In your organization, how do you measure productivity? Do you look at how much money each employee generates, or base it on their performance reviews? Or do you not look at productivity as a useful metric at all?
Productivity represents the foundation of your business. It measures the ability of your business to make money, use resources wisely, and increase revenue. Using a productivity formula can reveal critical information about your business.
Table of contents:
- What is productivity in employees?
- What is the formula for determining productivity?
- Benefits of calculating productivity in employees
- Labor productivity formula
- Productivity metrics
- How to improve productivity in employees
What is productivity in employees?
Productivity determines the value each employee adds to the organization. It takes into account the quality and efficiency of their work, and the output each employee produces for the company.
Productivity relies on a mixture of both internal and external factors. Internally, productivity changes depending on an organization’s
- Work culture
- Learning resources
- Work-life balance
- Physical office environment
External factors that impact productivity include:
- Economic conditions (e.g., downturns)
- Politics (e.g., elections)
- Environmental factors (e.g., climate change)
- Technology (e.g., computer malfunctions)
You cannot necessarily change the external environment that negatively impacts productivity. That said, you can almost always modify the internal environment to improve productivity for your organization.
What is the formula for determining productivity?
At its most basic level, productivity measures how much output an organization produces per input. In other words:
Productivity = Outputs / Inputs
So, if a furniture company produces twenty chairs in two hours, their productivity comes out to ten chairs per hour. The higher their productivity, the more chairs (output) they produce per hour (input).
However, few businesses can measure productivity so easily. Knowledge-based companies, such as consulting or accounting firms, produce more intangible outputs. After all, how can you quantify the productivity of intellectual work?
In this case, it makes sense to substitute the output with value (e.g., dollars) in place of units. For example, your company may have a productivity of $4.4k per hour.
You can apply this basic formula on a micro-level to measure productivity for each employee. The average of that would give you your average productivity per employee.
Benefits of calculating productivity in employees
Productivity represents the foundation of your company. By measuring and analyzing productivity, you have a useful metric for determining the performance of your organization.
Calculating productivity also brings a number of benefits, such as improving your resource utilization, identifying ways to speed up operations, and more.
Helps you to speed up operations
Calculating productivity can prompt you to check steps of your operations, and identify and cut out unneeded steps.
For example, you may find employees spend unnecessary time formatting business plans instead of writing them out. You can then instruct everyone to focus on the content instead of how it looks, thus increasing productivity.
Enables you to eliminate and optimize resources
Sometimes, your business pays for software or resources unused by employees. Productivity measures the value of your business over the costs to reach that value, which includes money spent on office supplies, software apps, events, and so on.
You might realize your company spends $1k on a project management app that few people use. It would then make sense to consider cutting it or finding a more affordable alternative.
Alternatively, if you view the app as valuable, you can try and get more people to utilize it, which could increase productivity.
Improves individual performance
Though you should not use productivity as a sole performance indicator, you can use it to motivate employees to perform better. Managers can integrate individual productivity into their performance reviews, providing both them and employees with a measurable and improvable quantity.
Additionally, it can also reveal gaps in how employees use their time. It may show, for example, one employee taking more breaks than needed, thus decreasing their productivity. Employees can then better manage their time to increase their productivity.
Labor productivity formula
Dividing outputs over inputs gives you a solid idea on overall productivity. However, two alternative formulas — partial factor productivity and multifactor productivity — take a more detailed approach to calculating productivity.
Multifactor productivity relates output to a specific set of inputs — labor, capital, and materials. It can help you determine the impact of larger changes, such as seeing whether a change in labor inputs (e.g., higher wages) positively impacts productivity.
You can calculate it by using the following formula:
Cost per unit = Output / (Labor + Capital + Material)
You measure output based on the units of whatever you produce. The rest of the inputs — labor, capital, and material — also depend on your organization. You might use hours worked for labor, cost of equipment for capital, and cost of supplies for material.
Partial factor productivity
Partial factor productivity hones in on one specific input. You take your output and then divide it over one type of input, such as labor, capital, or material. By comparing each input’s productivity, you can prioritize your investments
As an example, you might notice a high cost per unit, or low productivity, for capital. This suggests room for improvement when it comes to money spent on equipment, inventory, and other parts of capital.
You can also use different metrics to measure productivity other than outputs over inputs. When measuring productivity, you should consider different ways to measure it as it can give you a more complete picture.
Revenue per employee
When hiring employees, you want their revenue to outrank the cost to employ them. Revenue per employee can give you a high-level metric to see if that rings true.
You divide your total revenue over your total number of employees. The higher your revenue-to-employee ratio, the greater your company’s productivity and profitability.
Not every formula captures the true essence of productivity. So, to get a more personal look into your organization’s productivity, consider surveying employees and asking them to evaluate their productivity.
You might have them rank it on a scale from 1 to 10 and provide reasoning. You can also ask questions about distractions at work or whether certain activities waste their time.
Focus work and meeting rate
Employees often block out hours on their calendar to prioritize focus work. This ensures no meeting clouds their need to hunker down and execute on an assignment or task. To measure productivity, you could see how many employees schedule focus work on a daily or weekly basis.
Though not always reflective of their productivity, a higher focus work rate implies more time completing assignments. On the flip side, a high meeting rate may imply lower productivity. Employees attending too many meetings means spending less time on more meaningful tasks.
How to improve productivity in employees
After calculating productivity, you want to look at ways to improve it. Consider trying the following to up productivity in your business:
- Offer more training resources, such as free online courses
- Reduce micromanaging
- Ask for feedback from employees
- Provide appropriate technology to employees
- Encourage more focus work
- Host more asynchronous meetings
- Ensure teams set clear SMART goals, expectations, and deadlines