Investopedia: How Is Productivity Calculated?

Wal-Mart.com USA, LLC


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 amount of goods and services produced. Productivity can be calculated by measuring the amount of units produced relative to employee labor hours or by measuring a company’s net sales relative to employee labor hours.


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 the feedback generated from co-workers to measure the productivity of an employee. In certain circumstances, it can be an excellent way of measuring productivity. Productivity is evaluated by peers—including those both above and below them in the chain—on how well they’ve fulfilled their duties and contributed toward the wider company goals. The 360-degree feedback system requires everyone in the team to have an understanding of the various roles and functions, as well as an expected level of output required for those roles. It also only works in an environment where a team interacts a great deal. They need to be able to provide accurate commentary to you on each other’s habits. To institute a successful 360-degree feedback systems, an organization must provide training to ensure employees are versed in the correct way to provide feedback. Each person needs to provide feedback based on their honest assessment of an employee’s overall contribution toward team goals, and not allow personal biases to cloud their judgement. Gathering feedback for the larger group also helps counterbalance any potential personal grudges.


  • 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 software can help an organization track productivity at a glance. Using electronic time sheets, employees track data more accurately and you get an by-the-job look at exactly how your team are performing. You can use this data to run performance-based reports. If your team works on site or remotely across the world, this method is a great solution, as it enables you to collect accurate data, no matter where your employees are. Of course, tracking time is only one measure of a productive and contributing employee, and depending on your type of business, it might not be your best productivity measure.


  • Monitoring Social Media: Some employers make it a point to follow their employees on social media in order to put into action their philosophy that any employee posting to social media or otherwise may be messing around on the internet during their workday and thus contributing less than their peers, who might stay off Facebook. Such companies that such a hardline stance toward personal computer and social media usage on company time will single out people they believe to be taking advantage.


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).


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Source: investopedia.com

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