What is employee productivity? The key to measuring this crucial metric

Employee productivity is a key business metric for a reason. And yet, so many employers misunderstand it. In this article, we’ll go over the definition of employee productivity, why it matters, and the many ways to measure it. If you want to optimize your workforce, read on.

What is employee productivity?

The most basic definition is that employee productivity equals output per hour. This is also known as labour productivity, and it’s the formula used by countries like the U.S. and the UK as a measure of the health of their workforce and economy.

For the American workforce, the U.S. Bureau of Labor Statistics takes the output for industries, defined as revenue and sales, and divides it by the input, defined as hours worked. For your organization, you could take the output of your annual revenue and divide it by the total number of hours your employees worked. Alternatively, you could choose a certain product (widgets) or a specific task (deals closed) as your output.

The above formula for employee productivity makes sense in industries where there is a clear and tangible product produced, such as in manufacturing. It’s trickier to use when talking about knowledge workers and service providers, where ideas and intangibles are being produced, because it’s tough to define their outputs or tie those outputs to revenue and sales.

Perhaps, then, it’s best to view productivity as more multidimensional, a measurement that takes into account:

Efficiency
Effectiveness
Quantity
Quality

Efficiency vs Effectiveness

Efficiency is about producing a result without wasting time, energy, or resources. Effectiveness is about achieving success with what you produce. They’re closely related but different. For example, let’s pretend you have two doctors working in the same clinic, and you measure their employee productivity by using metrics like patient wait time and patient satisfaction.

Doctor A completes every patient visit in less than 15 minutes, which is exactly the amount of time each appointment slot allows. So at the end of the day, Doctor A’s patient wait time is nearly zero. Pretty efficient, right?

Now, let’s say Doctor B often goes over 15 minutes during visits, increasing patient wait time. But her patient satisfaction rates are the highest in the clinic because she is so thorough during her visits. Pretty effective doctor, right?

So in this case, Doctor A may be more efficient at seeing patients, but Doctor B is more effective. Productivity, then, is a combination of both: You want to see your employees get work done without wasting resources, but you also want to see them succeed in the work they complete.

What is the importance of employee productivity? 5 benefits

Reduce expenses

Increasing employee productivity means it’ll take fewer resources to get work done, which will save your company money. Take, for example, the hotly contested four-day workweek. According to a Henley Business School report, businesses in the UK were able to save £92 billion a year by allowing at least some of their employees to work just four days a week, thanks to improvements in efficiency, retention, and absenteeism.

“Productivity is a difficult concept, but it is central. Without productivity objectives, a business does not have direction. Without productivity measurements, it does not have control.”

Peter Drucker

Management consultant and author

Reduce expenses

Prevent employee burnout

Productive employees don’t need to spend as much time or energy on completing tasks, which means they won’t be as stressed.

Boost job satisfaction

Productivity is about removing roadblocks and making employees’ jobs easier. With those frustrations and time-wasters gone, your workforce will feel much more satisfied.

How do you measure employee productivity (beyond output per hour)?

As mentioned above, productivity is output divided by inputs, or output per hour. But, as we discussed, work isn’t always so black and white.

According to a Dell report called The Evolving Workforce: "Three in four employees believe that their productivity is measured by the quality of their output and not the time spent in the office."

Sometimes, the best measure of employee productivity is an indirect measure. That is, you measure the factors that impact employee productivity. Let’s look at some examples of ways to measure employee productivity beyond that basic formula.

1. OKRs (Objectives and Key Results)

OKRs consist of two things:

Objective: The goal. Example: “Increase customer satisfaction.”
Key result: The metric that shows progress toward that goal. Example: “Increase Net Promoter Score (NPS) to 50.”

By tracking how many OKRs your team is achieving, you can more precisely track productivity. This is something that social media software company Buffer started doing in order to measure how well their four-day workweek experiment was going.

As Nicole Miller writes for the Buffer blog: "Buffer is also diving back into using OKRs as a tool to track our productivity and progression."

2. Velocity

In project management, velocity is calculated by taking the amount of work completed and dividing it by the time it took to do the work. In his blog post on beating burnout, Alex Turnbull, the founder of helpdesk software Groove, writes about how he used velocity as an indirect measure of team productivity.

“Over four weeks, our Pivotal Tracker velocity dropped by nearly 20%,” he writes. “Now, velocity is not an exact measure of productivity. But it is a quantifiable metric of how fast we’re completing tasks, and together with our own observations of our productivity slipping, it painted a grim picture of how much work we were getting done.”

3. Employee happiness

Research has shown that employee happiness positively influences productivity. When Japanese technology company Hitachi had employees use wearables and a mobile app to increase feelings of happiness, it saw a 15% increase in retail sales and a 10% increase in profits, according to Deloitte.

To measure employee happiness, use an employee app to regularly conduct surveys using a Likert scale. For example, “On a scale of 1-5 (with 1 being “extremely unhappy” and 5 being “extremely happy”), how would you rate your happiness at work over the past three months?”

Alternatively, you could keep track of your Employee Net Promoter Score (eNPS) to gauge how happy your employees are.

4. Revenue per employee

To calculate this, you simply take your annual revenue and divide it by the number of employees you have. By measuring this every year, you’ll have a benchmark to see how your workforce and business are doing.

Employee productivity: What really matters

At the end of the day, when talking about employee productivity, what really matters is the reason you’re measuring it. For most employers, measuring employee productivity is about assessing how efficient and effective their employees are and optimizing processes to ensure profitability and avoid burnout.

Output per hour makes the most sense in the manufacturing industry, where tangible products are being created. But the way you choose to measure employee productivity will depend on your industry and your organizational needs. Software engineering teams, for example, come up with many ways to measure developer productivity, such as quality of code and speed of development. Sales teams might measure their productivity by number of calls per hour or conversion rates. Healthcare providers might measure it in terms of quality of care.

If what gets measured gets managed, then understanding employee productivity is your first step to improving it.