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Employee Value Formula

Employee Value Formula

Employee Value Formula

Employee Value Formula

Can you put a value on a person? When stated plainly, it sounds ridiculous. Human life is so full of nuances, variables, and hidden impacts that the calculation of the value of humankind becomes maddening.

Insurance agencies and juries are forced to come up with numbers to accurately capture the value of life. To those around the life lost, it is never enough. We have trouble putting a number to the value of a life mostly because there is an emotional component that can never be quantified.

The cold-hearted business world is different, though. Everything must have a purpose and value. This includes all employees. In a way, we put a number on each employee.

Easy Examples

The easiest example of employee value may be that of a salesperson. Let’s say a salesperson brings in $4 million in revenue; that’s what they are worth. If their business were to reduce their role, the organization would lose $4 million in revenue. If the organization were to replace this individual, it would expect that the resulting revenue would be roughly the same.

To further refine that estimation, let’s assume that the salesperson is productive only 50% of the time, in that half their time is spent on low-value administrative tasks. This means the salesperson’s average revenue per hour is $4,000.

Another method of measuring employee value is to look at the aggregate of employees. This translates into revenue divided by the number of employees equaling the average value of each employee. For example, continuing with the example of a sales organization, let’s say we have 20 sales representatives, four managers, and one administrative assistant. The organization brings in $80 million in revenue, with a total of 25 employees. Using this formula, each employee is worth $3.2 million.

What to Expect

Based on this formula, if you added a new sales representative, you could expect revenue to grow an additional $3.2 million to $83.2 million overall—maybe even more than that. However, this formula also includes the admin assistant, and if you added an additional assistant, would it add another $4 million in revenue? It probably would not.

The issue with this formula is that it is not entirely accurate. Nor does it give you much insight unless everyone in the workplace does the same thing. To understand employee value, you must be creative to capture the complexity of the situation.

Starting with hiring a new person, you need to understand the current gap in what is not currently happening and what financial impact that makes. How much does that cost the company in lost productivity or opportunity? What value would come from this newly hired employee?

Because of New Employees

In this scenario, we can imagine that there is a gap in post-order support and administrative duties that each salesperson endures such that it takes up two hours of their time each week. If the organization were to hire an additional administrative assistant who would help facilitate orders and remove additional administrative tasks, that could free up sales agents by 40 hours per week. Based on our earlier calculation that a sales agent can make $4,000 per hour selling products, the value proposition adds a layer of depth. Giving more selling time back to a team of 20 would result in a revenue gain of $160,000 per week or over $8 million per year. In this scenario, who is more valuable: the salesperson or the administrative assistant?

There is a similar approach for letting someone go from an organization. First, you must explore each person’s role, what they do, and the gaps they fill. You have more information on the impacts they make because you can assess their actual performance, not theoretical performance as when you are creating a new position. There are the first impacts of their main job function, but there are also the secondary and tertiary impacts of their work on others in the organization. While they may do something very simplistic, their role may be the centerpiece of the entire organization’s productivity system.

The formula process consists of a backtrack investigation thought experiment. In this exercise, you remove the individual from the organization and determine all the impacts that would occur. These impacts can range from items produced to tasks accomplished and from communications made to mentoring. After outlining all the impacts, you determine how much value each of these impacts has for the organization.

 

Impact A + Impact B + Impact C… = Organizational Value

 

As a case study, let’s look at Sheri. She is an admin assistant who makes $50,000 per year for the sales organization where she maintains records, assists with orders, and serves as the morale lead, running the party planning committee. The records she keeps save each sales agent two hours each week, and the order management she performs saves an additional hour, totaling three hours saved per agent and 60 hours saved for the entire sales force. Additionally, Sheri creates a strong sense of community through her morale efforts, which we estimate lower attrition by one person per year. For each lost sales employee, the organization estimates that it costs $80,000 to replace the individual, in addition to lost sales during the hiring process.

Therefore, we calculate Sheri’s impact at $240,000 saved per week by providing sales agents with more sales time and an additional $80,000 in attrition savings. Annually, Sheri contributes $12.5 million to the organization for her cost of $50,000. That is an amazing return on investment and insight that can only be uncovered through second and third-order impact analysis.

References

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