THE TRUE VALUE of hiring and retaining top people

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 doesnt mean you should abuse or ignore the rest of your employees. It just means you shouldnt 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 thats 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 isnt 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 by determining the output of an average performer. This is called the average output per employee. See a sampling of outputs on page 2 for ideas on what to measure.

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 is the case for 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.

Below are 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 for 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 individuals performance) are as follows:
* 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 his or her employees (in the case of a manager)
* Success rate of teams he or she is 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 or a committee
* Attendance
* How high they are ranked by outside recruiters
* How high they are ranked on the company succession plan

How to calculate the performance differential for a salesperson
Lets say the average salesperson generates $250,000 per year, whereas your top salesperson generates $400,000. Divide 400,000 by 250,000, and you get a top performer increase factor of 1.6.

Next, divide total revenues of your organization by the number of current employees. Lets 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, dont 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 standards by which they will be measured 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.

Dr. Sullivan, a noted author, speaker, and internationally recognized visionary currently serves as a Professor and Head of the Human Resource Program at San Francisco State University. You can find more articles by Dr. Sullivan at www.drjohnsullivan.com