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Last Updated on December 9, 2020

How the Productivity Formula Can Improve Employee Efficiency

How the Productivity Formula Can Improve Employee Efficiency

In 1911 Frederick Taylor, an American engineer turned management consultant, published a book, The Principles of Scientific Management, which revolutionized practices for workplace efficiency through the productivity formula.[1]

In the book, Taylor proposed the idea that employee productivity and motivation could be altered by changing specific variables. By optimizing these variables, companies could maximize workplace efficiency and profits, while minimizing costs and eliminating inefficiency.

Since Taylor’s ideas were published several decades ago, these important variables have been integrated into a simple equation that managers and leaders use to measure and improve employee motivation and productivity.

The simple equation is called the productivity formula, and here’s how it works.

What Is the Productivity Formula?

The productivity formula is a measure of the productivity of an economy, organization, team, or employee. In the context of a company, it provides a useful indication of how efficiently a company converts raw materials, machines, and groups of employees into useful goods or services.

This can be represented in the surprisingly simple productivity formula:

The Productivity Formula

    The productivity formula is a basic relationship between physical input and output variables. The most common inputs are labor productivity hours, capital, and materials, and the most common output units are sales and amount of goods produced.

    A company that produces more with a given variable of inputs (capital, labor, and materials) or uses fewer inputs to produce the same level of output has greater productivity. This creates a competitive advantage over a company that produces a lower amount.

    The productivity formula illustrates how a company can increase units of output produced per employee hour, machine, or material used.

    How to Use the Productivity Formula

    As an example, a manager may want to calculate the productivity of the employees of his/her company or team.

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    In order to do this, employee productivity can be calculated by dividing the goods and services produced or sales revenue generated by the total number of hours the company’s employees worked in a given period of time.

    For example, consider an employee called Tom who made sales worth $2,000 in one week of 50 hours worth of work. Another employee called Jill worked 20 hours a week and made $1000 worth of sales. Using the productivity formula:

    Tom’s productivity: $2000/50hrs = $40/hour

    Jill’s productivity: $1000/20hrs =$50/hour

    In this hypothetical scenario, Jill is more productive than Tom, even though Jill generated less sales than Tom.

    Here’s another example:

    Imagine a retail company looking to measure its productivity. If the output of last month’s production was 20,000 units, and the total employees hours worked was 2,000 hours, then based on the productivity formula:

    Company productivity: 20,000 units/ 2,000 hours= 10 units/hour

    As a final example, consider a heavily automated production line with a small number of staff. If in a month, the production line produces $1 million dollars worth of goods with 1000 total hours worked, then the company productivity is:

    Company productivity: $1,000,000/1000 = $1000/hour

    Even though the labor cost is much smaller than the cost of equipment, a company that invests in the efficient use of technology will gain a competitive advantage and improve company productivity.

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    Managers can use this formula to determine which employees are the most and least productive, or measure the efficiency of a company in using its resources and materials.

    Nevertheless, this version of the productivity formula is limited due to its simplicity and restriction in variables.

    As per the examples above, this productivity formula only uses single units for input and output to calculate the level of productivity, and that’s why it’s described as a partial factor productivity.

    For a more accurate measurement, a company will need more inputs and outputs to calculate its overall productivity.

    This is where the multi-factor productivity formula could be useful.

    The Multi-Factor Productivity Formula

    As previously noted, the partial or single-factor productivity formula is limited as a wholesome measure of productivity.[2]

    The multi-factor productivity formula helps managers measure the productivity of various departments across a company.

    With this formula, productivity is measured by comparing output to various inputs necessary for production. This includes ratios of units produced to materials, labor, and capital.

    For example, switching one variable for another, i.e. labor for capital, could produce a significantly different productivity figure. A more efficient measure of productivity should take into account the different substitutes for input and output and accurately represent how they affect company productivity.

    Whereas the partial factor productivity formula uses one single input, the multi-factor productivity formula is the ratio of total outputs to a subset of inputs. For example, an equation could measure the ratio of output to labor, materials, and capital. This method is a more comprehensive measure than partial factor productivity, but it’s also harder to calculate.

    For example, imagine a car manufacturing company that purchases advanced machine equipment to increase its production. Assuming this equipment enables the company to reduce the number of employees and costs 40% more than a standard machine, output will remain the same.

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    But since the number of employees has reduced, the labor and capital productivity of the company will increase. And there will be a decline by 40% in material productivity since output is constant and purchased material has increased.

    As a further consideration, a Total Factor Productivity formula will take into account all inputs used in a production process and provide a more accurate assessment of company productivity and performance.

    How to Improve Employee Productivity With the Formula

    Here are 3 strategies based on the productivity formula to improve employee productivity:

    1. Measure and Improve the Efficient Use of Time

    Time, though not purchased, is often mistakenly ignored as a cost.[3]

    For example, if two companies have identical equipment, staff, products, and material, but one business takes two weeks longer than the other to ship order purchases, their productivity is not the same.

    Managers who work with employees to maximize the amount of time spent on tasks that align with their strengths and minimize time spent on everything else will improve employee productivity.

    2. Promote Employee Autonomy

    In his book, Management Challenges for the 21st Century, legendary management expert Peter Drucker writes that:

    “The demands that we impose the responsibility for their productivity on the individual knowledge workers themselves. Knowledge Workers have to manage themselves. They have to have autonomy.”

    Various studies have shown that human beings derive the greatest levels of motivation and satisfaction from achieving goals that are self-determined, so this is essential to think about regarding the productivity formula.

    Self-determined goals increase intrinsic motivation—i.e. the desire to do something for its own sake—rather than extrinsic motivation.[4]

    Intrinsically motivated people take more action on a given task, persist in the face of adversity, explore more creative ideas, enjoy their work, and perform better.

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    The more autonomy and ownership employees have over their work role, the more productive they will be.

    Managers who include employees in setting goals and give them the autonomy to execute on them can significantly improve their productivity.

    3. Encourage Team Empathy

    In Smarter Faster Better: The Secrets of Productivity in Life and Business, author Charles Duhigg describes the story of how Google improved their team performance through “Project Aristotle,”[5] an extensive research project analyzing team productivity.

    At the end of their research period, Google discovered that the best teams weren’t necessarily a collective of individual top performers, but rather a collective of individuals who shared empathy with one other.

    Teams that encouraged members to listen to one another and show sensitivity to each others needs performed the best.

    That is why people with high emotional intelligence tend to be the best leaders in a group setting. They tap into the emotional component of human motivation to get the most out of the people around them.

    Final Thoughts

    The productivity formula is a simple, useful tool to quantify, measure, and manage employee productivity.

    As a standalone benchmark of productivity, it may not be sufficient as a measure of productivity that takes into account the complexities of a company. The best way for managers to use the productivity formula to motivate employees is to incorporate the people element.

    By maximizing time efficiencies and promoting employee autonomy and team empathy, managers can build a workplace culture that encourages long term productivity and satisfaction.

    More Tips on Improving Productivity

    Featured photo credit: Stanley Dai via unsplash.com

    Reference

    [1] New York Times: F. W. Taylor, Expert in Efficiency, Dies
    [2] Bureau of Labor Statistics. U.S. Department of Labor: Multifactor Productivity – Overview
    [3] Paul Krugman, The Age of Diminishing Expectations: “Defining and Measuring Productivity”
    [4] American Psychologist, 55, 68-78. Ryan, R. M. & Deci, E. L. (2000). Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being.
    [5] New York Times: Project Aristotle

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    14 Ideas on How to Measure Productivity to Make Progress

    14 Ideas on How to Measure Productivity to Make Progress

    Everyone has heard the term productivity, and people talk about it in terms of how high it is and how to improve it. But fewer know how to measure productivity, or even what exactly we are talking about when using the term “productivity.”

    In its simplest form, the productivity formula looks like this: Output ÷ Input = Productivity.

    For example, you have two salespeople each making 10 calls to customers per week. The first one averages 2 sales per week and the second one averages 3 sales per week. By plugging in the numbers we get the following productivity levels for each sales person.

    For salesperson one, the output is 2 sales and the input is 10 sales: 2 ÷ 10 = .2 or 20% productivity. For salesperson two, the output is 3 sales and the input is 10 sales: 3 ÷ 10 = .3 or 30% productivity.

    Knowing how to measure and interpret productivity is an invaluable asset for any manager or business owner in today’s world. As an example, in the above scenario, salesperson #1 is clearly not doing as well as salesperson #2.

    Knowing this information we can now better determine what course of action to take with salesperson #1.

    Some possible outcomes might be to require more in-house training for that salesperson, or to have them accompany the more productive salesperson to learn a better technique. It might be that salesperson #1 just isn’t suited for sales and would do a better job in a different position.

    How to Measure Productivity With Management Techniques

    Knowing how to measure productivity allows you to fine tune your business by minimizing costs and maximizing profits:

    1. Identify Long and Short-Term Goals

    Having a good understanding of what you (or your company’s) goals are is key to measuring productivity.

    For example, if your company’s goal is to maximize market share, you’ll want to measure your team’s productivity by their ability to acquire new customers, not necessarily on actual sales made.

    2. Break Down Goals Into Smaller Weekly Objectives

    Your long-term goal might be to get 1,000 new customers in a year. That’s going to be 20 new customers per week. If you have 5 people on your team, then each one needs to bring in 4 new customers per week.

    Now that you’ve broken it down, you can track each person’s productivity week-by-week just by plugging in the numbers:

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    Productivity = number of new customers ÷ number of sales calls made

    3. Create a System

    Have you ever noticed that whenever you walk into a McDonald’s, the French fry machine is always to your left? 

    This is because McDonald’s created a system. They have determined that the most efficient way to set up a kitchen is to always have the French fry machine on the left when you walk in.

    You can do the same thing and just adapt it to your business.

    Let’s say that you know that your most productive salespeople are making the most sales between the hours of 3 and 7 pm. If the other salespeople are working from 9 am to 4 pm, you can potentially increase productivity through something as simple as adjusting the workday.

    Knowing how to measure productivity allows you to set up, monitor, and fine tune systems to maximize output.

    4. Evaluate, Evaluate, Evaluate!

    We’ve already touched on using these productivity numbers to evaluate and monitor your employees, but don’t forget to evaluate yourself using these same measurements.

    If you have set up a system to track and measure employees’ performance, but you’re still not meeting goals, it may be time to look at your management style. After all, your management is a big part of the input side of our equation.

    Are you more of a carrot or a stick type of manager? Maybe you can try being more of the opposite type to see if that changes productivity. Are you managing your employees as a group? Perhaps taking a more one-on-one approach would be a better way to utilize each individual’s strengths and weaknesses.

    Just remember that you and your management style contribute directly to your employees’ productivity.

    5. Use a Ratings Scale

    Having clear and concise objectives for individual employees is a crucial part of any attempt to increase workplace productivity. Once you have set the goals or objectives, it’s important that your employees are given regular feedback regarding their progress.

    Using a ratings scale is a good way to provide a standardized visual representation of progress. Using a scale of 1-5 or 1-10 is a good way to give clear and concise feedback on an individual basis.

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    It’s also a good way to track long-term progress and growth in areas that need improvement.

    6. Hire “Mystery Shoppers”

    This is especially helpful in retail operations where customer service is critical. A mystery shopper can give feedback based on what a typical customer is likely to experience.

    You can hire your own shopper, or there are firms that will provide them for you. No matter which route you choose, it’s important that the mystery shoppers have a standardized checklist for their evaluation.

    You can request evaluations for your employees friendliness, how long it took to greet the shopper, employees’ knowledge of the products or services, and just about anything else that’s important to a retail operation.

    7. Offer Feedback Forms

    Using a feedback form is a great way to get direct input from existing customers. There are just a couple of things to keep in mind when using feedback forms.

    First, keep the form short, 2-3 questions max with a space for any additional comments. Asking people to fill out a long form with lots of questions will significantly reduce the amount of information you receive.

    Secondly, be aware that customers are much more likely to submit feedback forms when they are unhappy or have a complaint than when they are satisfied.

    You can offset this tendency by asking everyone to take the survey at the end of their interaction. This will increase compliance and give you a broader range of customer experiences, which will help as you’re learning how to measure productivity.

    8. Track Cost Effectiveness

    This is a great metric to have, especially if your employees have some discretion over their budgets. You can track how much each person spends and how they spend it against their productivity.

    Again, this one is easy to plug into the equation: Productivity = amount of money brought in ÷ amount of money spent.

    Having this information is very useful in forecasting expenses and estimating budgets.

    9. Use Self-Evaluations

    Asking your staff to do self evaluations can be a win-win for everyone. Studies have shown that when employees feel that they are involved and their input is taken seriously, morale improves. And as we all know, high employee morale translates into higher productivity.

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    Using self-evaluations is also a good way to make sure that the employees and employers goals are in alignment.

    10. Monitor Time Management

    This is the number one killer of productivity in the workplace. Time spent browsing the internet, playing games, checking email, and making personal calls all contribute to lower productivity[1].

    Time Management Tips to Improve Productivity

      The trick is to limit these activities without becoming overbearing and affecting morale. Studies have shown that most people will adhere to rules that they feel are fair and applied to everyone equally.

      While ideally, we may think that none of these activities should be done on company time, employees will almost certainly have a different opinion. From a productivity standpoint, it is best to have policies and rules that are seen as fair to both sides as you’re learning how to measure productivity.

      11. Analyze New Customer Acquisition

      We’ve all heard the phrase that “It’s more expensive to get a new customer than it is to keep an existing one.” And while that is very true, in order for your business to keep growing, you will need to continually add new customers.

      Knowing how to measure productivity via new customer acquisition will make sure that your marketing dollars are being spent in the most efficient way possible. This is another metric that’s easy to plug into the formula: Productivity = number of new customers ÷ amount of money spent to acquire those customers.

      For example, if you run any kind of advertising campaign, you can compare results and base your future spending accordingly.

      Let’s say that your total advertising budget is $3,000. You put $2,000 into television ads, $700 into radio ads, and $300 into print ads. When you track the results, you find that your television ad produced 50 new customers, your radio ad produced 15 new customers, and your print ad produced 9 new customers.

      Let’s plug those numbers into our equation. Television produced 50 new customers at a cost of $2,000 (50 ÷ 2000 = .025, or a productivity rate of 2.5%). The radio ads produced 15 new customers and cost $700 (15 ÷ 700 = .022, or a 2.2% productivity rate). Print ads brought in 9 new customers and cost $300 (9 ÷ 300 = .03, or a 3% return on productivity).

      From this analysis, it is clear that you would be getting the biggest bang for your advertising dollar using print ads.

      12. Utilize Peer Feedback

      This is especially useful when people who work in teams or groups. While self-assessments can be very useful, the average person is notoriously bad at assessing their own abilities.

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      Just ask a room full of people how many consider themselves to be an above average driver and you’ll see 70% of the hands go up[2]! Now we clearly know that in reality about 25% of drivers are below average, 25% are above average, and 50% are average.

      Are all these people lying? No, they just don’t have an accurate assessment of their own abilities.

      It’s the same in the workplace. Using peer feedback will often provide a more accurate assessment of a person’s ability than a self-assessment would.

      13. Encourage Innovation and Don’t Penalize Failure

      When it comes to productivity, encouraging employee input and adopting their ideas can be a great way to boost productivity. Just make sure that any changes you adopt translate into higher productivity.

      Let’s say that someone comes to you requesting an entertainment budget so that they can take potential customers golfing or out to dinner. By utilizing simple productivity metrics, you can easily produce a cost benefit analysis and either expand the program to the rest of the sales team, or terminate it completely.

      Either way, you have gained valuable knowledge and boosted morale by including employees in the decision-making process.

      14. Use an External Evaluator

      Using an external evaluator is the pinnacle of objective evaluations. Firms that provide professional evaluations use highly trained personnel that even specialize in specific industries.

      They will design a complete analysis of your business’ productivity level. In their final report, they will offer suggestions and recommendations on how to improve productivity.

      While the benefits of a professional evaluation are many, their costs make them prohibitive for most businesses.

      Final Thoughts

      These are just a few of the things you can do when learning how to measure productivity. Some may work for your particular situation, and some may not.

      The most important thing to remember when deciding how to track productivity is to choose a method consistent with your goals. Once you’ve decided on that, it’s just a matter of continuously monitoring your progress, making minor adjustments, and analyzing the results of those adjustments.

      The business world is changing fast, and having the right tools to track and monitor your productivity can give you the edge over your competition.

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      Featured photo credit: William Iven via unsplash.com

      Reference

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