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The True Value of Hiring and Retaining Top Performers

July 28, 2002
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Related Topics: Candidate Sourcing, Retention, Workforce Planning, Featured Article

Many managers have the mistaken impression that they should treat all workers equally. The opposite is true.Great managers have figured out how to treat top, average, and poor performers "differently." If you want to give your company a competitive advantage and increase employee productivity -- and thus company performance -- you should dedicate more time and resources to the top 20 percent of your employees. In fact, you can increase company revenue by millions of dollars -- literally -- by retaining the top 20 percent, releasing the bottom 10 percent, and replacing the latter with average employees.

    This doesn’t mean you should abuse or ignore the rest of your employees. It just means you shouldn’t treat all employees equally.

10 times more valuable
    Top performers almost always exceed the performance of average workers by at least 25 percent. It is not unusual in some industries to find that the performance differential between average and top performers is 10 -- that’s 1,000 percent! If you invest in an asset (whether that asset is an employee or any other financial investment) that costs 25 percent more but produces 10 times more in output or revenue, you have a net gain -- and an outstanding one at that.

Calculating the "top performer differential"
    Demonstrating the dollar value of top performers in comparison to average workers isn’t as difficult as you might think. Start by identifying several jobs that have easily measurable results (the outputs by which your employees should be measured). Sales positions are an easy starting point. The goal is to compare output or results of those with average performance and those ranked as the best in each job function.

    Follow these steps to calculate your Top Performer Differential:

  1. Average Output per Employee. Start with the output of the average performer. This is called the average output per employee.

  2. Top Performer Output. Calculate the output of your very top performers (or the average of the top 1 percent of your employee population).

  3. Top Performer Increase Factor. Divide the top performer output per employee for a specific position by the number you identified as the average performer output. The resulting number is your "top performer increase factor" for that position. (The ratio is usually between .5 and 3, but sometimes is as high as 10, as in the case of Cisco Systems.)

  4. Revenue per Employee. Calculate the average revenue for an employee for these jobs (total divisional revenue for a year divided by the number of divisional employees. If that is not available, take the total revenue of the firm for a year, and divide it by the number of employees.) You can also choose to do "profit per employee" instead. Just substitute dollars of profit for revenue.

  5. Revenue Increase for Top Performers. Take the average revenue per employee and multiply it by the top performer increase factor. The resulting number is the revenue generated by the top performer.

  6. Value Difference Between Top and Average Performer. Subtract the average revenue per employee from the revenue of a top performer. The difference is the value added each year by hiring or retaining a top performer versus an average performer. (The same calculations can be done to compare average and poor performers.)

  7. Add Other Jobs. Next, do it for other measurable-output jobs. If the ratio (the percentage difference) is close for most jobs (it usually is), use that ratio for all jobs in the firm. If various positions provide dramatically disparate differentials, average them to come up with an organizational differential.

A sampling of outputs
    If you find yourself at a loss for potential outputs to use in measuring your employees’ performance, then consider some of the following as starting points. You can always refine these over time as you figure out what works best for your team and company. Your goal is to test tools and strategies of measure. So, begin by using multiple measures. No single measure will be without its faults, so "triangulate" to verify your initial findings.

Examples of direct measures of results (data-driven results)

  • Output data/overall results for current period

  • Percentage of goals or targets met

  • Error rate

  • Customer complaints or compliments

  • Impact (accuracy) of key decisions. Amount of money that a decision lost or made the company.

  • Impact (accuracy) of forecasts

  • Percentage/number of repeat customers

  • Number of ideas, suggestions, or innovations implemented

Examples of indirect measures of results (proxies for performance--subjective team or manager review of an individual’s performance)

  • Key accomplishments ranking (first to achieve or last to achieve)

  • Speed of promotions

  • Performance improvement

  • Scores on standard performance appraisals, 360-degree assessments

  • Performance of their employees (in the case of a manager)

  • Success rate of teams they are a part of

  • Customer feedback

  • Output results from previous projects/positions (assuming that past performance is indicative of future performance)

  • Forced ranking by direct peers

  • Forced ranking by project team

  • Forced ranking by manager(s)

  • Forced ranking by neutral (selected) panel of experts /committee

  • Attendance

  • How high they are ranked by outside recruiters

  • How high they are ranked on the company succession plan

Pay as indicator of worth

  • Percentage of bonus target(s) met

  • The ratio of employee bonus to salary (how high their bonus-to-salary ratio is)

  • Employee base pay rate compared to market rate

Training as indicator of worth

  • Scores/assessments in training courses

  • Scores on job simulations

  • Number of certifications

  • Number of jobs employee can do/fill in for

  • Tools and technology employee can utilize

Recognition as indicator of worth

  • Name recognition in the field

  • Number and quality of awards, recognition, and commendations (internal and external)

  • Number and/or value of copyrights and patents

  • Number of requests for employee’s work or services

  • Number of employees who cite the employee as a factor in their development/learning

  • Number and severity of disciplinary actions

  • Customer compliments and complaints

How to calculate the performance differential for a salesperson
    Let’s say the average salesperson generates $250,000 per year, whereas your top salesperson generates $400,000.

    Divide 400,000 by 250,000, and you are provided with a "top performer increase factor" of 1.6.

    Next, divide total revenues of your organization by the number of current employees. Let’s say you have $100,000,000 in revenues and 1,000 employees. The result is an average revenue per employee of $100,000.

    Multiply this number by the top performer increase factor, and you get the average contribution to revenues by top performers -- $160,000 in this example.

    Subtract from this number the average revenue per employee of $100,000, and you see that on average, top performers contribute $60,000 more per year than average performers.

Let employees know
    Regardless of the measurements (criteria) you decide to use to calculate employee performance, don’t keep it a secret.

    Even if the measures you select have some bias in them, employees can learn to change their work behaviors to fit the criteria if they know in advance what they are. Letting them know the rules and measures they will be compared to minimizes confusion and allows the workers to focus on what is important.

    In addition, when you post the criteria, you will (whether you like it or not) get feedback. You can use that feedback to adjust the criteria over time.

Workforce online, August 2002 -- Register Now!


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