What is a key performance indicator?
Key performance indicators (KPIs) are objective metrics that companies track over time to determine whether the organisation is achieving its strategic objectives. They can be used to measure the performance of staff, roles or departments and every aspect of a business, including finance, HR, customer service and marketing . KPIs are a highly effective way of reviewing the growth and health of your business and identifying new opportunities.
Why set employee KPIs?
As a small or medium-sized business, your employees are your greatest asset. And their performance is crucial for your business success. That’s why employee KPIs are essential. They align your employees’ performance with your organisational goals. Employee KPIs also play a crucial role in ensuring employee satisfaction and reducing employee turnover .
How to set employee KPIs
Step 1: Get your team involved in the process
Getting your employees involved from the very beginning will help to generate buy-in and motivation to achieve the KPIs, as well as ensure that everyone is working together towards achieving the business goals. Bring your team together to discuss the team’s goals and which KPIs should be used to evaluate their performance.
Step 2: Set targets that are aligned with your goals
The purpose of KPIs is to turn your business goals into measurable targets for you and your employees to focus on achieving. So, your KPIs should be tailored to both your organisational and your team goals. Let’s look at an example:
Business goal: Reduce the number of dissatisfied customers by 30 percent
Employee KPI: Weekly difference, as a percentage, in complaints handled that resulted in satisfied customers compared to dissatisfied customers
Step 3: Include a mix of team and individual KPIs
When evaluating the performance of your employees, you should aim to incorporate both team and individual KPIs. Measuring how well your teams perform is important for motivating and inspiring teamwork. A team KPI could measure, for example, customer satisfaction or project completion rates.
Individual KPIs are extremely useful because they give you actionable insights into your individual employees’ contributions to your business. KPIs for individual employees should be aligned with the team’s overall strategy. Here is example of an individual KPI:
Team goal: An extra $50,000 in revenue
Individual KPI: Number of phone calls made per week
Step 4: Measure your KPIs
Make sure you have a system set up to collect the data regularly and that someone is responsible for collecting and reporting on each KPI dataset. It’s a good idea to have all KPI datasets together in one reporting system.
Step 5: Review and adjust your KPIs
KPIs are only useful if they’re working for you. So, it’s important to review their effectiveness at regular intervals – for example, monthly, quarterly or annually – or when there are important changes in the business or in the market conditions.
Tips for developing employee KPIs:
- Make them achievable. It should be possible for employees to achieve their KPIs with the available resources. It’s hard to think of anything more demotivating than unrealistic targets, which make employees feel like they are being set up to fail.
- Make them quantifiable and easy to measure.
- They must be relevant. Don’t set KPIs just for the sake of it. The metrics you measure should have an impact on your business’s performance. Performance drivers of a service business, for example, will be very different to a manufacturing business.
- Less is more. Avoid having too many KPIs. To ensure that they are accurate and focused, we recommend 4 to 10 KPIs for each area of your business.
- Choose KPIs that focus on as many different areas of the business as possible. Business owners and managers commonly make the mistake of only using KPIs that relate to the bottom line.
- Support your KPIs with strong, accurate and timely measurement and reporting processes.
Employee KPI examples
Here are seven common employee key performance indicators and the formulas you can use to measure them. These indicators give you an overall picture of employee productivity and engagement. They allow you to quickly identify problems that could be the result of broader operational issues, resource availability or workflow bottlenecks. You shouldn’t base your evaluation of your employees’ individual value or contribution to your business solely on these metrics.
- Revenue per employee
Revenue/number of employees
This metric is often used to gauge how profitable a company is. It tells you how much revenue each employee brings in, so you can make sure your employees aren’t costing you more money than they’re making. You can also track profit per employee using the same formula. This might be more relevant if you work with many freelancers or remote workers who don’t incur the same expenses as in-house employees.
- Utilisation rate
(Total weekly billable hours/totally weekly hours logged) x 100
This metric is mainly used in professional services and service-based organisations. It shows you how much directly profitable work each employee does compared to their internal cost. It is an important indicator to track because it will help you to set profitable rates for services, determine fair remuneration levels for your employees, make better hiring decisions and work out whether your staff are being overworked or underutilised.
To measure this KPI, it’s a good idea to have time-tracking software that allows you to easily distinguish between billable and non-billable hours. Most organisations aim for a utilisation rate of around 80 percent, meaning that 80 percent of the employee’s time is spent on billable work.
- Average task completion rate
Total time to complete the same task (within a set time period)/number of times performed
This KPI gives you a rough idea of your team’s overall efficiency. It tells you how long your employees usually take to complete particular phases of a project, which allows you to improve your budget estimates and resource management.
- Overtime rate
Total hours of overtime /number of employees
This indicator gives you the average amount of overtime that your employees do. Some employers use this metric to gauge employee engagement, while others use it as an indicator of employee wellbeing. But you shouldn’t take it as an indication of an employee’s dedication, because the number of hours someone works doesn’t necessarily reflect the quality of their work or their enthusiasm.
A high overtime rate might be a sign that you need to recruit more staff – the long hours could be wearing your employees out. Regardless of your company’s stance on overtime, it’s worth keeping an eye on it.
- Employee capacity
Weekly capacity – total hours logged
This is a very useful indicator if you want to distribute work evenly across your team. It shows you who is likely to be heading towards burnout and who might be looking for some more work to do.
- Employee retention
(Number of employees retained/number of employees at start of year) x 100
When you run a growing business, you want to make sure that you are retaining the best employees. One way to help you identify whether you’re achieving this is to measure employee retention. Hiring and training employees is major investment, and the longer a quality employee works for your business, the better your return on investment will be.
- Employee engagement
Employee engagement relates to employees’ levels of enthusiasm for and connection with an organisation. Measuring employee engagement tells you how motivated your employees are to put in extra effort for your business and how committed they are to staying with the business. It’s no surprise that organisations with engaged employees are higher performing and more resilient. So, employee engagement is a crucial metric to keep track of.
Because employee engagement is about how people feel, measuring it can be challenging. But here are some effective ways to capture this KPI:
- An employee engagement survey. A great way to assess your employees’ level of engagement is by simply asking them. Surveys should be completed frequently and should focus on questions about the employee experience.
- Absenteeism and staff turnover rate. It may seem obvious, but employees who show up tend to be more engaged. The Society for Human Resource Management recommends that most sectors aim for an employee turnover rate of 10%.
- Employee net promoter score (NPS). This is easy to measure because it involves asking just one question: “How likely is it that you would recommend working at our company to a friend or colleague?” Generally, the question is answered on a scale of 0 to 10. Responses from 0 to 6 = detractor, 7 to 8 = passive, and 9 to 10 = promoter. To calculate your employee net promoter score, simply subtract your percentage of subtractors from your promoters.
Final thought: should you make employee wellbeing a KPI?
An employee wellbeing KPI is certainly not commonplace yet, but the idea has gained traction thanks to increased focus on wellbeing since the COVID-19 pandemic. Many companies around the world have made employee wellbeing their top concern, understanding that it is a critical factor in determining which organisations will survive the new uncertain normal.
Wellbeing has many dimensions – physical, mental, emotional and spiritual – so measuring it can be challenging. The main goals and objectives of your organisation’s wellbeing strategy should guide which metrics you choose to use. Some employers have tracked mental health using a short survey that employees complete once a fortnight. If your organisation has an employee wellbeing program, another option is to measure participation rates in the program. After all, such an initiative will only be effective if people are using it.
