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Calculating the Tremendous Dollar Value of a Top-performing or Innovative Employee

by Jan 13, 2014, 12:53 am ET

Lionel MessiIn professional sports, almost everyone readily agrees that a top-performing athlete is worth their weight in gold. That value is clearly reflected in their compensation, where for example a top-performing NFL quarterback can get paid 10 times more than the third-string quarterback on the same team. The value of adding a LeBron James, Peyton Manning, or Lionel Messi to your team can easily exceed hundreds of millions of dollars in revenue. The same is true in entertainment, where adding the right actor to a film or rock star to a concert can easily double the gross over an unknown performer.

Unfortunately in the corporate world, the HR function has failed to come up with a credible method for quantifying the “performance differential” between an average employee and a top performer in the same job. And as a result of not having this economic justification, executives have all too often been reluctant to fund the leading-edge recruiting, retention, and management processes that are required in order to successfully attract and retain these highly desirable top performers and innovators. In last week’s article, I demonstrated how to calculate the negative costs associated with hiring and keeping weak performers, and in this companion article, I highlight how to calculate the performance multiplier of top performers.

Calculating the Performance Multiplier of a Top Performer

There are seven steps in the process for calculating the top-performer multiplier.

Step I — Begin by working with the king of metrics

Before you begin putting a dollar value on top-performing employees, consult with the CFO’s office (the undisputed king of metrics) with the goal of getting them to partner with you throughout the calculation process. With their help, you can not only avoid any major calculation errors but you can also use their credibility in order to avoid any future criticism from other executives. For similar reasons, including the COO’s office in the process is also a good idea.

Step II — Quantify the value produced by an average employee

You of course should start with the premise that top performers by definition produce above-average results. So begin by determining the “baseline results” that an average employee produces. The accepted method is to use the average revenue per employee (the total corporate revenue divided by the number of employees) as a baseline and a fair indicator of the worth produced by “the average” employee over one year. This baseline measure has an advantage because even organizations that do not produce a profit can calculate it. For example, at a company like Sears, the average revenue per employee is $138,200, and at a better-performing organization like Apple, the revenue per employee is just over $2 million per year.

Step III — Consider using external performance multiplier data

On occasion, company executives or the CFO will accept external data as representative of the performance multiplier of a top performer over the average employee at your firm. If that is true in your situation, the following historical data points of multipliers may be useful.

A top 1 percent performer produces:

  • 10 times higher value than average —  GE, Yahoo, and the U of Indiana study by O’Boyle and Aguinis
  • 25 times higher value than average — Apple
  • 28 times higher value than average —  Bradford Smart at Top Grading
  • 300 times higher value than average — Google

Step IV — Determine the “top performer differential multiplier” between an average employee and a top-performing employee in the same job

Your next step is to determine the percentage or multiplier above the previously determined average output that a top performer produces. This is known as the “top performer differential multiplier” and it is represented by a “percentage” if it is less than 100 percent higher (i.e. 33 percent above the average) or a “multiplier” (i.e. 10 times the average). For clarification purposes, a top-performing employee’s performance ranks in the top 1 percent and an innovator produces product or process features that improve it by at least 25 percent.

The performance differential definitely varies based on the job being analyzed. For example, the performance differential percentage between top and weak employees in “easy-to-learn routine jobs” will be much smaller than in jobs that require innovation, creativity, and continuous adaptation to new technologies and business challenges. Start with product design jobs.

Work with design executives to identify the creative ideas, product feature ideas, and product ideas that were originated by each design employee during the past two years. Next, use a small team of executives to estimate the dollar value and business impact of each idea. Next you create a “ranked from best to worst list” starting with the design employee who produced the highest total economic value down to the value produced by the lowest-performing design employee.

Remember that the estimated value of the ideas and innovations doesn’t have to be perfect; however, the process used to estimate them must be consistent across each employee. Once the best-to-worst list is completed, simply calculate the percentage difference between the value produced by the average employee on the list and the value produced by the top-performing design employee on the list.

Next, conduct the same differential analysis on other creative or design jobs like web designers and programmers. Follow that up with an analysis of jobs that require a high level of adaptiveness and problem solving, like managers, traders, and those who work in highly competitive environment. And finally conduct analysis on easy-to-quantify jobs like sales and customer service.

Eventually you’ll get some pretty good estimates of the “top-performer-differential multiplier” for each major job family throughout the firm. The multiplier percentage may range between a low of 33 percent and a high of 1,000 times. Obviously when you find a high multiplier in a job family, that means that you should prioritize and direct the best HR resources towards hiring and retention in those jobs. If you find a zero or low performance differential between top and bottom performers you must conclude that either you have an effective top grading hiring process or you have a serious labor issue that is unnaturally restricting employee performance.

Step V — Quantify the added value of a top performer using the multiplier

The next step is to multiply the average revenue per employee by the “top performer multiplier” to get an average dollar impact. For example, at a company like Sears, the average revenue per employee is $138,200, so a 10 times multiplier would mean that a top-performing employee would produce an additional $1.3 million in revenue each year. At a higher-performing organization like Apple with revenue per employee of $2 million per year, using its actual multiplier of 25 times, a single top-performing programmer would produce an astounding $48 million per year in added value each and every year. This may seem like an outrageous economic impact, but if the employee invented the iPod, the iTunes site, or the Siri feature on the iPhone, it may actually be an underestimate.

Step VI — Consider including additional “top performer value” factors to the calculation

If you really want to get sophisticated, you can add some additional value-added factors based on the premise that top employees create value in areas that average or top performers do not. These additional value-added factors are always estimated, based on the documented impacts from a few representative top-performing employees.

  • Game changers – pioneers and purple squirrels may move beyond simply having new ideas, and instead create innovations that are so powerful that they literally disrupt the industry and provide your firm with a competitive advantage. Having these innovators on board may also provide your firm with a first-entry advantage.
  • Relationship building – because of their powerful contacts, top performers may be capable of building relationships with key customers and strategic partners that an average employee could never pull off.
  • Attract new customers – these innovators may be industry icons who have the capability of attracting customers and vendors who otherwise would never consider your firm.
  • Speed  because these innovators learn and adapt incredibly fast, they may provide your firm with the speed required to be first to market.
  • Patent value – these innovators may create patents that give your firm a competitive advantage, as well as bringing in additional revenue.
  • Monetization – top performers and innovators are much more likely to be able to successfully monetize already existing features.
  • Problem solvers – these top performers may be able to forecast and solve strategic problems that no average worker could.
  • Recruiting magnets - these innovators may be industry icons who have the capability of attracting dozens of other top performers to the firm. Their staying at the firm may also cause others to stay longer.

If you find that top performers and innovators regularly produce any of above-listed positive unique impacts, you should add their estimated value to your “revenue per top-performing employee” calculation. 

Step VII — Determine whether top performers can be developed internally

Once you realize the tremendous value of top performers, you may also want to find out if above-average-performing employees can be developed into top performers after undergoing leadership development, coaching, and training. This is done by waiting 12 months after applying an intervention, and then measuring whether the employee’s performance improved up to the 1 percent top-performer level. It is much faster and there is a much higher ROI that results from externally recruiting top performers and innovator as opposed to developing them. This advantage comes in part because the business impact of recruited top performers is immediate and adding them to your staff will help your firm, while simultaneously hurting your competitors when they lose their top talent.

The Normal Top Performer Multiplier

Because organizations vary in the amount of change, adaptiveness, and innovation that they encounter, it’s hard to set a single benchmark standard for a top performer multiplier. However, using the very best high-tech firms like Apple, Google, and Facebook as a model, here are some guidelines that you might be able to use as a benchmark.

  • Minimum top-employee performance multiplier – +33 percent of the average revenue per employee (+ $606,000 each year in the Apple example), or three times their $200,000 annual salary.
  • Average top-employee performance differential – +10 times the average revenue per employee (+ $20 million each year in the Apple example), or 100 times their annual salary.
  • An exceptional innovator – expect +100 times the average revenue per employee for exceptional innovators (+ $200 million each year in the Apple example), or 1,000 times their annual salary each year. 

To some, these calculations in the Apple example may, on the surface, be outrageously high, but remember the overall value of a major innovation at a firm like Apple can reach into the billions. And if your new hire was a college dropout named Mark Zuckerberg or Steve Jobs, few would argue over the tremendous value that they would bring to the firm.

Final Thoughts

All organizations should know the value of their assets, but especially their top-performing employee assets, which are so essential to corporate innovation and business success. Because so many firms publicly state that their employees are “our most important asset,” it is surprising that only a few firms have taken the time to calculate the “positive performance differential” that is provided by top performers and innovators. And at the firms that have actually done the calculation, it has not come from the HR function.

I hope I’ve given you a head start in the process of determining the value of a top performer. Even if you under-calculate the value of top performers by a huge amount, don’t worry because the actual value is so high that it’s almost impossible not to come out with a high positive ROI for hiring and retaining top performers and innovators.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Logan Meece

    Dr. Sullivan,

    I think it’s interesting that you use star athletes as comparison for your article, but completely ignore the importance of the team.

  • Keith Halperin

    Thanks, Dr. Sullivan. It looks like you’ve been writing about this a on ERE at least since 2002. While it seems obvious that companies should hire the best revenue-generators they can:
    1) Most corporate functions AREN’T in this revenue-generation capacity: what’s a superstar A/P Clerk, HR Generalist, Tech Support Lead like, and what’s THEIR value?
    2)Most companies CAN’T hire top revenue-generators, because they have nothing to offer them. Consequently, they should determine the best people who they CAN reasonably expect to get and go after THEM (http://www.ere.net/2013/02/15/recruiting-supermodels-and-a-tool-to-help-you-do-it/.)

    Cheers,
    Keith

  • Martin Snyder

    Most any algorithm with so many wide estimates for values is going to be of limited (like none) use as a predictive tool, but the exercise still may be useful as a mind-expander.

    Of course, since only “A” players who are top “quality of hire” material are going to get aboard anyway, even that has a limited use.

    No college dropouts. No bad dressers. No bad communicators. No unpleasant politics. No gender ambiguity. No poors in general. You know the drill.

    http://www.fastcompany.com/3024568/leadership-now/why-weird-people-are-often-more-creative

  • Keith Halperin

    @ Martin: “why-weird-people-are-often-more-creative”
    Exactly- THAT’S WHY WE DON’T WANT THEM.

    Cheers,

    Keith

  • http://www.epraxis.com Severin Sorensen

    I applaud the creativity placed around identifying a multiplier to equate the value of a difference maker though approximating the true value seems more art than science at this writing. One thing is clear, as “Ed Ryan” the Pastor turned executive recruiter used to call it, for a CEO to loose a difference maker is a cardinal sin given their transformational impacting nature on the firm. As an executive coach and c-level suite ‘difference maker’ recruiter, the value of a difference maker cannot be overstated. It is often the difference of go, or no-go for the enterprise, and the difference between being a Lindbergh and being first in flight, or being lost in the ranks of the nameless also rans.

    Thanks for your thoughtful work,

    Severin

  • http://PeopleAssessments.com Dr. Tom Janz

    It’s both exciting and terrifying when astute, seasoned practitioners of recruitment practices start throwing their elbows around in the I/O Psychology china shop. Lou Adler does it from time to time with abandon. This time it is John. Should anyone care? Only if incremental learning from experience matters and that requires having some knowledge of what others in the field have done and said before. The risk is coming up with compelling theories that have already been punctured by an ugly little fact or a mathematically provable formula. There is value in reading the literature, as boring as that might be for some.

    I hesitated before commenting at all, since the topic of accurately quantifying the full performance value of top vs. typical vs. struggling performance as it relates to the financial value of hiring top talent has been largely ignored for several years now by the I/O community. It was hastened among us pin heads by the Whyte and Latham(1996) article titled the “Futility of Utility”. Rhyme proved stronger than reason in this case. Even though the common sense that John wields with such agility in this article aligns with the rejoinder to Whyte and Latham’s conclusions by Steve Cronshaw (2006), I/O psychology has largely abandoned the field. Kudos for John for championing this issue.

    Searching the string “Standard Deviation of Performance in Dollars” using Google Scholar yields 16 articles directly related to the issue of quantifying the financial value of top vs. typical talent in the first three result pages. Almost all of these articles come from the 80s and 90s, thanks in no small part to Whyte and Latham. Rather than aiming for the top 1% as John does (which can be slim pickings in any one company for the demanding creative roles that generate the greatest value), these articles focus on the top 15%, since the 85th percentile corresponds to one standard deviation from average performance. In the mathematically-proven staffing utility equation, one standard deviation of annual performance in dollars is the key number that translates hiring system metrics (average tenure, number of hires, selection system accuracy, and selection funnel gain) into financial metrics (dollars/euros/pounds, etc.). Having a provable formula can do wonders for you. See what e=mc(2) did for Einstein.

    So what can be gleaned from the scientific literature that might sharpen the arguments John makes? First, CFOs might be glad to know that over 40 routine production studies (chocolate makers and butter wrappers) establish at least a 40% relationship between fully loaded labor cost and 1 standard deviation of annual performance in dollars (abbreviated to SDy$– don’t ask why). Other studies among big-ticket sales professionals, stockbrokers, and business unit managers find relationships between SDy$ and fully loaded income as high as 2-10X annual compensation.

    Incorporating all the elements of value creation by using the selection utility formula, supported by the US Office of Personnel Management as well as documented in field research published by SHL and Pearson among others, could also help the CFO staff gain some comfort.

    CFOs might be happier to benchmark the value of typical talent by examining profit per employee (EBITA/employee perhaps) vs. revenue, since you can’t buy back shares or fund pet projects with revenue.

    There are likely other useful pointers arising from the published research that escape me at the moment. Perhaps Wendell or Charles (or any other smart, capable I/Os out there) can lend their wisdom to these posted comments.

  • Martin Snyder

    Dr. Janz perhaps the reason for the dearth of work on the subject recently is that most business people KNOW that top performers in key roles can realize potentially very large multiples of average salary; the actual multiple does not really matter for decision making purposes. Steve Jobs will be this generation’s exemplar until someone else pulls it off.

    To a greater point, the religious faith in deterministic number-fiddling is no more effective than sheep entrails as prediction tools for the major wealth creating innovations that have appeared over the years, see cf. Mr. Jobs.

    Apple was counted out and all the formulas in the world would not have predicted such a resurrection (and perhaps a retraction to come). The very fact that validated instruments do work well for the majority of hiring decisions only encourages that faith.

    Human affairs are emergent and cannot be fully predicted. A probabilistic approach that includes hiring some number of losers on purpose goes against the grain of virtually every institution, and that’s why it’s so often the outsiders, the ignored, and the marginalized that end up changing the world.

    True believers need to have little stake in the present- no current identity worth saving, which is nearly the sine qua non of those who disrupt. It’s true believers who move the world, for better or worse, and this is the story of mankind…and no algorithm can yet contain it….

  • http://PeopleAssessments.com Dr. Tom Janz

    @Martin Snyder
    As far as I can tell, the base rate for Steve Jobs is 1/(somewhere north of 1 billion, considering just Americans)– a rare event as you suggest. The value of deterministic number-fiddling lies in the power to replicate human capital value, and not have it depend on the rare skills of a Steve Jobs to make it happen. Yet, I suggest that Steve Jobs would have scored high on tests of fluid intelligence (if he would sit still long enough to finish one), and would do even better on an assessment of learning agility– the ability to learn quickly from experience.

    Apple did not rely on a singular creative genius to design the Apple Store any more than NASA relied on a single brilliant mind to land on the moon or put up the International Space Station. In the case of the Apple store, there were many prototypes that were adjusted based on many usability studies that deployed a lot of deterministic number fiddling to get several factors just right.

    I would never suggest that human affairs can be fully predicted. We top out around validities in the high .60s. And I too shed a tear watching the “Crazy Ones that Change the World” video. But there are many more stubborn, obsessive, and wildly passionate individuals that we have never heard from or about BECAUSE they lacked the keen insight, abstract reasoning, courage to be new, good fortune, and learning agility common among those who have changed the world.

    We don’t need to hire an allotment of losers to make sure we don’t exclude the next Steve Jobs. I suspect that those who hired Aldrich Ames, gave their money to Bernie Madoff or introduced their best friend to Jeffrey Dahmer would agree. We do need to better understand the talents that contribute to the kind of rare insight and success that Jobs and Branson and Helen Keller, etc. contributed in the right setting to deliver the kind of impact they had.

  • Martin Snyder

    Dr Janz, first by “loser” i mean outsider/misfit, not a person of no capability or talent. This very morning the lede graf on ERE says ““Hire, reward, and tolerate only fully formed adults,” writes Patty McCord in the Harvard Business Review. “The best thing you can do for employees — a perk better than foosball or free sushi — is hire only “A” players to work alongside them. Excellent colleagues trump everything else.”

    Patty McCord is wrong.

    Second, Jobs is the easy example because he would never have been hired as an A player, nor would have Gates, nor Ellison until they proved themselves otherwise.

    Your example of Apollo is flawed, because without Von Braun (an actual loser war criminal) or Goddard (an unwanted, laughed at outsider) there would have been little opportunity to employ 400,000 people to create Apollo. To put a fine point on it, the Wright brothers were hardly A players either. NASA did rely on brilliant individual minds indeed.

    If you want innovation, you need a probabilistic portfolio that includes losers. Not many- a good asset portfolio holds mostly blue-chip or quality securities, but without a decent proportion of flyers, upside is severely limited.

  • Keith Halperin

    ISTM that it is in the best interest of a hiring manager to hire not the best person they can get, but the person who makes the hiring manager *look “best” in the eyes of her/his superiors. If that happens to coincide with the larger, company’s goals- so much the better. The key is to make sure that individual desires for gain and security are linked to those of the company’s. Companies which expect their employees to operate against their own interests do so at their peril…

    Keith

    *It would be foolish for a hiring manager to bring aboard someone who could threaten her/his job, so a mediocre manager might encourage the hiring of an even more mediocre (but still more or less competent) subordinate, in order to look good by comparison.

  • http://PeopleAssessments.com Dr. Tom Janz

    @Keith Halperin
    Or to put it more algebraically– ‘A’ players hire ‘A’ players. ‘B’ players hire ‘C’ players. I’m not aware of any studies that reach this conclusion from evidence, however. Anyone?

  • Keith Halperin

    @ Dr. Janz: Not quite.
    I believe that IT IS IN THEIR INTEREST for someone to hire a person who makes them look good, and it’s possible that if a hiring manager is in a secure position, hiring someone better than they are could be in their interest.

    My statement is just my *opinion- semi-anecdotal: since I am not a “Recruiting Thought Leader,” my evidenceless opinion shouldn’t be taken as fact, or “revelation”. (Not that any RTLs on ERE do that, of course….)

    Cheers,

    Keith

    *I WOULD be interested in studies, if such do exist.