Why It’s Important to Calculate the Lifetime Value of Employees

Only recently have organizations begun to view employees as value creators rather than as expenses.

Savvy employers have come to understand that a company’s main competitive advantage comes from its people. It’s the employees’ energy, passion, talents and creativity that makes a company stand out and excel.

That’s why it’s extremely important to be able to measure the long-term financial contribution of employees, similarly to how we have benefited from the tremendous advantages of being able to measure the lifetime value of customers.

Measuring lifetime employee value

While it’s fairly easy to measure the value of a sales performer who generates revenue, it’s harder to measure the value of a non-sales employee.

However, with the help of Employee Lifetime Value (ELTV) research from the FORUM at Northwestern University, companies can now measure the lifetime financial contribution of every single employee.

The FORUM’s ELTV model represents the value of an employee by identifying measurable flows of money and computing a dollar return to an organization that can be directly attributable to an employee’s performance.

Value is not limited to direct, measurable cash in-flows, but some activities that clearly create value are difficult to measure and often go unrecognized by management. The model rests on the assumption that investment in a workforce will yield future cash in-flows, so the model is about the value an organization obtains for investing in people; not the “return” derived from dividing all cash in-flows by the entirety of expenditures.

Employees and their long-term performance

One of the greatest benefits of using the ELTV model is that it helps managers focus on the individual employee and their long-term performance. If a manager understands an individual’s strengths, the organization can better allocate funds to maximize performance; and investments made early in an employee’s career payoff in the long run.

The research conducted for the FORUM by Dr. Frank Mulhern at Northwestern University reveals the cost of investments in employees drop significantly as workers become more experienced and build stronger relationships with management and co-workers.

To secure these investments, HR leaders can offer solid research (like the examples below) and proven business models like ELTV to win over their senior executives.

Some 85 percent of a company’s assets are related to intangible capital such as knowledge and human talent. (Brookings Institute);
Employees are the major source for a company to increase competence and profits. (Michael Porter);
Employee turnover costs companies in the U.S. more than $140 billion annually in recruiting, training, replacement, administrative and other costs. (Keep Employees Inc.);
More than half (57 percent) of companies are worried about employee retention and long-term workforce requirements; 61% are concerned about the cost and disruption of frequent turnover. (HR Magazine);
A company that lost all of its equipment but kept the skills and know-how of its workforce could be back in business relatively quickly. A company that lost its workforce, while keeping its equipment, would never recover. (McLean).

An important opportunity for HR

Measuring employee value directly can be very beneficial, and it provides an important opportunity for HR professionals to play a much larger role in their organization’s future success by initiating programs that bring out the best in people.

More importantly, we now have a means to quantify the value of our organizations’ most important assets.

The post originally appeared in a somewhat different form on OCTanner.com