Using Profitability As An Employee Evaluation Metric

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Traditional performance management processes do exactly what their name implies - they evaluate and rate staff performance, usually using a symbolic rating system, i.e. 1-5. However, they tend to be dangerously disconnected from the commercial process of a business. How do we know that an employee with a 5 star-rating is actually more profitable and valuable to the business than a 3 star rated employee? In the worst case scenario, an appraisal system based on symbolic performance ratings could be over compensating less profitable employees and under valuing highly profitable ones. 

Appraisal systems and HR staff can no longer afford to be so disconnected from the profitability imperative of the business. McKinsey was one of the first to recognize this a decade ago in their landmark authoritative report, ‘The new metrics of corporate performance: Profit-per-employee’
 

McKinsey showed that the main drivers of growth for the 30 largest companies in the world (between 1995 and 2005) was profit per employee. They argued that the best way for organizations to maximize market capitalization was to measure and optimize for profit-per-employee. Companies also need to ensure that their performance management systems are geared towards hiring and retaining profitable employees and improving or removing less profitable ones.

HR and talent management processes need to become more commercially driven, starting with employee evaluation. It’s vital that HR teams select performance evaluation software that is designed to output team and employee productivity metrics.

Build a productivity-guided HR process in tune with the commercial strategy, able to cut through prejudice, giving HR more credibility and influence in the boardroom.

Employee Evaluation Myths

As a business leader or team manager, you should be aware that many myths about appraisals still persist. These myths can hold you and your team back, which is why it is vital to quickly debunk them. 

Myth 1: Managers do not want to invest in performance management

Reality
The use of modern technology including mobile apps, simplified evaluations, emoticons and the ability to leave real time feedback has changed managers’ perception towards employee evaluations. Performance management is no longer considered a chore to be completed in the fastest possible manner at the last moment. Most managers now actively invest time in leaving feedback for their employees. The long physical forms that used to cycle through several rounds of discussion have been replaced by smartphone apps that make evaluations fun.

Myth 2: Performance feedback should come only from the manager

Reality
While supervisor feedback is important, the key to organizational success in this modern age is collaboration. If organizations want to thrive, they need to follow the lead of companies like GE, Google, Cargill, Eli Lilly, Amazon, Adobe and Accenture by adopting a 360-degree feedback strategy, where colleagues and internal / external customers share feedback as much as managers do. 

Companies are increasingly looking at their customers to provide employee feedback while connecting this input to rewards and promotions for their teams. Customer feedback, when collated over a period of time, shows a clear path towards opportunities to improve.

Myth 3: Performance evaluations must be linked to pay

Reality 
While it can often make sense to link performance goal realization to bonuses and pay rates, this does not mean every feedback is linked to pay.

In fact, it can be damaging to personal development, because employees will be less willing to acknowledge weaknesses or take advantage of learning opportunities if they think they will be financially penalized. That’s why some developmental areas of the performance appraisal should actually be separate from pay, and the main consequence of weaknesses in these areas should be an opportunity to do further training and team introspection.

Research shows that employees are also less willing to answer performance evaluations honestly if they think they’ll be penalized financially, and who can blame them? Organizations would do well to take this into account, and address weaknesses with further training, rather than financial penalties.
 
One of the essential elements of a successful business is the employment of team members who love what they do and excel at their jobs. When asked about the success of a basketball team, Michael Jordan noted that, “Talent wins games, but teamwork and intelligence wins championships”.

The same principle applies to a company. Management can employ the most talented staff available in the workforce; however, if they do not work together as a team, the chances of the company being successful is very small. It is vital for employees (and employers) to work together to ensure a profitable and successful business venture. 

“The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.” Ronald Reagan

AssessTEAM offers a simple performance management solution focused on 3 key areas:

1. Clear and Concise Job Descriptions as KPIs

The first step toward building a successful employee performance management strategy is to ensure that each employee has a definite (and clear) idea of what their job expectations are. This includes both a detailed description of each job, as well as setting up clear and measurable performance goals for each job position.

Once clear and concise job descriptions have been created with measurable deliverables, performance management becomes much more streamlined.

Clear KPIs for work expected not only assists employees in knowing what they are expected to do, but also helps to ensure the evaluation process is transparent for everyone involved. 

AssessTEAM includes over 3000 professionally built KPIs available to all customers.

2. Gather 360 Degree Feedback

Getting clear feedback is essential for any performance management process. 360 degree feedback is something of the norm now with most modern companies. Collating feedback from the evaluee, peers, supervisors and subordinates helps to get a well rounded picture of the person's work performance. 

When coupled with real-time feedback or the critical incident method of performance evaluation, 360-degree feedback becomes a powerful tool to gather inputs from your team and make modifications long before problems affect team performance. 

Using a one click evaluation process for supervisors, peers, self, subordinates and customers AssessTEAM makes 360 feedback gathering extremely efficient.

3. Compute Profitability by Comparing Efforts with Revenue Attained

AssessTEAM offers simple timesheet tracking for employees to record their work hours across various projects. These projects can be both internal cost centers and customer projects. The timesheet data is converted to project costs using the man-hour rates, which is then compared with the project budget to ascertain profitability metrics. This simple process of comparing costs vs revenues also gives businesses a valuable insight into efforts invested by each team, person or project.

Productivity reports by both team and person show a clear analysis of profitability metrics over a period of time. Business owners can use this data, not only for employee evaluation, but also for the detailed assessment of product lines, team investments and cost optimization.

Final Thoughts

Doing business in a post-modern, frenzied business world is not easy. Adding profitability to your employee evaluation metric is just another step towards a more holistic performance management process that's immune from personal prejudice, working only towards organizational goals.

Rajat Mathur is the Sales Director at AssessTEAM, LLP. Visit www.assessteam.com   Connect AssessTEAM, LLP Follow @AssessTeam