Section 5: Employee Lifetime Value and Cost Modeling
Pasha Roberts, Chief Scientist, Talent Analytics, Corp.
It is simple enough to document the hard costs that make up the initial stages of employee life-cycle. This section will walk through the major cost areas, but the specifics will depend on the role at hand. We don’t suggest modeling “soft costs” such as morale or engagement, as they are easy to manipulate and difficult to defend.
Typically a small number of meetings and accounting queries are all that is needed to put a simple aggregate together. It is a good practice to assemble the costs in a shared spreadsheet for the involved parties’ approval.
Human Resources spends a great deal of time and effort to fill one position. Typically a recruiter will screen, interview, and reject many candidates before finding the right person. What does this cost?
Such costs often include the following:
- Job Boards
- Print Ads
- Job Fairs
- Employee Referral fees
- Skills Assessment
- Predictive Scores
- Drug Testing
- Background Screening
In addition, managers and staff spend time interviewing candidates. This is usually well documented, consisting of phone or video interviews, panel interviews, and final individual interviews. They cost money, including:
- Recruiter time
- Manager time
These costs are surprisingly consistent. Some items, like drug tests, have fixed costs. HR works hard to keep the hiring funnel efficient and full. There is usually a fixed set of job fairs, advertising and job board usage per year.
All of these costs get aggregated and averaged for the role, and applied to the first day of a new hire’s job. It is not unusual for this acquisition cost to be quite high.
What are the costs to bring one employee on board? Some companies have regular orientation events to welcome new hires.
Such costs often include the following:
- Human Resources paperwork
- Orientation event – parking, staff
- Shirt, Gifts
- Days of shadowing workers on the job
Employee salary typically starts during orientation. As above, these costs simply go into the spreadsheet on the proper day.
If termination costs are significant, you may want to include them here on day 1. Essentially, we are accounting for the prior employee’s termination.
What are the costs to train one employee?
Such costs often include the following, averaged per hire:
- Trainer Salary divided across students
- Food and Venue
How many days, weeks, or months is the training? Is there a test at the end, and if so, how many pass the test? Is the new employee paid at full salary during the training?
As before, these costs are relatively fixed and can be filled into the spreadsheet.
On the Job Learning
Even after training, employees are not fully productive. The actual ramp-up is not a cost, but part of performance. We will cover that in the next section – it is important to not double-count.
But during ramp-up, most new employees consume the attention of managers and peers. Often this is the expected procedure, and can be modeled into the costs like everything else. For example, a bank supervisor may watch every transaction for a new bank teller, until milestones are met.
Where peer attention is significant and structural, it makes sense to build simple rules to factor it in. For example, a model may include 20% more of a supervisor’s time (and therefore salary) for the first month. Again, we roll this into the model, day by day.
Base Salary, Benefits and Infrastructure
In most large organizations, employee salaries for a role fall within a reasonably tight band. In an entry-level position, such as a call center, the first-year salary may be completely standardized. Even in positions with large individual variances, the long-term patterns are often quite stable. The goal is to build a reasonable model of the salary for one new employee in this role. If there is a probationary salary, simply model it in.
Sales commissions and other bonuses are performance-based. They can be included here, or deducted from performance numbers in the next section. Commissions can be dominant in a role, or a secondary effect. The important thing is to be consistent, and not double-count costs vs. performance.
Add in other fixed, ongoing costs for the employee, such as health insurance or other benefits, at the time that they start. If benefits start later in the cycle, simply model it in.
Some infrastructure is appropriate for inclusion – incremental ongoing fees, such as electricity or building usage. However, do not include infrastructure that is reused when the employee is replaced – for example a computer or desk will be used by a replacement employee.
Once the employee is at full productivity, costs are typically limited to salary, benefits, and infrastructure. For long-term roles, we model in raises and bonuses. When an employee is promoted, they have effectively left the role of this analysis.
Summing up the Cost Curve
The result is a list of daily costs for having an employee on board in this role. If they end up terminating, the costs will stop. But, this metric does not handle terminations – that comes later.
It isn’t necessary to cover edge cases, like lawsuits or medical emergencies. These are exceptions – a distraction from the overall patterns that will emerge.
People Analytics in the Era of Big Data: Changing the Way You Attract, Acquire, Develop, and Retain Talent Hardcover – April 25, 2016
by Jean Paul Isson (Author), Jesse S. Harriott (Author), Jac Fitz-enz (Foreword)