Problems With Traditional Performance Management (3/3)
In the first and second parts of this blog series, we covered why traditional performance management systems are ineffective at developing and motivating talent. We will finish the blog series off by looking at how much it can really cost organizations. Also, instead of quoting grand industry numbers that is difficult to understand without context (e.g., “employee turnover is costing the U.S. companies $(insert large number here) billions!”), we are going to make some basic assumptions and walk through examples to make it a little bit more tangible.
We think there are three main costs with traditional performance management: time spent on administrative tasks, turnover costs, and productivity.
TIME SPENT ON ADMINISTRATIVE TASKS
Managers, employees, and HR teams spend countless hours preparing for the annual performance review process.
If you are in HR, you know how frustrating it is to have managers or employees complete their reviews late. Come on people, this is important! Not only do you have to chase people down to complete their reviews on time, you have to document them, summarize them, create nice reports, get approval from manager or manager's manager, and distribute it timely (to the right people...). If you support a 100-employee organization and you are a department of one, these tasks can easily take up a month or two of your time. That is a lot of $$!
The worst part: all of this effort goes into performance management, but the result? A manager and an employee having a 10-minute conversation that typically is, quite frankly, meaningless.
With traditional performance management systems, organizations are probably spending ~90% of their time on frustrating administrative tasks and ~10% on (maybe) meaningful conversations. We need to flip that ratio.
Turnover is expensive. Most analysts/research papers indicate that turnover costs anywhere between 40% to 400% of employee's salary. Our best guess is anywhere between 60% to 150%. You can download the Turnover Cost Calculator that we put together. You can change the inputs in blue text to see how much turnover costs relative to employees' salary.
If you assume the following:
- 100-employee organization with 15% turnover rate (i.e., 15 quit every year)
- Average salary of employees at $70,000
- Average turnover cost is 80% of salary (i.e., $56,000 per employee)
Employee turnover would cost this organization $840,000 every year.
A modern performance management solution (like ours!) has proven to reduce turnover significantly at low-cost. If we assume that modern systems reduce turnover rate by 2% points, from 15% to 13%, in the previous scenario, we are looking at $112,000 saved every year. It's an extremely high-return investment.
Last, but not least, employees' lost productivity. Employee productivity is not easy to calculate or analyze due to the complexities of businesses and people. At the simplest level, I think about performance management's impact on productivity in two ways:
Employees are more/less engaged and motivated ("I feel good because someone recognized my work. I am going to work harder and/or be more engaged!").
Employees learn new skills from to be more effective in their roles ("My manager provided me with great feedback on how I can present better. I am going to apply these lessons next time").
If you assume the following:
- Employee productivity is calculated as revenue per salesperson
- $10MM revenue organization with 100 salespeople
Employee productivity would be $100K of sales per salesperson.
If we assume that modern performance management can help these salespeople be more motivated (e.g., go above and beyond for clients and up-sell 5%) and more skilled at sales (e.g., 5% increase in number of calls made per day), the impact is enormous. In this particular example, you would be looking at ($100K x 5% up-sell revenue) + ($100K x 5% calls made) = $10K increase in employee productivity, or 10%. That's awesome.
In summary, the punchline is that traditional performance management systems are ineffective and costly. If you are feeling these pains, there are many great solutions out there that are very high in return on investment, including us! I suggest you check it out!