Chapter 17

Measuring People Performance

In This Chapter

Measuring how satisfied and engaged your employees are … and understanding the difference between the two

Working out whether your employees would recommend you … and understanding why they should

Making performance appraisals meaningful and useful

People are your most important assets. They are also probably your biggest cost, so it’s really vital that you know what they are doing and whether they are happy, productive and engaged. It is clearly important that your people are doing what they are supposed to be doing, working hard and adding value to the business; generally speaking, they are only likely to be doing that if they are happy and engaged – at least most of the time.

Considering the importance of people, I am constantly surprised at how few businesses really measure their people in any meaningful way. In fact most companies do this really badly and it’s almost always the least well measured section of a performance framework.

Many businesses conduct basic staff surveys – often copied from some other company’s staff survey or one that managers have found online. Alternatively, businesses will use over-simplified metrics: examples include the number of training days staff have completed or simple measures of absenteeism. These may provide a number –great for slotting into a performance dashboard – but none of these methods give meaningful insights and they certainly don’t help improve people performance.

The KPIs I detail in this chapter offer up a solution to this challenge and provide worthwhile ways to measure people performance so you can ensure that your people are happy, productive and engaged. That way they really will be your biggest asset and not your biggest liability.

How Satisfied and Engaged are Your People?

Employee satisfaction is one of the most established of all the non-financial KPIs. This is largely because of the recognised correlation between happy employees and happy customers – and happy customers mean happy shareholders.

Employee satisfaction is a powerful leading indicator of customer satisfaction, which is in itself a leading indicator of profit. A leading indicator is one that is focused on the future and allows us to make predictions about what will happen in the future.

As a result most businesses at least try to measure employee satisfaction in some form or another. But there is a growing recognition in business that satisfaction is not a good enough measure.

In the same way that customer satisfaction doesn’t tell the whole story about customer loyalty, employee satisfaction doesn’t tell the whole story about staff productivity. For example, an employee might be ‘satisfied’ because he has an easy job or likes the people he works with or is paid well, but this ‘satisfaction’ doesn’t necessarily mean he is productive or committed to delivering the corporate vision. Ironically it may be the most dissatisfied employees that are the most performance-oriented and really want to do all that they can to deliver to the organizational vision and mission. In such cases their dissatisfaction may be a reflection of their inability to do that well enough and not a reflection of their commitment.

As a result, employee engagement surveys emerged as a mechanism for assessing employee contribution, rather than just satisfaction, which could be misleading.

Whatever metric you use, it’s clear that if you want to hunt down performance improvements and increase revenue and growth you must measure how satisfied and engaged your people are.

Satisfaction and engagement matters

In 2007 Gallup estimated that 73 per cent of US employees were actively disengaged, costing the US economy up to $350 billion per year in lost productivity. In other words, the disengaged employees either just turned up to work and went through the motions or they actively sought to do as little as possible.

If your employees are disengaged your business will almost certainly be haemorrhaging money, as well as losing key talent.

Conversely, high engagement can provide significant commercial advantages. Leading global HR consultancy Towers Watson found that companies with highly engaged employees generate more marketplace power than their competitors. Their data collected over 36 months for 40 global companies showed that companies with a highly-engaged workforce turned in significantly better financial performance than those businesses with a disengaged workforce.

In a separate analysis, Tower Watson found that organisations that consistently show higher engagement levels than average produced shareholder returns 9.3 per cent higher than the returns for the S&P 500 Index.

Measuring satisfaction and engagement in practice

Employee satisfaction index and employee engagement level are the two main KPIs for measuring how happy, productive and committed your people are to your business objectives.

KPI: Employee Satisfaction Index

The key performance question Employee Satisfaction Index helps to answer is: ‘To what extent are our employees happy in their job?’

Employee Satisfaction, often referred to as climate is usually measured through a survey. In order to get really meaningful data the survey must be anonymous, so people feel free to express their opinions without the possibility of reprisal or career limitation. However, what that survey measures will depend on what aspects of your business you want to find out about. For example, you may be specifically interested in how satisfied your employees are with one or more of the following:

• Leadership and direction
• Internal Communications
• Staff development opportunities
• Culture
• Facilities
• Work, pay and conditions

Your Employee Satisfaction Index may be completely different to your competitors’. You need to work out what you want to measure and create a survey that measures and weighs those things.

The formula therefore relates to how you value the different elements or questions of your survey. You can either give them all the same ranking or weigh different parts higher or lower.

For example, say you sent an engagement survey about departmental leadership to everyone in the marketing department – 50 people. In the survey they were asked to rank their agreement or disagreement with 3 statements from strongly disagree (1) to strongly agree (5).

• Statement 1: I trust our leaders? – with an average score of 3
• Statement 2: Our leaders are strong communicators? – with an average score of 4
• Statement 3: I feel supported by our leaders? – with an average score of 2.

If the department feels they are all equally important, it could simply create the index by adding the scores up and dividing them by 3 (the number of questions):

(3+4+2)/3 = 3

This metric is particularly useful because it allows you to examine the data across different classifications or parameters such as age, level of responsibility, department, location, and so on.

You can also conduct additional statistical analysis, such as correlation or regression to identify issues which are driving satisfaction and the relative impact of these issues on satisfaction. Correlation analysis measures the strength in the relationships between variables and regression analysis measures how much one variable affects another.

This metric is usually measured through an annual survey. However a better way to measure the trend and get an on-going read of employee satisfaction is to survey 10 per cent of the workforce every month for 10 months. That way everyone still only completes the survey once a year but you have 10 data points not one and that insight can allow you to make in-time corrections to ensure on-going high satisfaction scores.

Make sure you use the insights you gain from the employee survey and fix as many of the things that are causing dissatisfaction as possible. If you uncover low satisfaction and do nothing about it, it will only make matters worse!

When your people feel you are listening to them, that what they say matters and that you are genuinely trying to address the issues they raise, then not only will they continue to complete the surveys – giving you additional on-going insights – but they are also much more likely to bring you good ideas and process improvements too.

KPI: Employee Engagement Level

The key performance question Employee Engagement Level helps to answer is: ‘To what extent are our employees committed to playing their part in the delivery of our vision and mission?’

Like the satisfaction index, employee engagement is measured via a survey. The most common survey is probably the one devised and deployed by the Gallup Organisation.

Gallup’s survey consists of just 12 questions and is focused on uncovering the specific behaviours or characteristics that will make a quantifiable difference to performance in the workplace. Employees answer the 12 questions through straight yes/no responses, and the results are then turned into a score. You can find the full list of questions at: https://q12.gallup.com/Public/en-us/Features

Based on your employees’ responses you can see the percentage of employees that are actively engaged, engaged, disengaged or actively disengaged and the likely financial consequences of engagement.

There are other ways to measure engagement and you can certainly create your own survey around key things that you want to establish. The benefit of the Gallup survey is that you can compare your results to other businesses and your competitors.

Engagement surveys should be short and focused, and it’s probably best to secure an external provider to conduct the research and deliver the results. The external provider should, however, be able to demonstrate a link between high engagement scores and superior financial performance. They should also be able to drill down into the data to explain what parts of the business have disengaged employees so you can find appropriate solutions.

Like satisfaction surveys, engagement surveys must trigger behavioural change. If they don’t they can do more harm than good, as employees become even more de-motivated and disengaged.

Would your Employees Recommend Your Business?

In many ways, your employees are your internal customers. It matters what they think of your business. When your employees believe in what the business is seeking to do, align themselves with the corporate values and admire the ethical, environmental or financial performance of your company, then that pride shines through in the way they treat and interact with customers and suppliers.

In years gone by it didn’t really matter whether employees liked the business they worked for, as they did their jobs. In fact the cliché of ‘them and us’, indicating the divide between management and other employees, showed that there really wasn’t much love lost. But in an age where every thought, slight and observation can be shared with the online universe, having employees on your side is increasingly important.

Employees are often seen as presenting the unfiltered truth about businesses, untouched by propaganda or marketing spin. So when a business has employees that love the business and shout about that passion from the rooftops, people listen.

Furthermore, if you consider the power of sites like LinkedIn at finding new employees and sourcing talent, what other employees say about a future employer matters. A cursory search for a business name online will often uncover blog posts or discussion threads from unhappy employees, which can quickly alert people to whether the business is a good business to work for or not.

Perhaps the best measure for whether your employees would recommend you is the staff advocacy score. Similar to the Net promoter Score (see Chapter 12) that asks customers whether they would recommend the product, business or service the staff advocacy score asks employees if they would recommend your business to a friend.

The extent to which your employees would advocate your business to others is an important KPI to measure, because it is closely linked to staff satisfaction and loyalty. These in turn have implications for customer loyalty, your brand and profitability, not to mention your ability to attract new talent and keep the talent you already have.

Measuring the trends

You typically measure the staff advocacy score annually but I believe this is a mistake because it just provides one datapoint – a single snapshot of how employees view the business at any one given time.

Clearly this score will fluctuate throughout the year, and will depend on the individual experiences of the people you ask but also on the collective performance of the business and what opportunities and threats the business faces throughout the year. For example employees of a large clothing manufacturer may be rocked by news that the company uses factories in the developing world that employ children to produce some garments. If they are asked whether they would recommend the business after such a story they are likely to say ‘No’. If several months later, however, the story turns out to be false then they may bounce back to ‘Yes’.

It is therefore much more useful and insightful to measure the trend of whether your people would recommend you to others – either as a place to buy products or a place to work. This can easily be done simply by surveying a percentage of your workforce every month until everyone has completed the survey over the course of one year.

That way you still only survey each employee once a year but the resulting data is much more useful. Ongoing data can also alert you to problems long before they escalate into an online public relations nightmare.

Measuring staff advocacy in practice

The main KPI for measuring whether your employees would recommend your business is the Staff Advocacy Score.

The key performance question Staff Advocacy Score helps to answer is: ‘To what extent are our employee’s advocates of our business?’ You derive the data you need to calculate this metric from a staff survey that asks just one question: ‘How likely is it that you would recommend this company as an employer to a friend?’

The respondent is then asked to rank their response on a scale from 0 – 10 (0 being not likely to 10 being very likely). Based on the response to this single question you can then group your employees into three categories:

• Advocates (9-10): Advocates are loyal, enthusiastic employees who will promote you as a potential employer.
• Passives (7-8): Passives are satisfied but unenthusiastic employees. Not only are they unlikely to positively influence someone to join the business but they are more likely to leave the business.
• Detractors (0-6): Detractors are unhappy employees who could potentially damage your brand and put people off working for you through negative word of mouth.

The formula for calculating the Staff advocacy score is:

Staff advocacy score = percentage of advocates – percentage of detractors

For example say you survey 1000 of your employees and ask them the staff advocacy question. 982 employees respond as shown in Table 17-1:

Table 17-1 Typical staff advocacy score data

Although the staff advocacy score will give you a neat, simple number to slot into performance dashboards, it won’t tell you why employees are advocates or detractors. Seeing as the score is based on one question it is always wise to include a couple of additional open qualitative questions to gather more detail. Consider asking what employee particularly like or dislike about the company and/or how they would improve things if they could.

This additional detail will identify areas for improvement which could effectively move detractors to passives or advocates, and passives up into advocates. Ironically if you address what is making someone really unhappy they can often before your most vocal advocates.

Looking All Around – 360 Degree Feedback

Great companies are built by great employees. Conversely, poor companies are often the result of poor employees. You need to measure people performance so you know which your business is! In order to drive growth and profitability, you need to develop and motivate your employees. That ensures that you maintain the skill level required in the business, and that you keep your talented employees. Performance reviews or appraisals play an important role in that development process as they allow line managers to have a constructive review of an employee’s performance. If done well, performance appraisals provide a positive experience that contributes to the overall employment and career development experience of an employee and helps to strengthen the relationship between line managers and their reports.

Unfortunately performance appraisals are rarely done well. Most performance reviews are woefully inadequate, demoralising and almost entirely focused on the negative. As a result, the mere mention of, ‘performance review’ or ‘performance appraisal’ creates universal eye-rolling.

Performance review training for managers may encourage them to deliver a few cursory compliments before focusing on what the individual didn’t do well but the employees know what’s coming.

Performance reviews by their nature are always looking backwards – not forwards – and almost always reflect the opinion of just one person. If an employee doesn’t get on with his or her manager, then this strained dynamic can influence the performance review even when it shouldn’t.

Understanding the need for a full picture

In an effort to improve this dreaded annual dance and bring about genuine improvement it was clear to most managers and HR professionals that a broader, fuller picture of performance was required. 360-degree feedback is the result.

360-degree feedback provides an individual with a broad assessment of their performance based on the views of those who have a stake in their performance. Those stakeholders may be their supervisor, manager, co-workers, customers (internal and external), suppliers and so on. The person being assessed also has the opportunity to assess their own performance and it is often the comparison between this self-assessment and the perception of other stakeholders that allows each individual to understand his or her effectiveness. Often these insights, which can illuminate training and development needs, actually help the individual to improve.

Because 360-degree feedback is scored, this approach offers a more objective basis for pay rises and promotions than the old type of performance review, which was very subjective.

Measuring 360-degree feedback in practice

The key performance question 360-degree feedback helps to answer is: ‘How well are our people performing in the eyes of those who have a stake in their performance?’ Data for the 360-degree feedback is collected through an annual survey – usually web-based.

There is no one formula for the creation of 360-degree feedback, because what is asked and measured will depend on what is considered important within your business. There are, however, certain areas that are almost always included. These are:

• Question number: Always number the questions in a 360-degree feedback to make reference and analysis easier.
• Key skills or capabilities: This should always be tailored to the key skills required for the person to do his or her job. For example a marketing manager may be assessed for key skills of communications, planning, reporting, creativity and problem solving. A warehouse supervisor may be assessed for key skills of organisation, planning, communications, people management, problem solving.
• Skill component or element: This will seek to dig deeper into the essential component parts of the key skills. For example the marketing manager may be assessed on active listening skills (within communications) or generates ideas (within creativity) or finds innovative solutions (within problem solving). The number of components per key skill will vary with every position and should only focus on things that really matter to performance.
• Specific feedback questions: These questions should relate to skill component for example the feedback question for the active listening component may ask, ‘Does the person take care to listen and understand properly when you/others are speaking to him/her?’
• Tick-box or grade box: Usually the grading is presented as a Likert scale which asks the assessor to rate the person being assessed on a score from 1–5 or 1–10, where 1 is very poor and the higher number is very good. Be sure to clarify the rating system and make sure everyone is clear on the definitions of each score, so that accurate comparisons can be made between results.

For the 360-degree feedback to be as useful as possible it is often completed anonymously. In other words, the people doing the assessing and scoring the individual are not known to the individual.

Confidentiality is important to both parties in the feedback process. Those doing the assessing are likely to be more honest about the individual’s performance when they can remain anonymous. After all, it would be a brave employee indeed who highlighted his boss’s performance failings when it was that exact person who determined whether or not the employee is promoted or gets a pay rise. The person being assessed may also feel very anxious about the process if he or she is not assured that the results will remain confidential.

To help ensure confidentiality:

• Select a neutral administrator. You can either recruit a representative from HR or hire an external consultant to administer the 360-degree feedback so than anonymity is assured.
• Create user-names and passwords for access to the online survey.
• Make sure the online systems encrypt the response data and the data is stored on secure servers.

A good 360-degree feedback survey should only ask relevant questions that can impact performance and direct improvement. Focus on important observable behaviour, question one behaviour at a time and use clear language.

In an effort to raise management performance internet giant Google set out to answer two questions:

• ‘What is it that makes a great manager?’
• ‘What are the behaviours that make managers struggle?’

Based on some extensive research that involved interviews with their managers, 360-degree feedback surveys of their employees, and regression analysis of things such as job performance and employee satisfaction, Google was able to identify eight behaviours that make a great manager in Google:

• Is a good coach
• Empowers the team and does not micromanage
• Expresses interest/concern for team members’ success and personal wellbeing
• Is productive and results-orientated
• Is a good communicator – listens and shares information
• Helps with career development
• Has a clear vision/strategy for the team
• Has important technical skills that help him/her advice the team

In addition the research alerted them to the top three reasons why managers were struggling in their role:

• Has a tough transition (for example, suddenly promoted, hired from outside with little training)
• Lacks a consistent philosophy/approach to performance management and career development
• Spends too little time on managing and communicating.

Google then acted on these insights and now gear the 360-degree feedback surveys for managers around these aspects. Conducted twice a year the surveys have allowed Google to instigate an early warning system to detect both great and struggling managers. Google has also revised its management training in light of these findings.

How Much Value Are Employees Generating?

Knowing whether your people are delivering on their objectives and performing well is one thing. Quantifying the value your employees generate is another.

As your biggest cost base it’s important that you understand how much value your employees add to the financial performance of the organisation. Most businesses will employ a range of HR KPIs, and yet research suggests that less than half actively track the impact of employees on financial business performance.

Because of the cost implications of hiring more and more people, most businesses aim to deliver as much revenue as possible with the fewest number of employees. Putting revenues in relation to the number of employees that were needed to create that revenue is an important productivity measure.

Measuring the value your employees generate in practice

There are two main KPIS for measuring how much value employees generate – Human Capital Value Added (HCVA) and Return per Employee (RPE).

KPI: Human Capital Value Added (HCVA)

The key performance question Human Capital Value Added (HCVA) helps to answer is: ‘To what extent are our employees adding value to the bottom line?’ You can collect the data needed to calculate this metric from the financial accounting system or financial statements, and you usually calculate it quarterly.

HCVA = Revenue – Total Costs – Employment cost/Average full-time Employees

Total costs are the difference between the Revenue and Profit Before Taxes and employee costs are pay and benefits. Here full-time employees means full-time equivalent, so if you have 5 full-time employees and 2 that work half days, then Average Full Time Employees here would be 6 (5 + 0.5 + 0.5).

For example, say Company A employs 800 employees and enjoys revenue of $50 million. Total costs are $22 million and employment costs are $15 million.

HCVA = 50,000,000 – 22,000,000 – 15,000,000/800 = $53,750

Looking at costs of full time employees alone can sometimes distort the picture because most businesses incur further employee related expenses such as the cost for contingents, absence, and turnover. These can be added to the formula.

An alternative formula for calculating HCVA is:

HCVA = Operating Profit + Employment Cost/Average Full Time Employee

KPI: Revenue per Employee (RPE)

The key performance question Revenue per Employee (RPE) helps to answer is: ‘How productive are our employees?’ You can easily collect the data needed to calculate this metric from the financial statements, and you usually calculate it quarterly.

RPE = Revenue/Number of equivalent full-time employees

If a company generates a revenue of $1,000,000 and has 29 employees, then the RPE would be $34,482 per employee ($1,000,000/29).

Although there are no general rules or benchmarks for RPE, it is a commonly used KPI, so data around this metric exists. The higher the RPE the better as it is an indication of productivity and efficiency. The metric is especially useful when comparing it to other companies in your sector. Below is a sample of RPE results for some large companies.