How to calculate people metrics that matter most to fast-growing startups

For fast-growing startups, there are six key people metrics that matter most to business performance.

“More mature businesses take an annual approach to calculating metrics, versus fast-growing ones that look at quarterly or monthly numbers and look forward aggressively. Most recurring revenue businesses typically try to focus on the “next 12 months” as it is about building on top of what you have and planning to grow into what you will become. That is where you really get the value out of a metric such as revenue per employee—it really is a lagging metric of success, but as a forecast over the next 12 months, it gives you incredible clarity.”

–Robert Bromage, CEO of IntelliHR

1) Employee productivity

What is it?

A general proxy for output is revenue per employee, but depending on your company’s business model and stage, you may also calculate human output in other ways. For example, more mature businesses may calculate profit per employee. You may also break down output by business area such as sales team revenue per employee.

How is it calculated?

Revenue per employee can be calculated in three ways, but option three is the most indicative of future growth.

Option 1: Total annual revenue / total employees as at December 31

Option 2: Total revenue in December / total employees as at December 31

Option 3: Total December quarter revenue x 4 / total average employees December quarter

Why is it important?

Revenue per employee is a good indicator of efficiency, although it needs to account for external and internal factors. Businesses that are much lower in Revenue per employee may have hired ahead of growth or are at an early growth stage.

Bottom line

On its own, revenue per employee does not paint a complete picture, but it is a measure of how efficiently a company is leveraging its human capital.

2) Tenure

What is it?

This metric tells you how long an employee generally stays with a company. Tip: Average tenure at a company can be accessed through a Premium LinkedIn account.

How is it calculated?

Tenure is generally calculated in the following way.

The sum of months worked by all current employees divided by the number of employees you have today equals the tenure of “stayers.” However, this formula could miss the difference in retention rates during the employee lifecycle. On average, the rate of retention is far lower in the early years than in later years, so reviewing tenure by time period may be more instructive.

Why is it important?

Average tenure per employee should be longer than the time it takes to ramp them up to productivity or you will not gain the economic value. By creating benefits your employees enjoy, you can extend the time they spend with your business. Ultimately, more time equals more economic value for your business (all things being equal).

When you combine output (revenue per employee) and tenure, you can calculate the lifetime value of an employee. This is an important predictor of the revenue you will receive over the lifetime of an employee.

Bottom line

Pay attention to any evidence that employees are not committed to you long term. In response to the question, “Would you recommend this company to a friend?” Amazon, for example, receives a mere 64% and has a tenure of just over one year. Even large companies with strong reputations are not immune to low tenure.

3) Turnover

What is it?

This metric should be reviewed monthly and on a rolling basis. Patterns that emerge regarding who left, when and why should be tracked and investigated. Exit, stay and skip interviews are all good ways of collecting evidence to ensure you are managing your people operations properly and mitigating future turnover.

How is it calculated?

The employee turnover rate is calculated by dividing the number of employees who left the company by the average number of employees within a certain time period. This number is then multiplied by 100 to get a percentage.

Why is it important?

Premature turnover erodes value creation for your business and creates instability. It can impact your customer retention and your ability to build your product or expand into new markets. As an investor, you should ask for general and specific turnover numbers, including non-regrettable and regrettable turnover. A pattern of increasing turnover should be a red flag and dealt with swiftly.

Bottom line

Above-average turnover will impact future revenues and be costly to your business. With every employee that leaves, a company loses both its financial investment in recruitment, onboarding and training costs, as well as its non-financial investment (which can sometimes weigh heavier) in knowledge, workplace collaboration and competitiveness.

4) Engagement

What is it?

Engagement is an indicator of employees’ discretionary effort. The Culture Amp question “I am motivated to go above and beyond?” gets to the heart of this, and the positive responses to this should score above 70%. As an investor, you should expect all your portfolio companies to be doing regular employee pulse checks and following up with corrective action.

Public Glassdoor scores can be a proxy for overall engagement, and reading the comments section can be eye-opening. The average company review on Glassdoor is 3.4, but the best companies receive a 4.6. A Glassdoor score of about 4.0 is highly beneficial for scaling companies, as many candidates review this site as part of their decision to join a company. Note: During the COVID-19 pandemic, some companies have had to lay off people, so recent employee reviews may decrease their scores.

How is it calculated?

There is no one way to calculate engagement, but employee Net Promoter Score (NPS) and discretionary effort are good proxies.

Why is it important?

A 2017 study by three researchers at Norwich Business School at the University of East Anglia in the UK used more than 326,000 Glassdoor reviews to quantify the impact of employee satisfaction on the long-run stock performance of companies. The authors found that a portfolio of companies with high employee satisfaction on Glassdoor significantly outperformed the overall stock market, earning 1.35% more in returns—what researchers call “four-factor alpha”—over the eight-year period they studied. According to the research, employees’ online reviews are good predictors of a firm’s financial results and, consequently, of value relevance for investors.

5) Leadership

What is it?

Investors should expect their executive team to undergo performance reviews on an annual basis. How the CEO leads his or her team should be part of this review. A company’s employee engagement survey will also give you specific feedback on how leadership is perceived. Lastly, Glassdoor’s public data also provides ratings for both CEOs and senior leadership.

Why is it important?

Exceptional leadership is often a magnet for talent and a lack of it is also at the heart of why employees leave a business. Supporting your executive team with ongoing feedback and referrals to leadership coaches are two of the ways you can help boost it.

6) Diversity

What is it?

It’s a commitment followed by real action in terms of hiring, developing and retaining the best people. This means opening up new networks intentionally and continually, and not relying on referrals because they are easy. Take a deep dive into your numbers for hiring, development, promotion, compensation and exiting to uncover unequal and biased practices. Who Are Canada’s Tech Workers, a Brookfield Institute study in 2019, showed how people of colour and women are woefully under-represented at the leadership and board of directors levels of tech companies because of biased practices.

How is it calculated?

It is fairly simple to get accurate numbers on diversity through a simple employee survey. Create an aspirational target that is representative of the diversity of the supply of labour. The 50-30 challenge is a great place to start. It suggests organizations aspire to two goals: gender parity (50%) on Canadian boards and senior management, and significant representation (30%) on Canadian boards and senior management of other under-represented groups. Measure where you are starting from and create a commitment to progress to a certain number. You will only diversify your executive and board teams if you start building a pipeline for the future today.

Why is it important?

As you scale your organization, you need to have a wider talent pool that is more reflective of Canada’s diversity while also ensuring employees experience your organization more equally. Overall, a more diverse workforce will enhance your business success and help you build a better product, tap into a wider market and connect with more customers.