Measurement is an important tool for management as it allows you to assess the effectiveness of your (and your team’s) work, showcase the value of that work, efficiently manage resources, and focus on improving performance. Setting key performance indicators for employees provides a framework to easily track, measure, and report on their performance.
Here, we’ll explore how to identify, set, and measure key performance indicators for employees.
Defining KPIs and Their Benefits
Key performance indicators (KPIs) are a type of measure that is used to evaluate the performance of an organization against its strategic objectives. Key performance indicators for employees, much like performance review SMART goals, help every area of your business move forward at the strategic level by providing goals and targets for your team to work towards. They are also milestones to measure progress, and insights that help employees across an organization to make smarter decisions.
In sum, KPIs can help employees to stay focused, motivated, and engaged while providing clear direction for their professional growth and development.
KPIs and SMART goals are often used as interchangeable terms which can cause confusion and misguide managers. It’s important to understand the difference between the two to effectively implement them into your management efforts.
Types of KPIs
Key performance indicators for employees come in many forms. While some are used to measure monthly progress against a goal, others have a longer-term focus. Regardless of their differences, all KPIs have one thing in common: they’re tied to strategic goals. Here’s an overview of some of the most common types of KPIs.
- Strategic: Think of these as “big-picture” key performance indicators for employees. Overall, strategic KPIs monitor organizational goals and can include things like return on investment, revenue, and market share. These are the KPIs that executives typically look to determine how the organization is doing at any given time.
- Operational: These KPIs typically measure performance in a shorter time frame, and are focused on organizational processes and efficiencies such as customer response time, average monthly transportation costs or cost per acquisition.
- Leading vs Lagging: Leading KPIs can help predict outcomes whereas lagging KPIs track what has already happened. Organizations use a mix of both to ensure they’re tracking what’s most important.
4 Steps to Setting KPIs for Employees
One of the most important steps in setting key performance indicators for employees is to ensure you’re only measuring what will help you reach your business goals. To help determine what KPIs are right for your employees, keep in mind the components that make up effective KPIs.
Setting key performance indicators for employees can be achieved by following these 4 steps:
- Determine goals: Talk to your employees to understand and align on the goals they’d like to achieve, and discuss how you can use KPIs to measure their progress
- Tie them to strategic objectives: Consider the objectives of the employees department as well as the company as a whole. Every key performance indicator should tie directly back to your overall business goals.
- Write SMART KPIs: The most effective KPIs follow the SMART goal format. Make sure they’re Specific, Measurable, Attainable, Realistic and Time-Bound.
*Pro Tip: Starting a KPI with a verb tells you what needs to be done. Assigning a value ensures your KPI is measurable, and a timeline will do wonders for staying timely on your progress.
- Plan to iterate: As your business and customers change, you may need to revise your key performance indicators. Perhaps certain ones are no longer relevant, or you need to adjust based on performance. Be sure you have a plan in place to evaluate and make changes to key performance indicators when necessary.
Identifying the Right KPIs for Your Employees (+7 Examples)
Now that you know what makes a good KPI, it’s important to understand how to choose the right key performance indicators for employees. KPIs will vary employee to employee depending on their department, position, and overall goals.
First, let’s assess the steps to identifying the right key performance indicators for employees:
- Define Business Goals: Start by defining the business goals you want to achieve. This will help you identify the KPIs that are most relevant and valuable for measuring progress towards those goals.
- Determine Critical Success Factors: Identify the critical success factors that are necessary for achieving those goals. For example, if your goal is to increase revenue, a critical success factor might be to increase customer acquisition rates.
- Brainstorm: Once you have identified critical success factors, brainstorm potential KPIs that could be used to measure progress towards those factors. Consider both quantitative and qualitative metrics.
- Prioritize: Evaluate and prioritize the KPIs based on their relevance, importance, and ability to drive progress towards the critical success factors.
- Communicate: Communicate the KPIs clearly to employees, providing guidance on how they will be measured and how they relate to business goals. Encourage employees to take ownership of their performance and track their progress towards achieving the KPIs.
By following these steps, you can identify the right KPIs for your employees, which can help drive performance, improve productivity, and achieve business objectives.
Now, let’s look at some KPIs as they apply to different areas of a business. Here are 7 examples of key performance indicators for employees that cover financials, marketing and sales, and HR.
Gross and net profit margin
Setting profit KPIs helps you keep your business on track financially, and allows you to course correct early on to save money and manage your financial goals. The key difference in measuring profit margins is between ‘gross’ and ‘net’ profits.
- Gross profit margins calculate the percentage of revenue that remains after deducting only the cost of goods sold (COGS). It is calculated by subtracting COGS from total revenue and then dividing the result by total revenue.
Example KPI: Keep gross profit margins at 40% for the year.
- Net profit margins calculate the percentage of revenue that remains as profit after deducting all expenses, including COGS, operating expenses, and taxes. It is calculated by dividing net income by total revenue.
Example KPI: Keep net profit margins at 20% for the year.
Inventory turnover measures how quickly your company sells and replaces its inventory during a specific period. A higher your inventory turnover ratio, the more efficient you are at managing inventory by selling your products quickly and replacing them with new inventory. Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory value.
Example KPI: Maintain an inventory turnover ratio of 4 during the next production cycle.
Marketing and Sales
Lead conversion rate
Measuring lead conversion rates allows you to assess the effectiveness of your marketing efforts. Let’s look at how to calculate your website lead conversion rate, the percentage of website visitors who become leads by filling out a form or contacting your company. It is calculated by dividing the number of leads generated by the number of website visitors and multiplying the result by 100.
Example KPI: Maintain a website lead conversion rate of 5% until the new website launch.
Customer lifetime value
Your average customer lifetime value (CLV) measures the average revenue you can expect to generate from a single customer over the course of your relationship. It is calculated by multiplying the average purchase value by the average purchase frequency rate and multiplying the result by the average customer lifespan. A high average CLV indicates you company have loyal customers who are likely to continue making purchases in the future.
For example, if the average purchase value is S$100, the average purchase frequency rate is twice per year, and the average customer lifespan is 5 years, the average CLV would be S$1,000.
Example KPI: Maintain an average CLV of S$1,000 each month.
There are many ways to determine employee satisfaction. One easy indicator is by employee turnover rate, the rate at which employees leave your company. It is calculated by dividing the number of employees who leave by the total number of employees and multiplying the result by 100. A low employee turnover rate indicates that employees are satisfied with their work and are less likely to leave the organization.
Example KPI: Maintain an employee turnover rate of 10% or less each quarter.
Employee engagement scores help HR teams measure the level at which your employees are engaged with their work and the overall company. Typically, this is measured through data gathered from employee surveys. Once this data is collected, the score is calculated by averaging the responses among participants. A high score indicates your employees are emotionally invested and likely to excel at their job responsibilities.
Example KPI: Achieve and maintain an employee engagement score of 3.5 out of 5 until the next employee performance review cycle.
Tracking and Measuring Performance
KPI tracking, the monitoring of changes in KPI trends over a specific time period to understand how your business is performing, helps you keep track of the health and success of your business.
To track and measure key performance indicators for employees performance, capture the necessary data for each KPI and convert it into useful metrics, then follow up with those elements by tracking and monitoring them over time.
Effectively tracking and measuring the performance of KPIs also allows you to measure the overall progress of your teams, provides opportunities to make real-time adjustments to stay on track, and consistently analyzes trends.
Effectively Manage Performance with Omni
Setting key performance indicators for employees requires strategic input and consideration from managers, however the tracking and gathering of data can become yet another time-consuming administrative task. Omni helps you track, analyze and gain actionable insights from performance data through an automated and digitized platform. Easily and quickly gather the data you need so you can spend more time on the strategic planning necessary to drive business outcomes.
To learn more about how Omni can automate and improve your performance tracking practices, schedule a demo with our team today.