Productivity measures the efficiency of a company's production process. It is calculated by dividing the outputs produced by a company by the inputs used in its production process. Common inputs are labor hours, capital and natural resources, while outputs are generally measured in sales or the number of goods and services produced. Productivity can be calculated by measuring the number of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours.

Key Takeaways

  • Productivity refers to how much output a company can generate with a given amount of input.
  • Labor productivity, or how productive a company's workers are, is an important factor for ongoing profitability.
  • Measuring productivity can be done in several ways, with newer methods relying on software tracking and monitoring.

Calculating Labor Productivity

Overall employee labor productivity is calculated by dividing the goods and services produced by the total hours a company's employees during a certain period of time. For example, suppose a manager wants to calculate the productivity of all the employees at his company. The manager calculates that the company had an output of 30,000 units last month, while its input was 3,000 hours of labor. The productivity for the company is 10 (30,000 divided by 3,000); this means the employees produced 10 units per hour in the previous month.

Alternative Methods of Calculating Productivity

360-Degree Feedback:

With this method, an organization solicits and uses feedback that comes from an employee's coworkers. While this might sound combative, in many cases this can actually be a great method of evaluating their productivity. In this approach, productivity is evaluated by asking both superiors, peers, and subordinates. Coworkers are asked to rate how the employee in question has contributed to the company and how well the have fulfilled their duties.

The 360-degree feedback system requires each person involved to have a good understanding of what it means for that person to be effective at their job and a diligent worker. It also only works in situations where team members are interacting with each other closely. To successfully institute a 360-degree feedback system, a company must train employees on how to give instructive feedback honestly and objectively. Getting feedback from several peers also hopefully eliminates any bias that a single person might have against another.

Measuring productivity using total sales:

Another common way to measure a company's labor productivity level is to divide the total sales by the total amount of hours worked. For example, company ABC had net sales of $15 million and its employees worked a total of 20,000 hours over the last fiscal year. The output is the company's net sales and the input is the number of hours. The productivity of the company is $750 ($15 million divided by 20,000). This means for each hour of labor, company ABC's employees produced $750 in sales.

Online performance tracking:

Online time tracking and project management uses software to help a company track productivity automatically. Using electronic timesheets, companies track data about employees more accurately in real-time. These data can then be used to create performance reports for each employee. This is also a great solution to measure productivity for companies with remote workers. One limitation of time tracking is that time working is just a single measure of a productive worker - what may matter more is how they utilize that time and the quality of their output.

Monitoring Social Media:

Some employers make it a point to follow their employees on social media in order to put into action a philosophy that posting to social media or surfing the internet during the workday. The idea is that internet and Facebook scrolling detract from productive work, especially on company time. Company computers can have software installed that tracks such improper use and report it to management.

Measuring Productivity in Different Industries

Productivity benchmarks and targets depend on the industry. Some jobs already have basic benchmarks established. For example, customer service representatives have benchmarks that establish how long a “productive” call should take. Most companies need to establish specific benchmarks for themselves. In many jobs, like customer service jobs, employees don’t have much control over their own productivity (i.e. it depends on how many calls they receive, which they can’t control).