What is Employee Lifetime Value?
Employee Lifetime Value is the total monetary value an employee brings to an organization over the course of their employment, including their contributions to revenue, productivity, and any other measurable impact, minus the costs associated with recruiting, training, and retaining them.
How to Calculate Employee Lifetime Value
Employee Lifetime Value (ELTV) is an important metric for understanding the long-term value an employee brings to a company. Calculating ELTV helps businesses assess the financial impact of their workforce.
Let’s break down how to calculate this figure and what factors to consider.
1. Determine Average Employee Tenure
The first step in calculating ELTV is understanding how long employees stay at the company on average. This is the employee tenure, which is typically measured in years.
To calculate this, add up the number of years worked by each employee and divide it by the total number of employees. This gives you the average employee lifespan at your company.
For example, if your company has 10 employees with the following tenure: 5, 4, 6, 3, 8, 2, 5, 4, 7, and 5 years, you would add these up (50) and divide by 10, giving an average tenure of 5 years.
2. Calculate Revenue Per Employee
Next, you need to figure out how much revenue each employee generates during their time with the company. This is a critical part of determining ELTV.
Start by calculating the total revenue your company generates over a specific period, typically a year. Then, divide that number by the total number of employees.
For instance, if your company generates $5 million annually and employs 100 people, the revenue per employee is $50,000. This helps show how much each employee contributes to the company’s overall financial performance.
3. Factor in Employee Costs
Now, it’s time to calculate the costs associated with each employee. This includes:
- Recruitment Costs: The expenses for sourcing, interviewing, and hiring.
- Training Costs: Expenses for onboarding, ongoing training, and development.
- Salary and Benefits: The compensation package paid to employees, including base salary, bonuses, and benefits.
- Employee Retention Costs: These are indirect costs, such as programs aimed at keeping employees happy and reducing turnover.
To calculate the total cost per employee, add all these expenses together. For example, if it costs $20,000 per employee for recruitment and training, and each employee’s salary and benefits total $100,000 annually, the total cost per employee per year is $120,000.
4. Estimate the Employee’s Contribution Over Their Lifetime
Now that you have the average tenure and revenue per employee, you can estimate how much an employee will contribute over their time with the company.
Multiply the average tenure by the revenue per employee. For example, if the average employee tenure is 5 years, and each employee generates $50,000 in revenue annually, the total revenue contribution of an employee is $250,000 over 5 years.
This is the gross revenue an employee could bring to the business.
5. Subtract Employee Costs from Revenue Contribution
Finally, subtract the total employee costs from the revenue they generate over their lifetime. This will give you the Employee Lifetime Value.
For example, if an employee generates $250,000 in revenue over five years but costs the company $120,000 annually, their total costs over 5 years would be $600,000. So, the ELTV would be $250,000 – $600,000 = -$350,000. If this number is negative, you may need to re-evaluate the recruitment and retention strategies to improve the ROI on employees.
Conclusion
Calculating Employee Lifetime Value requires careful attention to multiple factors, including employee tenure, revenue per employee, and associated costs. By doing so, companies can better understand the financial impact of their workforce. Regularly calculating and analyzing ELTV can help businesses optimize recruitment, improve retention, and align employee management strategies with overall financial goals.