If you ask managers how much is the difference between their strong and weak performing employees, the majority of them would respond that it is significant. That is, however, not always right. The difference in performance may actually be as small as 5%. However, if it is more than 30%, talent management tools should be implemented since the company is losing a huge amount of money. The crucial question at this point is: Can you calculate the cost of under-performing employees?
If you are not sure how to do it, you may find inspiration in a recent article by John Sullivan on ERE.net. The world-renowned consultant in the field of HR and current professor of management at San Francisco State University describes 6 steps to calculate the costs of under-performing employees. Before proceeding with these steps, he recommends HR joins forces with your finance department. This will help you avoid errors in calculations and also look more credible in the eyes of your company's top management.
1. Determine the value of the average employee
Basing your calculations on the average revenue per employee is a fair indicator of the worth produced by the average employee during one year. If, for example, the average revenue per employee is 138,200 dollars, an employee performing 10% above the average will bring you additional 13,820 dollars.
2. Determine the difference between the average and weak employees in the same job
Start with jobs in which performance can be measured easily, e.g. salespeople. Compile a list of your salespeople from the best to the worst. The sales figures of the sales person in the middle of the list indicate your average sales volume. Then just measure the differences between sales volumes in percentages.
3. Calculate the percentages of below average performance
If, for example, your sales person performs 30% below average, multiply the average value of your employee (138,200 dollars) by 30 percent. This will be 41,460 dollars a year.
4. Continue with other jobs
Continue to compare the performance in other positions you have already quantified (customer service, IT, accounting). Most companies monitor about 40% of their jobs in performance-based numbers. These positions will be sufficient for you as a basis to implement company-wide metrics of differences in performance. Jobs that require creativity, flexibility and innovation always have a higher performance differential.
5. Add additional costs of poor performance
These include indicators such as the rate of absenteeism, poor customer interactions, mistakes, accidents, theft, revealing of trade secrets, negative effects on team work, wasting management time or even the cost of such an employee staying in your company too long to qualify for another job.
6. Determine whether you can deal with poor performance quickly and cheaply
Once you have the cost calculations for each position, you can monitor how the numbers change based on the types of intervention you chose for the under-performing employees. Just compare the numbers again after 12 months.
Organizations with excellent talent management practices usually have a small "weak performance differential" (percentage of performance difference between the average and the worst employee in a particular group of employees). In most companies, however, according to Sullivan, the following rules apply:
- "Minimum weak employee performance differential": - 33.3% of the average revenue per employee (three-quarters of his annual salary)
- "Typical weak employee performance differential": - 100% of the average revenue per employee (2.25 times his annual salary)
- "Exceptionally bad employee": - 300% of the average revenue per employee (6.75 times his annual salary)
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