The best way to demonstrate the value of your performance management system, is to link it to business impact. Learn how to calculate the cost of employee turnover, engagement and productivity and use these KPIs to measure ROI of your new performance management system.
High turnover and low engagement and productivity are the end result of deeper issues impacting your organization. When people don’t feel they can grow, aren’t getting clear direction from their managers, don't feel supported by their team or the workplace culture they will quickly become disillusioned and begin to look for new, more challenging opportunities.
The first step is to identify what these underlying issues are and create a talent management strategy to address them. Check out these 15 questions to ask in your next engagement survey to find out.
The problem is... even if your HR team knows introducing a new performance management system is necessary, the organizational-wide changes it can introduce require executive buy-in to fully get them off the ground.
To get the executive team onboard with the changes you want to make, it's essential to set both long (which this article will discuss) and short term goals which can be linked to business objectives. Here we'll show you how to set KPIs based on increased employee retention, engagement and productivity:
Your HR Challenge
Let's say you're Aviato, a Silicon Valley based tech company of 300 people who make an average salary of $60,000. Everything seems to be going well until you get your people analytics report and find out you're experiencing a 25% annual attrition rate! To make matters worse, out of the people who have stayed, 17.2% are disengaged. This has had a major impact on productivity and morale.
You know that a new ping pong table won't improve the situation, so you send out an engagement survey and find that what people are really missing are more opportunities to grow and development.
So you decide to introduce a new performance management system which will help you move from annual to quarterly performance reviews. Additionally, you decide to introduce a real-time feedback app to encourage people to ask for feedback when they need it and increase the overall rate of feedback being exchanged in between reviews.
Now it's time to convince the executive level...
1. Employee Retention
High turnover is a company’s worst nightmare. SHRM claimed that it costs companies 6-9 months of an employee’s salary to replace them (when considering an employee who makes $60,000 this can mean $30,000-$45,000 in recruitment and training costs alone!). A study, the Center for American Progress reported the average cost of replacing an employee to be 21% of their average salary. Another estimate cited by Josh Bersin from Bersin by Deloitte put it at 1.5-2X an employee’s annual salary.
Whatever the cost, turnover can have a major impact on your company’s financials, not to mention the impact it can have on morale and simply getting things done.
How to calculate the ROI of employee retention
If your main objective with your new performance management system is to decrease turnover, consider setting a retention goal. At the end of your first year using this new system, what should your retention rate look like and what will you save by achieving this goal?
The first thing you need to do is calculate the current cost of turnover. The above averages can give you a very general ballpark figure but to calculate the true cost of turnover at your company, try this formula:
(cost of hiring + onboarding + training + time to fill position) x
(number of employees x annual turnover percentage)
= Annual cost of turnover
(Tip: Here is a calculator that can do the math for you)
Once you have this number, set a conservative goal based on industry benchmarks. Gallup found that simply by giving more continuous strengths based feedback companies can reduce turnover by 14.9%.
* Let’s say you set a goal of reducing turnover by 7%
25% annual attrition rate
and your avg cost per hire is $4,129 (avg taken from SHRM study)
($4,129) x (300x25%) = $309,675
($4,129) x (300x18%) = $222,966
Savings = $86,709
Now compare this number to how much you’re spending on your new performance management system:
$86,709 - x = ROI of new PM Process
2. Employee Engagement
While engagement may seem like the most people focused HR metric, there is a clear link between engagement and bottom line objectives. Gallup found disengagement costs $3,400 for every $10,000 of salary. On average approx 17.2% of the US workforce is actively disengaged.
How to calculate the ROI of increased employee engagement
Again, Aviato has 300 employees, $60,000 average salary and 17.2% disengagement
(300 employees x 17.2% disengagement) = 51.6 disengaged employees
($60,000 x 34%) = $20,400 cost of disengagement per employee
($20,400 x 51.6) = $1,052,640 Total cost of disengagement
Let’s say your goal is to decrease disengagement by 7% through more continuous feedback:
(300 employees x 10.2% disengagement) = 30.6 disengaged employees
($60,000 x 34%) = $20,400 cost of disengagement per employee
($20,400 x 30.6) = $624,240 Total cost of disengagement
Previous cost of disengagement minus current:
$1,052,640 - $624,240 = $428,400
$428,400 - x = ROI of new PM Process
3. Employee Productivity
A study by Western Michigan University found that great feedback can increase performance by 5%-20%. Additionally, Gallup found that teams with managers who receive strengths feedback experience 12.5% greater productivity post-intervention than teams with managers who receive no feedback.
How to calculate the ROI of improved employee productivity
Start by calculating the value your company generated last year. To do this take last year’s revenue, number of employees and number of teams. Find the average revenue per team and subtract this by the average amount it takes to employ each team (average salary plus overhead). This amount is the dollar amount your company receives through productivity of employees. For example:
Value generated last year = $20,000,000
Teams = 30
($20,000,000/30) = $667,000 Avg revenue per team
Cost to employ = $600,000
Net contribution made by an average team = $67,000
Take a conservative approach by calculating how much more your company could gain from employee productivity if performance is increased by the minimum 5%.
5% more productivity per team = $70,350
Total increase in net contribution = $2,110,500 - $2,010,000
$100,500 - x = ROI of new PM Process
The importance of setting long and short term goals
Setting long term goals will provide you with a way to measure the effectiveness of your new system after a year of using it. However, it’s essential that you also set short term goals/milestones that you can use to make sure you’re on track and working towards this end goal. Check out this article with ideas for setting short term goals to keep you on track.
The Impraise Customer Success team helps you set up your performance management system but also to measure success. Schedule a call here to learn more.