Section 4: Employee Lifetime Value and Cost Modeling
By Pasha Roberts, Chief Scientist, Talent Analytics, Corp.
One Role at a Time
First, it is only meaningful to evaluate one role at a time, one company at a time. The curves and dynamics for an Accounting Role will be very different than that for an Inside Sales Role. Likewise, “industry benchmarks” are next to useless – companies differ, regions are different, and enterprises evolve over time. It is easy enough to gather this information for your own company’s roles, and we suggest investing the time to simply do so.
Some roles have more volume and size than others. A Call Center or Underwriter role will have plenty of data for great accuracy. Executive leadership is a small sample with less turnover – not as useful for analytics.
Often this exercise comes about in response to turnover or training issues, which manifest in the first year or two. The simplest of all is an entry-level position that automatically promotes after a year or two.
These short-term cases are easier to calculate than long-term employees. Beyond a few years, cost and performance factors get more complicated with raises, equity, inflation, and the time value of money. Long-term employees also vary in performance patterns – some continue to learn, while others coast or “check out.”
Three Common-Sense Numbers
Three common-sense questions underlie our three metrics:
- How much does it cost to find, train, and keep an employee in this role?
- How much does an employee in this role contribute to the business top line?
- How long do people tend to stay in this role?
These calculations are usually done at a high level, aggregating costs and performance for everyone in a single role. More advanced approaches seek out clusters or individual patterns across thousands of employees. These “big data” approaches are more useful for transaction and revenue-related roles.
Figure 1. The Three Curves
The Cost Curve tracks how much money is spent on an employee in the role, over time. It is like a daily log of costs for a new employee, from day 1. After a flurry of recruiting, orienting, training, and on-boarding costs, the expenses typically level out as salary and infrastructure.
The Performance Curve estimates the contribution an employee makes to the company, starting at day 1. Typically until training and orientation are complete, that number is zero. Employees typically “ramp up” to productivity after weeks, months, or years. After ramp-up, that level may plateau, increase gradually, or even bow downwards after years. The ultimate level of contribution can be calculated directly for some roles, estimated for others.
The Attrition Curve shows the probability of an employee being in the role at different points of tenure. On the first day, that number is close to 100%. This number is the flip side of turnover – if a role has 40% annual turnover, there is a 60% chance of being on the job in a year. The full curve is easily calculated from the HR System of Record, and is a powerful tool.
The three in combination are exceedingly powerful.