The best way to demonstrate the value of your performance management system is to link it to business impact. To do so, learn how to calculate the cost of employee turnover, engagement, and productivity, and use these key performance indicators (KPIs) to measure the return on investment (ROI) of your new performance management system.
High turnover and low engagement and productivity are the result of deeper issues impacting your organization. When people don’t feel they can grow, aren’t getting clear direction from their managers, or 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 that even if your HR team knows introducing a new performance management system is necessary, the organizationwide changes it can introduce require executive buy-in to fully get them off the ground.
To get the executive team on board with the changes you want to make, it’s essential to set both long- (which this article will discuss) and short-term goals that 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 develop.
Consequently, you decide to introduce a new performance management system that 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 …
High turnover is a company’s worst nightmare. The Society for Human Resource Management (SHRM) claimed that it costs companies 6–9 months of an employee’s salary to replace him or her (when considering an employee who makes $60,000, this can mean $30,000–$45,000 in recruitment and training costs alone!). A study conducted by the Center for American Progress reported the average cost of replacing an employee to be 21% of his or her average salary. Another estimate cited by Josh Bersin from Bersin by Deloitte put it at 1.5–2 times 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 by simply giving more continuous strength-based feedback, companies can reduce turnover by 14.9%.
* Let’s say you set a goal of reducing turnover by 7%.
- 300 employees
- A 25% annual attrition rate
- An average cost per hire of $4,129 (average taken from the SHRM study)
($4,129) x (300 x 25%) = $309,675
($4,129) x (300 x 18%) = $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
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, approximately 17.2% of the U.S. workforce is actively disengaged.
Ninety-eight percent of employees fail to be engaged when managers give little or no feedback. However, the good news is that studies show that 43% of highly engaged employees receive feedback at least once a week.
How to Calculate the ROI of Increased Employee Engagement
Again, Aviato has 300 employees, a $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
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, the number of employees, and the 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 average 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 toward this end goal.
Steffen Maier is the co-founder of Impraise, a people-enablement platform. Impraise’s belief is simple: Grow your people—grow your business. It helps unleash people’s potential, doing more than just performance reviews, which means accelerating performance, fostering career development, and seizing all the moments that happen in between.