Employee Lifetime Value: All You Should Know
We’ve heard the quote ‘people are your most important asset’ for decades now in business, but what does it mean? It’s easy to understand that people are the ones that deliver on the organization’s value proposition and vision; however, is there a way to quantify this? Enter employee lifetime value (ELTV) which aims to quantify and back this statement up with data.
ELTV is a relatively new concept, and its principles stem from a more well-known business metric: customer lifetime value. This recognizes the customers’ value in terms of long-term relationships with the business. ELTV works along with the same principle. Employee lifetime value is an important HR metric. Let’s discuss why, what impacts it, and how you can boost ELTV at your organization.
What is employee lifetime value?
Employee lifetime value (ELTV) refers to the expected future value of an employee’s time in an organization.
- Employee – Anyone who works at the organization, either on a full or part-time contract, and receives formal compensation.
- Lifetime – This is the total duration of employees’ working relationship with the organization.
A high employee lifetime value has a positive impact on the business outcomes, as the employees truly bring value to the organization.
The below graph depicts how you would interpret ELTV. The X-axis represents the time and the Y-axis shows the employee output. The area below the curve is ELTV:
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ELTV is quite similar to a concept in marketing known as customer lifetime value (CLV or CLTV) – an economic value that the customer brings to the business. This is not a measure of just one purchase of a customer but a customer’s value across the whole relationship. Similarly, the value of an employee’s contributions is measured across the entire working relationship and duration.
The ‘start’ label on the graph shows that an employee technically makes a ‘negative contribution’ to the organization. This is to illustrate the costs spent on hiring the employee. From there, the line goes up from an employee’s onboarding to the point of an employee contributing. Over time, the line and value of an employee increase until such a time the employee leaves.
Why is ELTV an important HR metric?
- Estimating human capital ROI – Monitoring ELTV data leads to stronger human capital decisions and thus a greater return on investment. Your organization can establish comparative data sets to understand the optimal path for new hires to contribute, and thus creating a more robust culture of connection and retention.
- Making a business case for investment in people – ELTV data provide you with the necessary information and a fresh perspective to showcase the importance of learning and development. You’re able to demonstrate the ‘costs’ of developing employees as an ‘investment’ with a tangible business impact.
- Understanding the employee lifecycle – ELTV provides a clear understanding of when and how to provide input into the various aspects of an employee’s career at the organization. It unpacks hiring, onboarding, development, and offboarding – and provides data at each of these intersections for it to be optimized.
What impacts ELTV?
There are a few factors that have a significant impact on ELTV:
A well-established onboarding program allows for employees to contribute much faster to an organization and also increases the likelihood of long-term retention. A study by Gartner shows that successful onboarding can improve employee performance by up to 15% and increase the likelihood of discretionary effort by 20%. Furthermore, a successful onboarding program leading to committed employees means they are nine times less likely to leave.
Training & development
An optimized employee development program leads to long-term growth in an organization and increases the value of employees’ contributions. Companies are not the only ones who value training. The learning & development statistics say it all: 94% of employees say that they would stay at an organization longer if the employer invests in their learning and development.
An effective talent acquisition and recruitment strategy should lead to higher output from the start of an employee’s journey. A new hire also brings with them new ideas and energy and subsequently can improve the contribution of team members. A study by McKinsey & Co. showed that hiring a top performer yields 67% more productivity and profit.
Strong management practices strongly correlate with the contribution that employees make and retention rates, and subsequently a positive impact on TV. A study by Gallup shows that the quality of managers accounts for 70% variance in team engagement.
Employees experience every aspect of the ELTV cycle/chart. By recruiting and developing employees, organizations can manage the contributions of employees.
Designing for impact allows you to specifically optimize employee performance and result in maximum results. The greater the experience throughout an employee’s tenure at your company, the more likely it is they will perform and contribute to the organization.
How to measure ELTV
To understand how to measure ELTV, let’s consider two scenarios.
Stacy works for an organization that has quite advanced HR practices. Every year, they are consistently ranked as one of the best employers to work for. On the other hand, Adam works for an organization that is known to have a toxic work culture and poor HR practices. Their ELTVs are plotted on the below graph:
Stacy is represented by the blue line & Adam is represented by the purple line.
Let’s break down each aspect of the graph to understand how to measure ELTV.
Hiring & onboarding
From the day an employee is hired, they cost the organization money, which is reflected in the negative output displayed. An organization then starts onboarding someone and measures how much faster that employee can start contributing towards the organization.
Back to the example, Stacy had an exceptional onboarding experience. She participated in a pre-boarding program and got an introduction to the company culture and way of work even before she began working. Everyone in the organization welcomed her and she received a personalized, tailored onboarding program.
On the other hand, when Adam started at his workplace, it was a complete mess. He did not have any of the tools to set up to be productive in the first couple of weeks. As a result, Stacy was able to perform and yield results much faster by 30%, and also much sooner into her career journey with the organization.
Following the same example, Stacy is allowed to work remotely on some days, and her concerns are listened to and addressed. She receives regular coaching and performance feedback, and her goals align with the organization’s goals. On the other hand, Adam has a lackluster employee experience, with micro-managing leading to increased stress and burnout. As a result, Stacy outperforms Adam by 50% and thus makes a more significant contribution.
Training and development
Similar to previous experience, Stacy is provided with both formal and informal learning opportunities, such as job rotations and access to a wealth of mentors, coaches, and a library of resources. On the other hand, Adam is only provided with e-learning opportunities but is not encouraged to do anything more. As a result, Stacy is able to do more with newly acquired skills, whereas Adam’s performances plateaus.
Subsequently, Adam decides to leave the organization, and the tenure with the organization is much shorter than that of Stacy. The difference in the impacts of these can be extrapolated over a period of time.
For example, Stacy’s onboarding resulted in a 30% greater performance. Over a year, that is up to a difference in the value of $36,000. In two years, that extends to $72,000.
Stacy’s superb employee experience also results in a revenue variance of $60,000 per annum and $120,000 over two years.
So, there’s no ‘firm calculation’ for ELTV. Instead, you have to understand the value and variance generated in each factor in ELTV.
What can you do to boost employee lifetime value?
Improving your people practices goes a long way in boosting the employee lifetime value at your organization.
- Build a strong recruitment and selection process – Employees who are the right fit for your organization and vice versa are more likely to stay with you longer but also be more productive and perform better. A good recruitment process requires you to have a solid employee value proposition. You need to couple this with a smart sourcing strategy and a clear vision of the type of candidates you want to attract. Before sourcing, create a profile of the ideal candidate and start sourcing and recruiting on this basis.
- Focus on onboarding – A high-quality onboarding process that starts with pre-boarding and job orientation helps your employees become more productive faster. In a work environment that is becoming increasingly remote, be sure to make use of video for a face-to-face introduction. Focus on automating the administrative tasks needed to get an employee onboarded (technology, paperwork, equipment, etc.) so that you can focus on the essential things. That is, opportunities to meet with colleagues and with relevant stakeholders.
- Invest in training – Targeted training, leadership development, dedicated learning time all of that will help you improve ELTV. Having a blended approach (digital & classroom) to learning will always serve the organization well. However, the most important aspect is to develop a culture of learning from the top-down. Lots of organizations have access to a plethora of resources, but much of it goes unused. If you purposefully create space and time for these activities, then learning becomes more effective, and the value of the contribution by your workforce increases.
- Develop your managers – We’ve all heard that employees don’t leave jobs; they leave managers. To develop your managers in a way that they can help their employees perform their best and stay within your organization. The more developed managers are, the greater the ELTV is for all employees.
- Work on your employee experience – Throughout the employee life cycle, focus on the moments that matter. Organizations with a higher employee net promoter score (eNPS) are likely to have higher-performing employees, resulting in more revenue and productivity. It’s important to understand that each individual is different, and thus their employee experiences require tailored solutions.
- Build an inclusive company culture – In such an inclusive work environment, your employees feel valued, respected, and appreciated. Diversity leads to greater ideas and innovation, which, in turn, creates more opportunities for employees to be given ‘stretch projects’ – where they are challenged by the complexity of the work and not the amount of work. Individual employees’ contributions, in this way, are more optimized than ever.
- Have solid compensation and benefits strategy – When employees feel they’re being fairly rewarded for the work they’re doing, they’re going to be more motivated, engaged, and likely to stay. This requires a comprehensive compensation and benefits outlook to remain competitive in the market and also retain your top talent.
To sum up
Employee development, focus on employee retention, and good employee experience are key to increasing employee lifetime value, which in turn, has a positive impact on the bottom line. ELTV also allows you to understand the impact of small changes in HR practices and the incremental value it can add. In many instances, small improvements in an onboarding process can deliver up to a 6x difference in ELTV for an employee.