If you didn’t have to calculate ROI for your email system then you shouldn’t have to calculate ROI for your performance management system - it’s just another part of everyday business.
If you absolutely must come up with some numbers though, here are a few things that might help.
Save time & reduce errors
Make reviews quicker and easier to complete and you immediately save time for managers and employees. HR then requires less time to coordinate reviews and wrangle review data, and the exec team can immediately access accurate data for forecasting.
ROI: time saved per person * average hourly wage * number of people
Legally defensible employee management
By collecting objective, detailed performance data, you reduce the chance of legal action for undocumented decisions about compensation, termination or promotion. Not only do you save the potential costs associated with legal action, you save the time that would have been required to deal with it.
ROI: (cost of legal action + cost of time lost to legal action) * chance of legal action
Ad-hoc decisions lead to overspending on salary and bonuses. Setting clear goals up front creates a culture where there is less obligation to pay arbitrary bonuses. Identifying stars helps focus spending on retaining key staff, instead of applying increases across the board.
ROI: % reduction in salary increases + % reduction in bonus payment
Increased employee retention
Reduce costs associated with losing top performers – the fewer people leaving, the less you need to spend on recruiting replacements. Data from Cornell University and Hewitt Associates suggests that losing staff costs 30-150% of annual salary in downtime and replacement costs.
ROI: reduction in (good) employee churn * % of annual salary
Hire right & address underperformance quickly
With a performance management system in place, your competencies are in your job descriptions and you hire the right people. And because you’re reviewing the same competencies you hired for, it’s easy to see how people measure up. If you make a hiring mistake or experience performance-related problems, you’ll be able to take action before it costs you in productivity.
Improved training spend
Collect detailed information on employees’ skills and development needs, roll them up to organization level and you’ll know where the training dollar is best spent.
Organizations typically spend 2-4% of the salary budget on training, but Bersin research suggests that a clearer understanding of organizational strengths and weaknesses can help reduce the training budget by up to 20%.
ROI: 20% * (2% * salary budget)
Workforce goal alignment
Kaplan and Norton research suggests that less than 30% of things that people were working on actually contributed to achieving the business’ strategic plan. Collecting data on individual goal achievement and rolling that up to track achievement of strategic goals is a major system benefit; you can make sure employees are doing what a) they’re hired to do and b) what benefits the company.
ROI: increased probability of achieving strategic plan
Improved leadership pipeline
Having your review data in one place makes it easier to find and develop your future stars. Use the data to identify areas of potential weakness (eg key skill shortages) & plan to correct them before the potential problem becomes a real headache. If you can identify future leaders and fill critical roles in advance, you’ll avoid the cost of finding replacements and the risks associated with leaving strategic roles empty.
ROI: savings in search fees, less risk
Implement a system that’s usable and makes reviews worthwhile and more employees will engage with it (and so actually use it). Use SMART objectives, transparent reviews, solid development plans and a logical rewards system to encourage engagement - which means greater productivity.
ROI: a 2% increase in your average productivity = 2% total salary saving
All of the above measures deal with short to medium-term returns. But don’t ignore the competitive advantage of a strong talent strategy. For many industries in the knowledge economy the really limited resource is talented people: the businesses that do the best job of attracting, managing and retaining star performers will reap the rewards.
ROI: efficiency & compliance savings + improved staff engagement savings + increased business performance