Measuring the ROI of Employee Performance Improvement Plans (PIPs)

Nov 23, 2023 | Performance Management

When an employee’s performance falls consistently below average, a manager may need to create a performance improvement plan (PIP) to help correct course. A PIP outlines a path to improvement for struggling individuals, defining expectations and steps to take.

HR should assess the need for an employee performance improvement plan on a case-by-case basis, considering whether it could help resolve the issues at hand. If so, HR should help managers craft appropriate PIPs for employees. In doing so, HR can make sure all managers use consistent practices in creating PIPs. Then, HR should regularly check in with managers about their efforts to coach these employees.

Table of Contents

1. Why Measure ROI for PIPs?

2. Key Performance Indicators (KPIs)

3. Quantifying Costs

4. Quantifying Benefits

5. Calculating ROI

6. Real-World Examples  

7. Continual Monitoring and Adjustment

Why Measure ROI for PIPs?

Measuring the ROI of PIPs will show whether you’re taking the right steps to strengthen performance. In turn, this brings all of the following benefits:

  • Saving costs by avoiding wasted time, effort, and expense
  • Increasing productivity of individuals and teams
  • Improving retention rate
  • Making fair and objective decisions using the available data

In short, you’ll determine whether your PIPs serve as an effective method of improving performance. You’ll also enhance fairness by leveraging objective data. Further, measuring ROI will demonstrate the business case for HR initiatives.

Tracking ROI will also help you make crucial adjustments to your employee performance improvement plans. If your PIPs aren’t paying off, it could indicate one of three things:

1. You need to redesign the plans.

2. Particular individuals are in the wrong roles.

3. Certain employees have a poor attitude, which can’t be corrected with a PIP.

If you’re seeing a poor ROI across multiple PIPs, this indicates the need to redesign them. If just one employee is struggling with her performance improvement plan, consider whether her role truly suits her. Determine whether the issue stems from a poor attitude that leads to undesirable behaviours, too, says Barbara Mitchell in The Decisive Manager. In either case, this data will provide valuable guidance on how to strengthen your talent management practices.

Key Performance Indicators (KPIs)

KPIs are metrics that help you track changes in employee performance. To measure the success of a performance improvement plan, identify the specific KPIs that most need to improve. You’ll track how they change over the time period set for the PIP, such as 30, 60, or 90 days.

Individual KPIs

The PIP you’ve created for an individual employee should point toward particular areas for improvement. For instance, if customer relationships were poor, what percentage of customer satisfaction do you want the employee to achieve? Track the percentage of this goal that has been achieved. 

Here are some examples of KPIs to measure:

  • Individual productivity. This metric tracks the employee’s individual work output. You can use performance management software to accurately track productivity.
  • Absenteeism. This is a tally of full and partial days of absence.
  • Learning and development. What percentage of the required trainings has the employee completed? Does the employee demonstrate increased knowledge, via an exam or observation by the manager?
  • Customer satisfaction rate. This is the satisfaction rate of customers who work with the employee, reflecting their experience with this individual.
  • Error rate. What percentage of the employee’s work contains mistakes?
  • Percentage of work completed on time. Track the percentage of deadlines met (while maintaining a satisfactory quality of work).

To calculate absenteeism rate, divide the employee’s number of absences by workdays in a given period. Then multiply by 100. Calculate the value of the lost time by multiplying the average revenue per employee by the number of days absent. (You can make a rough estimate of revenue per employee by dividing the company’s average revenue per day by the number of employees.)

To estimate satisfaction rate, conduct a brief survey of customers. Divide satisfied customer responses by total responses, then multiply the result by 100. This gives you the percentage of satisfied customers.

Look at the employee’s engagement and job satisfaction levels as well. Are they increasing in response to changes made? Software solutions can help you track engagement, while surveys can help determine satisfaction.

Broader KPIs

Measure team- or department-level KPIs, too—the effects of your PIPs on broader success. For instance, track whether employee turnover rates decrease after you implement PIPs. Here are some other KPIs to track.

  • Team productivity. Look at how overall team productivity changes as you implement PIPs. (Performance management software can analyze a complex range of factors to reveal this change.)
  • Team morale. Examine whether group morale has risen. The results of employee surveys could help reveal shifts in morale.
  • Retention rate. Calculate turnover rate by dividing the number of departing employees in a given period by total number of employees at the start of the period. Then multiply by 100.
  • Net promoter score. What percentage of employees would advise a friend to work for your company? Track whether this percentage is rising or falling after implementing your performance improvement plans.
  • Training completion rate. What is the overall rate of training participation for your team?

These broader KPIs will help you determine if your HR team is meeting its goals. Through these KPIs, you can assess the effectiveness of your performance improvement plans (PIPs). Strong analytics tools can help you effortlessly measure important KPIs like these.

Quantifying Costs

HR professional taking a looking at various employees' performance improvement plans
Credit: Ono Kosuki
/ Pexels

Next, we’ll explain how to calculate the ROI for a PIP. This begins with quantifying the costs of the initiative, including both direct and indirect expenses.

Direct Costs

Tallying up direct costs is usually a straightforward process. Direct costs include expenses like employee training and materials. Have you paid for workshops or brought in an outside trainer? These count as direct costs. Tools and resources, like special equipment, are another common direct cost.

Indirect Costs

Indirect costs of a PIP can take a bit more effort to quantify. However, tracking them is crucial; otherwise, they remain unseen and unaccounted for. They include expenses like:

  • The time of HR staff. Calculate the percentage of time an HR manager or team spends on assisting with PIPs or developing related trainings. Then put this into financial terms by estimating the portion of their salary that is directed to this area of focus. (We’ll explain how to do this in a moment.)
  • Managers’ time. Estimate time spent creating the PIP, discussing it with the employee, and monitoring the employee’s success. For instance, calculate the percentage of a manager’s work week spent on PIPs. From there, you can estimate the percentage of the manager’s weekly salary that is funding PIP implementation.
  • Mentors’ time. If you’ve enlisted the help of a mentor, also quantify this person’s time spent coaching the employee.
  • Lost productivity during training time. Consider the cost of the employee’s unproductive time while participating in trainings, using the equation shared below.

Let’s walk through how to calculate the amount of time a staff member spends on PIP-related duties in a given time period. The State of Washington Office of Financial Management shows how to calculate this sum: Say an HR manager works for 174 hours a month and spends 10 hours on PIP-related tasks. The following equation will show the percentage of work time devoted to PIP responsibilities:

10/174 = .057 = 5.7% 

Then, you can easily quantify this amount as a dollar value by determining what 5.7% of the manager’s monthly salary equates to

Quantifying Benefits

A young employee looking over her own performance improvement plans.
Credit: Anete Lusina
/ Pexels

Next, quantify the benefits of your PIP. To recap, major benefits from a successful employee performance improvement plan include the following:

  • Increased individual productivity
  • Enhanced team productivity
  • Stronger quality of work
  • Reduced error rate
  • Decreased absenteeism
  • Stronger morale
  • Enhanced job satisfaction

In some roles, you can directly quantify particular results. For example, a sales professional who increases conversion of leads to customers might directly bring in a specific increase in profits. In other functions, results are more difficult to quantify. However, you can still make smart estimations. 

Convert data on increased work output, quality of work products, and other tangible benefits into monetary values, as Jack and Patti Phillips say in “How to Measure the Return on Your ROI Investment.” For instance, if the team’s increased work output has caused profits to rise, estimate the percentage of the change that the employee’s work accounts for. 

Look at improvements to team productivity, quality of work, error rate, and customer satisfaction, too. While it can be tricky to determine if team improvements stem from one specific factor, you can draw conjectures based on a range of evidence. For example, if the individual’s performance has improved in tandem with team improvement, you can surmise that these changes are likely related. If coworkers report that the employee’s communication has been improving, that will further validate this idea.

While it’s tough to quantify intangible things like team morale, you can look at whether it is increasing. Consider whether increased morale parallels a spike in productivity, signaling its positive influence on the team.

How to quantify the value of an increased retention rate? Examine the money saved by reducing recruitment demands and maintaining a productive workforce. Factor in average unemployment compensation, advertising costs, work hours of recruitment staff, number of unproductive days for the new hire, and other related expenses.

Calculating ROI

A young HR professional is calculating the ROI over the employees' PIP
Credit: Andrea Piacquadio
/ Pexels

Now you’re ready to calculate return on investment for your performance improvement plans. You can calculate the ROI using a simple formula:

ROI = (Net Benefits / Costs) x 100

It can also be framed in this way, explains Sandra M. Reed in A Guide to the Human Resource Body of Knowledge:

(HR program costs / Net HR program benefits) x 100 = ROI (%)

For example:

($4,000 / $17,000) x 100 = 23.53%

Then, you can decide whether the ROI is high enough to justify the investment. If the ROI were very low (e.g., 5%), it probably wouldn’t justify the expense involved—or it would signal the need for changes to the PIP.

Calculating the benefit/cost ratio (BCR) of an initiative can also provide insight on its value. Reed presents a formula for making this calculation:

HR program monetary benefits / HR program costs = BCR

If the BCR is greater than 1, the initiative will generate value. If it is less than 1, it will cost more than the value it delivers. 

For example, if program benefits total $15,000 and costs are $7,000, the BCR is 2.14, so it will generate moderate value.

Real-World Examples  

Let’s take a look at a couple of examples of how companies can generate a positive ROI from implementing employee performance improvement plans.

1. An employee was making substantial errors in reports, which was affecting relationships with stakeholders. The manager worked with HR to create a PIP that helped the employee strengthen the accuracy of the data he shared. Their strategy involved training him on how to conduct thorough research, double-check facts, and manage his time.

2. A nonprofit employee needed to give compelling presentations to potential donors. However, she would show up unprepared and speak in a monotone, failing to gain their support. So, her manager and HR director created a PIP designed to build her persuasive abilities and organizational skills. She practiced these skills in lower-stakes settings before resuming high-level meetings.

In such ways, a performance improvement plan can dramatically strengthen performance.

Continual Monitoring and Adjustment

Continuously monitor employee performance to track the long-term value of your PIPs. Use a variety of methods to assess the effectiveness of the PIP:

  • Questionnaires that measure actual use of the PIP, understanding of its components, and attitude toward it.
  • Observation of work productivity (via performance management software).
  • Evaluation of work outputs, in terms of quality and timeliness.
  • Assessment of team satisfaction with the employee’s participation.
  • Customer surveys measuring satisfaction.
  • Tests measuring knowledge gained, if appropriate.
  • Interviews with the employee’s manager and mentor.
  • Periodic analysis of the ROI of your performance management plans.

Based on the success of your PIPs, make further adjustments as needed to enhance them.

By measuring the ROI of your employee performance improvement plans, you’ll be able to continually strengthen them, delivering greater value. Adopting this practice will promote sustainable growth and ongoing performance improvement—not only for individuals but also for the whole company. Teams will work together more cohesively, and you’ll likely see better outcomes, customer relationships, and profits as every individual becomes a strong contributor.

See for yourself how the right tools can boost visibility into employee performance. Demo our product!

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