It is the people within an organisation that create real value. We all know that. We also know that it is difficult to quantify such value. Even so, measuring employee contribution and performance is vital to business growth.
Multiple variables affect this measurement:
motivation, attitude, expertise
However, it is not all on the employee. Businesses can also do plenty to affect this number: from improving the new hire experience through engaging with employees to rewarding them. So how do we get to this number? By calculating Employee Lifetime Value.
Defining Employee Lifetime Value
Employee Lifetime Value (ELTV) represents the total net value an employee brings to an organisation over time. While quantifying people’s impact on an organisation could get challenging, especially when compared to more straightforward indicators, such as market share, revenue or profit, organisations must measure the value of investing in their people and understand this value over extended periods. That is so they can make informed decisions around allocating resources, workforce planning and ultimately, marry people strategy with business strategy.
How is ELTV calculated – this is how you start:
There are a few ways to calculate ELTV, but generally, a dollar return to an organisation is attributable to an employee. It assumes that investments in a workforce will result in future cash inflows (without taking into account discount rates and the like – but this is a topic for another time). We can either start by taking the pretax profit for each dollar invested in employee pay and calculate the
- (Revenue-(Total Cost-(Regular Compensation Cost+Total Benefit Costs)))+(Regular Compensation Cost+Total Benefit Cost)
- (Profit+Average Number of Employees)+(Employee Cost+Average Number of Employees).
Or we compare operating profit to total compensation dollars required to produce profits.
ELTV is just a number:
The above calculation does not factor in all that makes the employee experience from pay increases to job categories. Different industries, business environments, employee situations require different ELTV formulas. It is hard to get an accurate ELTV because we are trying to measure the sometimes intangible. Nevertheless, it is okay and recommended to tweak some of the variables of an ELTV calculation based on the business situation, for example. Also, the purpose of ELTV is to aid business decisions rather than identifying the one “true” value.
So, while ELTV is essential for a fair people strategy, it has its limitations. Our next article will examine and offer solutions to these limitations, watch this space!
For the ELTV calculations, we used Mike West’s 2019 book, as a reference.
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