HR MANAGEMENT - Employee Productivity & Efficiency Calculations

Employee Productivity & Efficiency Calculations

by Jason Gillikin, Demand Media

Employee productivity and efficiency calculations can be a driver for expense reductions.

For many businesses, including most small businesses, the most significant cost is labor. Salaries and wages comprise the major line-item expense for most retail and small-scale manufacturing companies, but labor also tends to be responsive to productivity improvements. To reduce labor costs, entrepreneurs should consider measuring employee efficiency and setting aggressive performance targets to get the most bang for their labor buck.

Measuring Productivity

Productivity is simply the amount of units of a product or service that an employee handles in a defined time frame. An employee who makes widgets might make 20 widgets per hour, or an employee at a coffee shop might service 15 customers per hour. Simple productivity is neither good nor bad, and in service industries, it might vary according to factors beyond the employee's control, like the number of customers who present for service. Productivity is the basic measure of employee work output.

Determining Unit of Service

Productivity and efficiency require a defined unit of service. UOS analysis is usually job-specific, and is most relevant to employees who have jobs that are repetitive. For example, a spot welder might have "welds completed" or "parts completed" as his UOS, whereas a housekeeper in a hotel might have "rooms cleaned per shift" as her UOS. Some jobs, particularly professional jobs that have variable output, defy reasonable UOS measurements.

Measuring Efficiency

Efficiency is a ratio of an employee's actual time to perform each UOS against the theoretical time needed to complete it. For example, an employee who packages DVDs might put together 80 DVDs in one hour. If the best-practice target is 100 DVDs in an hour--measured by a time study--then the employee is 80 percent effective and has the capacity to produce 20 more units per hour.

It is usually helpful to report separately the percentage of an employee's paid time that is actually spent performing direct work. For example, an employee who is paid for working 8.0 hours but because of meetings and lunch breaks only works 6.0 hours only spends 75 percent of her time being "productive" in terms of UOS analysis. Only the six hours spent working should be factored into efficiency scoring.

Benchmarks And Targets

Some industries have basic benchmarks already established. For example, telephone call centers have service levels that identify the ideal amount of time that common transactions should take, that are consistent across industries. However, most companies will have to establish for themselves how long basic tasks should take, and set performance targets accordingly. The task of baseline measuring should be done with a time study, which averages the amount of time that multiple transactions take or assesses the amount of time an average employee performs the task.

It may not be ideal to require employees to be 100 percent efficient, particularly when the employees lack control over their own productivity--like in customer-service jobs when employees wait for customers to call or stop by. If an employee can never hit 100 percent, then morale may suffer.

Longitudinal Reporting

The real benefit to measuring employee efficiency is in longitudinal reporting. Calculating efficiency over a period of time can identify opportunities to reorganize staffing, or add or remove employees based on the company's volume of business, and an individual employee's long-term productivity can factor into merit increases and bonuses. Efficiency scoring can also help with predictive modeling. If it takes 90 seconds to produce a widget, and employees are operating at 75 percent efficiency, then instead of producing 40 widgets per hour, only 30 will be produced.