Don’t rely just on productivity measurements to value a worker

Published 1:30 am Thursday, September 21, 2017

The controversies swirling around the productivity data at the national level are not really a concern for individual businesses.

Owners and managers can still make good use of productivity data to keep an eye on the things that determine the bottom line — now and in the future. And it can give your business a competitive edge just when you need it.

Some of the basic productivity measures are very useful and do not require advanced math degrees or expensive software. And they are an excellent way to get started.

The most basic productivity index is found in a ratio showing the revenue taken in per employee. Just take the total revenue at year end shown in your income statement and divide it by the number of employees in your business.

You might be able to compare your revenue per employee to that of some public companies in your industry; it isn’t unusual for a company’s annual report to include the total number of employees. That comparison can be useful, but the real value of “revenue per worker” is in its trend up or down in your own business.

The business model should always be kept in mind because it will help you to avoid over-interpreting changes in the unrefined employees per dollar ratio. A sudden decline in revenue per employee, for example, could be the result of bringing a process “in house” when previously it had been contracted out. The business model changed, not worker productivity.

The next productivity measure to look at is “net income per worker.” This is calculated by dividing net income by the number of workers. It is most useful when looked at over time to see if it is increasing or decreasing.

Whether your business manufactures a product, resells a product produced by someone else, or provides a service, each dollar of revenue can be matched up with a set of costs. The basic cost categories are things like: direct labor; indirect labor; shipping and/or delivery; accounting; and overhead.

You are free to assign costs to any categories that fit your business, but those who produce their own product, or distribute products to others, should be aware that the Internal Revenue Service for its part has very definite ideas about cost categories.

By converting the number of workers to their cost, you can look at how many dollars in compensation it takes to bring in, say $100 in revenue or $100 of net income.

The fundamental productivity data is a useful way to examine how your company is doing. It is so easy in a growing company to let your productivity slip as you hire additional people — and these simple ratios can provide an early warning of a problem while it is still easy to fix.

The next fundamental productivity measurement is to look at the number of new and returning customers that your business served. It is often useful, too, to look at your average amount of a sale. These basic measurements will open a treasure trove of information about your business and how well it is doing in keeping customers satisfied.

Don’t be in a hurry to use productivity data as a compensation determinant. Many newly launched incentive systems based on productivity have disappointing results — often because of “gaming the system.”

We humans want to win, especially when our paychecks depend on it, so we focus our efforts on whatever maximizes our pay, not what is best for the customer or the business. Even robots, apparently, quickly learn how to game the system. A recent experiment in Artificial Intelligence had to be terminated when the robot players in a boat race game focused on accumulating points and ended up crashing their boats instead of finishing the race.

In general, the most frequent problem that business managers encounter when using productivity data is focusing on individual performance we often fail to recognize contributions to teamwork.

NBA great Shane Battier, for example, had individual performance statistics that for an NBA player were, at best, modest.

Yet he made his team play better, and they won more games. Houston Rockets’ general manager Daryl Morey said of him, “I call him Lego. When he’s on the court, all the pieces start to fit together.”

Workers who improve team performance in business are often undervalued in productivity measurement systems, even though we all know that the success of any business depends on teamwork. Workers who make teams more effective may not be star performers themselves but they are what make a business a winner.

Productivity measurements, when combined with your knowledge of how your business works, make a powerful tool for keeping your company more competitive. And that’s a good thing.

James McCusker is a Bothell economist, educator and consultant. He writes a column for the monthly Herald Business Journal.