effective and which have not yielded satisfactory results. Action plans can then be made to ensure the relevant areas are addressed.
What is a performance indicator?
A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity (such as projects, programs, products, and other initiatives) in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. What is deemed important often depends on the department measuring the performance – e.g. the KPIs useful to Human Resources will differ from the KPIs assigned to sales.
Choosing the appropriate KPI’s
There is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.
Cronin (2017) advises that when deciding on which performance indicators are relevant to a specific company, managers should consider the strategies and objectives that they wish to address. This then allows managers to choose the measures that speak directly to their goals. These indicators are most effective when tracked consistently and comprehensively. Furthermore, Griffin (2004) adds that performance indicators work best when they cannot be manipulated or changed by external influences and a direct link to the company’s goals and objectives exists. This allows companies to thus be able to make actionable strategies that can be relied upon. According to Eckerson (2009), effective key performance indicators should be specific, measurable, attainable, relevant, and time-bound, i.e. they should be S M A R T.
In addition to this, Eckerson furthered that effective key performance indicators are those indicators that meet the following criteria:
- Sparse - key performance indicators are more effective when they are few.
- Drillable - effective key performance indicators can have more information and detail “drilled into” them by users.
- Simple - effective key performance indicators are easy for all employees to understand.
- Actionable - key performance indicators are more effective if all employees know which actions can affect outcomes.
- Owned - key performance indicators are assigned to individuals, who are subsequently responsible for meeting them.
- Referenced - key performance indicators are more effective if employees can trace the origins of the indicators
- Correlated - effective key performance indicators have a direct relationship with the desired outcomes.
- Balanced - effective key performance indicators are both financial and non-financial.
- Aligned - effective key performance indicators support each other in achieving the intended goals and do not contradict each other.
- Validated - key performance indicators are effective if no employee can find a way to outmaneuver and bypass the performance indicators.
The most important KPIs to watch for are those KPIs that meet the abovementioned criteria and they are as follows:
Absence rate and absence Cost
Companies must watch for the absence rate and the absence costs which are related. These two KPIs quantify the rate of absenteeism in the organization and assign a cost, enabling companies to see how absenteeism affects business operations. Usually, when an employee is absent, other employees must cover for them, thereby dividing their attention between their duties and those of the absentee.
The absence rate is simply a ratio of the number of days an employee was absent from work versus the number of days an employee was present at work. This can be calculated explicitly by dividing the total number of days an employee was absent by the total number of days they were at work. The absence cost is calculated by using employee pay or other measures which quantify the cost of managing the employee’s absence.
Employee Engagement Index
Employee engagement quantifies an employee's investment and attitude towards a company’s goals. Several studies have shown that more engaged employees tend to be more productive, offer better customer service, tend to be involved in fewer accidents and make fewer mistakes, have fewer cases of absenteeism, and result in lower turnover. The employee engagement index can be found as a result of an employee engagement survey.
Benefits or Remuneration Satisfaction Index
How satisfied an employee is with the remuneration and benefits they receive can have an impact on their decision to leave the organization. This index can be measured through an employee engagement survey.
Employee Productivity Rate
The employee productivity rate tracks how productive an employee is by using company-specific metrics. These differ by industry and company.
Employee Satisfaction Index
Employee satisfaction can be measured through employee engagement surveys. The dissatisfied employee is at a greater risk of leaving the organization than the satisfied employee.
Employee Innovation Index
Employee innovation index can also be found using the employee engagement survey. Innovation speaks to the ability of employees to find new effective ways to address a problem. It is thus key to the success of a business.
Internal Promotion Rate
The internal promotion rate finds the proportion of senior positions which were filled by internal employees. Internal promotion rate can be calculated by dividing the number of senior positions which were filled by internal employees as a way of a promotion by the number of senior positions which were filled in total. Employees who are already within the organization and receive a promotion can hit the ground running and reduce the risk of a bad hire. In addition to this, internal hires are more likely to stay in the company longer, enabling companies to plan more effectively.
Net Promoter Score
A Net Promoter Score measures the degree to which an employee would recommend the organization or business services to another person. Satisfied employees are more likely to recommend services to other people thereby driving up sales and would recommend the company to valuable talent. This KPI can be found in employee engagement surveys.
Percentage of Cost of the Workforce
For companies looking to automate processes, this KPI helps quantify the amount an organization can save by automating. It can be calculated by dividing the cost of the workforce by the total cost incurred by the organization.
Quality of Hire
How effective an organization is in hiring aids companies in identifying refining the organization’s talent acquisition and hiring process thereby promoting a system that ensures the best candidates are chosen.
The quality of hire is calculated as a percentage of new hires that receive good ratings from their managers during their performance review.
Turnover rate is an important KPI to assess especially as employee turnover can be very costly for organizations. Linked to this metric are three other KPIs.
Involuntary Turnover Rate
Involuntary turnover rate divides the number of resignations which were initiated by the employer by the total employees leaving the company.
Voluntary Turnover Rate
Voluntary turnover rate divides the number of resignations which were initiated by the employee by the total employees leaving the company.
90-Day Quit Rate
The 90-day quit rate assesses the number of employees that leave the organization within the first 3 months. This KPI assesses the quality of hires that the company is hiring.
Companies should measure performance for several reasons. Monitoring performance creates a performance oriented-culture and promotes accountability in an organization. It ensures that the company goals, mission, priorities are clarified and clearly understood by employees. This improves communication between employees and managers, as employees are made aware of their responsibilities and the expectations the company has of them. Furthermore, success criteria for the objectives of performance measurement get defined and become established within the organization. This allows companies to formulate a rewards framework that is transparent and fairly rewards employees that perform well, as defined by the success criteria. As more and more employees aim to reach targets set for them by the success criteria, a culture is cultivated which provides opportunities for performance development especially if the continued learning and growth of employees is defined in the success criteria.
Carl Tapi is a Consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. https://www.linkedin.com/in/carl-tapi-45776482/ Phone +263 (242) 481946-48/481950 or cell number +263 772 469 680 or email: [email protected] or visit our website at www.ipcconsultants.com
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