Good employee productivity goes a long way in boosting your company’s revenue and profits.
But how do you quantify productivity?
One way is by calculating the employee productivity ratio.
The ratio considers different outputs (like the number of units produced) and inputs (like labor hour values) to determine how well your organization uses the resources.
In this article, we’ll discuss what the employee productivity ratio is, its formula, and the steps to calculate it. We’ll also highlight its major use cases and benefits.
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- What is the Employee Productivity Ratio?
- How to Calculate the Employee Productivity Ratio
- 4 Uses of the Employee Productivity Ratio
- 5 Benefits of Measuring the Employee Productivity Ratio
What is the employee productivity ratio?
According to the Bureau of Labor Statistics, labor productivity (or employee productivity) is the ratio of the goods and services produced (output) to the labor hours (input) required for the production process.
To calculate this measure of productivity, you can use human capital, material required, etc., as input and sales, customer loyalty, etc., as the outputs.
It’s crucial to measure employee productivity since it directly impacts your company’s growth, revenue, and bottom line.
Employee productivity ratio formula
Here’s the formula to calculate the employee productivity ratio:
Productivity = Output/Input
Using this formula, you can understand how efficiently your employees use their time, money, and resources to produce the output and contribute to the company’s growth rate.
When you calculate the workforce productivity with the above formula, your output will vary based on your industry.
While the labor productivity formula doesn’t require you to specify the Unit of Service (UoS), defining it will help to give more context to the output. UoS is the measure of service provided to consumers.
For example, a salesperson may have ‘deals closed’ or ‘calls made’ as their UoS, while the housekeeping staff’s UoS can be ‘rooms cleaned per day.’
Let’s now discuss the steps needed to measure the productivity ratio.
How to calculate the employee productivity ratio
The labor productivity ratio will undoubtedly vary depending on your industry, like production or service.
Let’s see how you can adapt the worker productivity formula to meet your specific needs:
Step 1. Determine your input
You need to decide what aspect of productivity you want to include in your productivity formula.
It may be:
- Labor hours.
- Number of employees.
- Productive hours.
- Cost per hour, etc.
But how do you accurately calculate the worker hours?
You can use a project management and time tracking tool like Time Doctor to easily record the number of hours with high precision.
What is Time Doctor?
Time Doctor is a robust employee time tracking and performance management tool used by small as well as large companies to boost the productivity level of the entire organization.
The tool offers silent and interactive time tracking modes that let you record timesheet data automatically or by using an easy on/off button.
It also tracks idle time, productive and unproductive time, and employee attendance along with other aspects of team and individual productivity.
You have the input, but what about the output?
Step 2. Define your output
You also need to specify the output – the end results – you want to cover in the equation. It could be:
- Units produced.
- Clients acquired.
- Successful sales in a month.
- Revenue, etc.
In terms of a nation’s economy, the output is the Gross Domestic Product (GDP), which helps understand the country’s productivity growth.
Step 3. Apply the formula
Once you’ve decided on your output and input, you can easily apply those values in the formula and calculate your labor productivity ratio.
Step 4. Compare it to the baseline
But just getting the numbers isn’t enough. You need to compare them to a baseline to understand how close or far you are from your expected standards.
For example, if you’re determining the productivity ratio of your housekeeping team, you may set the benchmark for the ‘number of rooms cleaned per shift’ as 1.4 based on industry standards. If an employee’s ratio comes to around 1, you could say that they’re underperforming.
You can also use the ratio to calculate a productivity metric like revenue per hour, units produced per hour, etc.
Let’s now look at some use cases of the employee productivity ratio that can help you understand your company’s productivity.
4 uses of the employee productivity ratio
Here are four ways you can use the productivity formula to track productivity in your workplace:
1. To calculate revenue per hour
A unit is a product that your company sells, produces, or develops.
The productivity ratio can help you determine how productively your employees have sold, produced, or developed your product and how it has affected your cash flows.
For example, if your company earns $700,000 per month manufacturing and selling garments, you can use the productivity ratio to calculate the revenue generated by each employee per hour.
If the employees responsible for stitching the garments work 2000 cumulative hours in the month, then $700,000 would be your output, and 2000 would be the input.
It means your productivity ratio, in this case, would be:
$700,000 / 2000 hours = $350 per hour
So your company makes $350 for each hour that an employee works.
2. To calculate labor efficiency
In an industry setting, labor is the amount of time, effort, and energy put in by employees to finish their work. Measuring labor productivity uses these important factors as the input.
For example, you want to calculate the labor productivity for an entire year for your sunglasses company. Suppose that you have manufactured 190,000 pairs of brown sunglasses in a year, requiring an aggregate of 21,000 labor hours to make them.
In this case, the output is 190,000, and the input is 21,000.
The productivity ratio for this instance will be:
190,000 pairs / 21,000 hours = 9 pairs
It indicates that the employees in the manufacturing unit produce an average of 9 brown sunglasses per hour.
This formula is also known as the partial factor productivity since it uses only a single input in the equation. Some other inputs may include:
- Energy costs.
- Materials used.
- Physical capital.
Some businesses may prefer this method since it calculates only one input independent of others. It’s also easier to interpret, improve, and compare to similar industries.
However, it doesn’t measure productivity in the entire context, which can give misleading results.
That’s why there are two ways in which you can modify this formula to get a clearer picture of your labor productivity. Let’s look at these modified versions:
a. Multifactor productivity
The formula calculates output based on hours of labor and physical capital since these are two important factors of production for any company’s economic growth.
Multifactor Productivity = OutputLabor input (hrs worked) + Capital input ($ invested)
While this labor productivity method calculates capital productivity as well, it still doesn’t give an accurate picture of the company’s total productivity.
To calculate your company’s overall productivity, you can use the total factor labor productivity formula.
b. Total factor productivity
This formula incorporates all factors that are associated with the company’s revenues.
Total Factor Productivity = Total OutputTotal Input (materials + labor hours + energy + capital + other expenses)
In this case, the total output includes all tangible values of the output (number of finished products, dividends, interest, and any other income).
Although this method is helpful to check the company’s total productivity, it can be difficult to calculate and also doesn’t highlight how an individual input affects productivity.
3. To calculate the tasks completed
Tasks can vary among teams and even between members of the same team.
But the speed and accuracy of performing them can affect your overall productivity. You can use this productivity measurement to determine how many tasks are completed by a person, team, or department.
For example, let’s say your 8 member auditing team completes 480 reports at the end of the financial year. To calculate the number of reports generated by each member, you can use the ratio considering 480 as the output and 8 as the input.
In this use case, the productivity ratio will be:
480 reports / 8 members = 60 reports per member
It indicates that the team finishes around 60 reports/member per year.
4. To calculate the impact of company training
A company spends a considerable amount of time and energy on employee training. You can use the productivity measurement to determine how your training affects the sales, revenues, or other Key Performance Indicators (KPIs).
For example, you provide 10 additional hours of training to your new sales team than the previous year’s team, then 10 is your input.
If the new team makes $2,50,900 in sales, while the previous year’s team made $1,20,300 in sales, then the difference between the two figures would be your output ($1,30,600.)
Here, the productivity measure will come to:
$1,30,600 / 10 hours = $13,060 per year
This means that each additional hour of training has an annual increase of $13,060 in the sales team’s KPI.
While all these calculations may seem complex, calculating this productivity measure has its advantages.
5 benefits of measuring the employee productivity ratio
Let’s look at the significant benefits of measuring the productivity ratio:
1. Understanding resource availability
The productivity ratio can help you understand how your employees work, how well they understand their roles, etc. It can give you a clear picture of which of your resources are underutilized or if you need to improve your organization’s performance.
You’ll be able to identify if your employees are frequently working overtime, need some additional training, need different tools for working, etc.
2. Identifying unwanted steps
Productivity is mainly about time management and saving one’s energy to focus on the most critical tasks. Measuring employees’ productivity ratio lets you identify areas, practices, and steps that burden or slow them down.
You can then revise the workflows to speed up the processes, eliminate unwanted or redundant steps, improve employee performance, and result in a long-term productivity increase.
3. Reducing costs at multiple levels
It’s possible that some processes may cost you more than your allocated budget, which you can clearly detect based on the productivity ratio gathered over time.
In addition to the capital, the productivity measure can also help you understand and modify the time, energy, and labor cost.
4. Reducing time wastage
There are many reasons for time wastage – social media and web browsing, and extended downtime during breaks are the two most common ones.
Periodically checking the employee productivity ratio can help you understand the frequency and duration of the above reasons and take corrective measures as needed.
Accurately tracking the time spent on these activities and making the employees aware of it can help them become more mindful of their time and reduce wastage.
5. Changing employee behavior
Measuring productivity can actually help boost employee productivity. When employees are aware that their performance will be monitored and they’ll get incentives accordingly, they feel motivated to work harder and improve their level of productivity.
Highly motivated employees automatically improve their work ethic and efficiency ratio, resulting in higher workforce productivity.
Increased employee engagement results in employees aligning their personal goals with those of your company since they feel that they’re an integral part of the company.
Engaged and motivated employees in turn help reduce turnover for your company.
Employee productivity ratio can be a highly beneficial tool for understanding your organization’s efficiency and productivity.
You can use the steps we covered here to calculate the productivity ratio.
Although it may seem complicated at first, regularly measuring productivity will benefit your company in the long run. And to simplify this, you can use Time Doctor to accurately track your employee’s total hours and other productivity indicators like websites used, tasks completed, and much more.
Why not sign up for a free trial today!
Vaishali Badgujar is a Content and SEO specialist at Time Doctor, an employee-friendly time-tracking system that boosts productivity.