June 3, 2019
Managers frequently utilize the concept of customer lifetime value (LTV)—a prediction of the net profit attributed to the entire future relationship with a customer. The benefits of calculating LTV are numerous; the metric informs decisions about customer acquisition, retention, and overall value. Though employee lifetime value (ELTV) can be difficult to quantify, managers can still benefit from considering the value that an employee adds to a company over the course of his or her tenure.
The basic structure of the employee relationship is an increasing return that reaches a maximum, then steadily falls once an employee decides to quit.
When an employee joins a company, he or she needs training, which requires investment. However, once a new employee learns enough to fully contribute, the employee consistently contributes value until he or she leaves.
How much is an employee worth?
As Predictive Analytics Times reports, “from a GAAP accounting perspective, most employee expenditures are considered to be costs… employees are not subject to depreciation, as are machines, for example.” However, employees also add value to an organization—even if they are not office workers or upper-level executives.
Pay is the first quantitative indicator for understanding what an employee is worth. No organization would pay more for an employee than the value of the benefits—both qualitative and quantitative—that he or she brings to the table. For example, Glassdoor states that the average annual wage for a warehouse worker is roughly $31,000 per year. Although a warehouse worker does not bring in $31,000 in revenue, the intangible value—derived almost entirely from facilitating inventory movement—is worth more than $31,000.
Analogizing the framework of customer lifetime value, assume that the average tenure for a warehouse employee is two years. Multiplying tenure by wages shows that the employee lifetime value for a warehouse worker is, at a minimum, $62,000. Pay is essentially a “floor” for the value of an employee. In other words, the employee relationship is worth at least $62,000 total, or $31,000 per year. If this were not the case, the employer would not have hired the employee.
How can businesses maximize employee lifetime value?
Employee retention, improved training techniques, and heightened worker engagement increase the value of a company’s employee base.
Improving employee retention increases average employee tenure. Therefore, employee retention also increases the value of employee lifetime value, allowing a company to experience more value from its employees over time.
Maia Josebachvili of Greenhouse conducted a case study with Greenhouse’s salespeople showing that “retaining a sales person for three years instead of two, along with better onboarding and management practices, yields a difference of $1.3 million in net value to the company over a three year period.” The organization made “small improvements” in its people practices and watched employee lifetime value increase significantly.
In only a few years, incremental improvements in hiring, onboarding, training, and engagement resulted in millions of dollars of value. When workers are given reasons to stay with their employer and feel involved in the company’s mission, both employers and employees benefit.
Companies should frame workforce decisions in terms of value optimization.
Managers who consider employee lifetime value must consider policies that increase the benefits of the company’s workforce. Strategies that increase retention, engagement, and satisfaction foster the creation of more value—both for employers and employees. The relationship between managers and workers is symbiotic; when one party benefits, the other does too.
Learn how Qlicket can help with maximizing employee lifetime value.