Exploring the Building Blocks of 'Employee Lifetime Value'

This FORUM/PIC white paper offers a new perspective on measurement

Historically, employees have been treated as cost creators, rather than as value creators. While it has been relatively easy to associate value with sales performers who generate revenue, the value non-sales performers contribute to an organization has been much harder to quantify.

New technology enables managers to accumulate extensive information about organizational performance at an individual employee level. Furthermore, any organization, regardless of industry, size, revenue or number of employees, can take the first step to estimating the value contributed by their employees.

What is ELTV?

Employee lifetime value (ELTV) is a quantitative measure of the long-term financial contribution an employee makes to an organization. The most obvious way to represent the value of an employee is by identifying measurable flows of money to an organization that can be directly attributed to an employee’s performance. The best example is revenue generated by a field salesperson whose incremental financial contributions to an organization can be directly measured. Other employee situations where financial contributions can be directly attributable include certain retail sales clerks, service personnel in health care, financial services and travel services, among others. There are, however, other areas where employees create value for their firms that, while not as easy to measure, can be systematically quantified. These critical areas include:

• Referral activity: Non-selling employees convince people to be customers.
• Cost savings and efficiencies: Employees identify or implement cost savings in production, purchasing, distribution, pricing or other areas.

In addition, there are a number of ways employees create value that are much harder to measure, but have a clear qualitative impact on the organization:

• Employee enthusiasm helping make a company look attractive to potential customers or employees.
• Creative and innovative employees helping organizations deliver superior and competitive processes, products and services.
• Employees generating good will through interpersonal relationships, inside and outside the workplace.
• Cultural effects such as more efficient processes or positive contribution to a company’s defined values.

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The Bottom Line

It is clear that value is not limited to direct, measurable cash in-flows. But some activities that clearly create value are difficult to measure and, because of this, often go unrecognized by management. As ELTV measurement matures as a management practice, more complete assessments of employee contributions will be incorporated into ELTV models.

For now, the ELTV Performance Metric – developed by Frank Mulhern, Associate Dean for Research, Medill School Northwestern University, and Yuri Moiseyev, graduate student in Integrated Marketing Communications at Northwestern – focuses primarily on linking financial in-flows to individual employees.

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Variables That Determine ELTV

Models of ELTV may vary from industry to industry, from one organization to another, or from one business environment to another. Nevertheless, we can identify ELTV variables across a variety of business situations. Before delving deeply into ELTV measurements, organizations must have a clear understanding of how the computed lifetime value scores will be used and whether the computed values will inform decisions about employee hiring or retention, among other applications. They must also have an intuitive grasp of how their people generate value. Once these types of qualifiers have been determined, the following variables are necessary to estimate ELTV:

• Selecting employees for inclusion in the analysis
• Obtaining information on financial in-flows to the organization
• Allocating financial in-flows to individual employees or groups of employees
• Compiling and/or predicting financial in-flows for each time unit
• Creating models to measure and allocate value generated by specific nonsales activities
• Obtaining information on costs of maintaining an employee
• Assigning costs to individual employees for each time unit
• Constructing a financial model that includes discounting monies over time if needed.

Note: Salaries and wages are best construed as part of the ongoing cost of maintaining an employee and should be subtracted from the financial in-flows attributed to an employee to yield a net contribution.

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A Critical Next Step

A primary benefit of estimating ELTV is that it helps focus managers on individual employees and their long-term performance. Development of tools to acknowledge and measure the intangible values contributed by non-sales employees is a critical next step in expanding definitions of value creation by employees. ELTV measurement is also a measure of organizational success, as our production-based economy transforms into an information and service economy, and as managers find new ways to maximize the value created by their people. In this new economy, people and their performance are the driving force in organizational success, and workforces are the real value creators.

This document examines properties shared by Employee Lifetime Value and Customer Lifetime Value, which are explored in further detail in a 45-page research report entitled “Employee Lifetime Value: Measuring the Long-Term Financial Contribution of Employees.” This white paper and the full report were produced by the Forum for People Performance Management and Measurement and the Performance Improvement Council and are available at: www.performanceforum.org.

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