Friday, September 12, 2008

The $6 Million Dollar Employee

What if you had the ability to predict the value of an employee over his tenure with your company? That intelligence sure would make employment decisions like hiring, firing, and training a lot easier.

For many years, marketing professionals have been calculating Customer Lifetime Value (CLV). CLV is defined as the present value (usually expressed in currency) of future profits that can be calculated based on current customer profits and customer behavior. There are many variations in models but most contain the following components:

• Time- period over which lifetime value will be calculated

• Interest rate

• Cost to attract, service and retain customer

• Revenues

To calculate CLV, sum the revenue, subtract costs, and take the present value over the specified time period. This information allows managers to determine if customers are profitable or not. This is a great way to get rid of your non-profitable, high maintenance customers.

Fast forward... over the last year, many articles have been written about using this same methodology for Employee Lifetime Value. Wow, wouldn't that give a new meaning to performance management?

By using a similar methodology as above for employees, companies can track employee value over their employment life cycle. For example, ELV may be lower in the first few years of employment due to ramp up and training but higher in the later years due to increased loyalty, commitment and deepened relationships.

HR can play a critical role in ELV. By learning to calculate and track employee value, HR can assist management in understanding how employees add value. HR can then focus on those VALUE enhancing activities like training, skills development, and career development. By calculating the ROI on these activities through a metric like Employee Lifetime Value, HR has a great way to show its own value!

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