How to define key performance indicators (KPIs) for employees
Being able to assess your business' health and your team’s performance objectively and accurately is essential to growth. And it requires more than just a cursory glance at your team’s data and performance metrics.
To truly comprehend where your business stands — and where your company is headed — you need to know which key performance indicators to focus on.
A key performance indicator, or KPI, is a measurement of performance that shows progress in a specific area over a specific period. This article will cover everything you need to know about key performance indicators for employees, how to define KPIs, and how to prioritise them.
What is a KPI?
Key performance indicators refer to the most crucial aspects of an employee’s or team’s duties, or of your business operations. As we’ll discuss, identifying the right KPIs to focus on is vital to the success of your business.
KPIs are typically tied to a statement of purpose as a way to:
Contextualise your intended goals
Set a clear timeline for initiatives
Set expectations for your employees and other stakeholders
KPI examples might be, “Sales team to increase number of upsells by 5% in Q4,” or, “Marketing team to create three new white papers by 1 October.”
Why do businesses need KPIs?
Identifying and focusing on key performance indicators will benefit your employees, teams and business in many ways.
Assess your business' health
KPIs allow you to assess your business' health with precision.
More than just offering a snapshot of your business' health and performance, KPIs put it all into context based on:
Historical business performance
Desired and predicted outcomes
Keep employees aligned
Defining specific, goal-oriented KPIs helps clarify expectations and maintain alignment throughout your organisation. Different teams can understand each other’s goals and see how each KPI supports a business objective.
Keep employees accountable
Along with alignment, creating clearly-defined KPIs helps hold your employees and teams accountable for maintaining a certain level of performance. This applies mostly to their job-related duties. Once your employees understand what’s expected of them, they’ll be better able to measure up.
It also helps hold individuals accountable to their teammates and colleagues. Essentially, KPIs can make it very easy to tell who’s pulling their weight — as well as who isn’t.
(On that note, KPIs aren’t a means to punish or admonish your employees. Rather, they’re to help employees make specific improvements to their performance moving forward. More on that in a bit.)
Enable managers and teams to stay agile
With a clear idea of how your employees should be performing — and insight into how they’re actually doing — team leads can make improvements to their approach as needed.
Whether this means further enabling and empowering employees, or refining processes and workflows, managers will always have the info and insight they need to take further steps in the right direction.
Types of key performance indicators
Key performance indicators can be classified in many ways. Here, we’ll take a look at some of the most common types of KPIs (some KPIs may fall into more than one of these categories):
Quantitative key performance indicators assess performance using numerical values and percentages. Examples of quantitative KPI statements include:
Increasing year-over-year conversions by 10%
Clearing $5 million in annual revenue
Decreasing average customer service response time by 30 minutes
Qualitative KPIs are based on subjective opinions and perceptions, as opposed to finite numerical figures. This type of info is essential for understanding both the “what” and the “why” behind phenomena such as:
For example, you might ask your customers to explain what they did or didn't like about a recent experience with your company. However, you'll end up quantifying the collected results to make the best decision possible for moving forward.
When measuring customer satisfaction, for example, you might classify each longform response on a scale from “very negative” to “very positive.” From there, you’ll have a gauge of how your customers are feeling, and be able to track improvements in sentiment.
Leading KPIs are typically used to predict future behaviours or outcomes based on historical data and informed hypotheses. Some examples of leading KPIs include:
Increased mailing list signups
Increased event registrations
Improved customer satisfaction
The notion is that an increase in these metrics will likely lead to an increase in sales, revenues and profit.
But you can’t assume this to be the case. Again, historical data showing an accurate correlation between, say, event registrations and future sales, must exist for your leading KPI to mean anything at all to your bottom line.
Lagging KPIs measure past performance and gauge the results against historical data.
KPI statements such as, “Increase year-over-year sales by 10%” are perfect examples here, as they contextualise your goals to make them more relevant. Without this historical data, you’ll simply be setting arbitrary goals that may not be realistic.
Characteristics of effective KPI metrics
Not all performance-based metrics should be considered key performance indicators. And treating all metrics as such can lead to wasted resources, missed opportunities and straight-out business failure.
That said, you need to be sure that the KPI you choose to follow are:
The key performance indicators you focus on should be those that have a substantial impact on your business operations.
In other words, you should be able to check these KPIs and know with near certainty that business is going well — or if changes may be necessary. Again, sales numbers, average order values, and retention rates are prime examples of impactful KPIs — while “vanity metrics” like social shares and page views aren't.
Your key performance indicators should be concise to make sure all parties understand them as defined.
This means defining:
The metric in focus
The historical data you’re comparing it to
The rationale to focus on this metric
Key performance indicators often involve multiple employees and teams — and it’s important that all involved parties understand where they fit in.
For example, increasing your MQL (marketing qualified leads) conversion rate may require:
Your marketing team to refine their lead-qualification processes
Your sales team to improve their sales processes
Your support staff to provide insight into your audience’s needs and expectations
If one of these pieces of the puzzle is missing, you might be unable to hit your goals.
KPIs for different business levels
Different levels of your business will follow different key performance indicators — each for their own purposes.
At the highest level, you’ll focus on KPIs that relate to your business' health. A few examples:
Customer lifetime value
Employee retention rates
Some KPIs focus on a specific team’s performance within your organisation. For example:
Sales teams will focus on average order value (AOV) and conversion rates.
Human resources will focus on time-to-productivity for new hires.
Customer support will focus on first-touch resolution rates and time-to-resolution.
A project-based KPI focuses on specific initiatives or campaigns.
This may mean different teams will focus on specific KPIs relevant to their duties, while also keeping an eye on the “big picture” metrics.
Popular KPI frameworks
There are a number of existing frameworks to help you get started.
Management by objectives (MBO)
Management by objectives, or MBO, is perhaps the most commonly-used approach to key performance indicators today.
Traditionally, MBO starts with a top-down approach in which owners, managers, and other key stakeholders define high-level business goals. From there, employees work with their managers to develop department and/or project-level KPIs for the initiative.
The advantages of this approach include:
Improved communication of business goals and team-specific objectives
Creation of a targeted, informed plan of action
Motivates good performance
Objectives and key results (OKR)
The OKR framework is a kind of MBO spin-off that pushes team members to go beyond the goalposts you’ve set for them.
In this framework, objectives refer to your major business goals (such as “Rank amongst the top five in sales in your industry”), while key results are the goals you’ll need to achieve to get there.
In defining the qualitative part of your key results, you’ll typically set the bar higher than your team can likely achieve. This will keep them striving toward the “next step,” instead of being content with doing a “good enough job” at the moment.
One metric that matters (OMTM)
In this more modern KPI framework, teams will identify the metric that matters most at the moment — then focus relentlessly on improving it before shifting to their next priority.
Note that the next KPI of interest may have already been defined — or it may have been uncovered as you work on improving the first one.
Agile teams use this approach to plug leaks in their operations and make iterative improvements to their workflows. The goal is to continuously push innovation in the areas that matter to the customer.
The balanced scorecard approach to defining KPI involves analysing the situation from four perspectives: customer, team, innovation, financial.
Specifically, you’ll be looking at:
How customers view your brand
What your employees say needs to be done to succeed
What you can do to create more value
How your shareholders view your company
In contrast to the OMTM framework, the balanced scorecard approach is more holistic in nature.
How to define the right KPIs
So far, we’ve talked a lot about potential key performance indicators you might use in various scenarios.
Now, let’s look at how to focus on the right KPI in any given situation.
1. Choose KPIs directly aligned with your business goals
The KPIs you focus on should be as closely related to your business goals as possible.
This is easiest to do when defining company-level KPIs, as they have a direct impact on your company’s bottom line and other business goals. Here, you’ll be looking at metrics like cash flow, working capital and profit margins.
Your team and project-level KPIs should also be related to your business goals — albeit a bit less directly. As discussed, historical data is needed to draw concrete correlations; otherwise, you may end up focusing on secondary metrics that aren’t that relevant for your business.
2. Consider your stage of business growth
Your priorities will be much different depending on what stage of growth your business is in.
Early-stage goals: Earn validation, increase brand awareness, gauge product-market fit
Middle-stage goals: Increase conversions, improve retention, decrease churn
Established company goals: Increase profit margin, minimise expenses, maximise efficiency
Knowing where your business currently stands will allow you to focus on the KPI(s) that matter most at the moment. Even if not specifically using the OMTM framework, this is still a necessary step to ensure the improvements you make have an impact on your team’s and business’ success.
3. Establish SMART KPIs
As we indicated earlier, your KPIs should follow the SMART framework:
Specific: Quantitatively defined to create alignment and avoid confusion
Measureable: Able to be measured objectively — either via quantitative values or agreed-upon qualitative results
Achievable: Supported by historical data to show what your team has been capable of in the past — and what they’re capable of achieving
Relevant: KPIs connect as directly as possible to your business goals
Time-based: An end date for the given campaign to keep employees on task, and to create historical data for future initiatives
4. Share KPIs with stakeholders
There are three pieces of info to share with your shareholders:
The key performance indicators you’re focusing on
Your rationale for prioritising these KPIs
Projections for the future should you achieve/not achieve your goals
You’ll also want to give your shareholders the opportunity to provide feedback on these goals and projections.
5. Avoid KPI overload
Regardless of which framework or approach you use, it’s important to concentrate on a minimal number of KPIs at a single time.
This will help you avoid stretching your team too thin. Chasing after too many KPIs at once will deplete your resources too quickly — and leave you with minimal progress to show for your efforts.
What’s more, having too many KPIs makes it difficult to pinpoint exactly what you’re doing well — and where room for improvement is needed. With too many variables in place, it’ll be hard to know which improvements are having the most impact on your team’s performance, meaning you may not know exactly how to proceed in the future.
6. Review and refine KPIs on a consistent basis
This goes for both your individual KPI-related initiatives, and for your general approach to using KPIs.
Regarding your individual initiatives, you’ll want to continually update your goals based on your team’s performance. You might set more challenging goals moving forward (such as aiming to increase conversions by 15% instead of merely 10%), or you might shorten the length of the initiative (such as increasing conversions by 10% within three months, not six).
Hit your KPIs with MYOB
Staying on top of your key performance indicators will almost certainly lead to growth for your business.
Thankfully, you have many tools at your disposal to help you keep track of your team’s performance records — and make the improvements needed to propel your business to success.
With MYOB, you’ll have instant and open access to a variety of reports, records and data that keep you informed. From there, you can use this data to define individual, team and company objectives.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.