Investment in human capital is no different to investment in stocks. A stock market investor needs to always keep a track of his stocks and accordingly diversify or modify his portfolio as market dynamics changes – Similarly, an organization needs to keep a track of value that is generated by its employees to be able to make necessary interventions where needed. The role of strategic HR is much more than hiring record keeping. Today HR role demands developing strategies to improve employee performance in order to boost the organization’s growth and revenue.
The concept of Employee Lifetime Value(ELTV), therefore, is quintessential in the Talent economy – A metric that HR professionals can use to understand how much an individual contributes to the organization, whether in dollars, in productivity, or even in morale. According to a Brookings Institute study, nearly 85 percent of a company’s assets are related to intangible capital tied up in knowledge and human talent. Given the impact of people on a company’s profit and overall financial performance, it is extremely important to find a way to measure the long-term financial contribution of employees.
At Greenhouse, VP of People, Maia Josebachvili, has explained the emerging significance of ELTV and how to understand the ROI on investing in People. In short, we can use ELTV as a tool to illustrate that investing time and resources at various points in an employee’s lifecycle creates measurable and significant returns for the organization.
The ELTV model is useful for several reasons. The significance of measuring employee value directly can be very beneficial, affecting a broad spectrum of the HR organization’s responsibilities. ELTV becomes the basis for mapping out individual development programs, appropriate reward and appraisal systems and performance measurement. At a strategic level, ELTV can provide aggregate data for workforce planning and modelling.
Not only does the ELTV data highlight opportunities for improvement in hiring and onboarding processes for new employees, but also in training and career development processes for current ones. The key purpose of People analytics is to help the HR a) stop doing things which are not going right? b) start doing things which are right and c) continue doing things which are going right. Measurement of ELTV can help the HR justify its actions and initiatives to achieve organizational success.
The graph below presents ELTV in terms of the employee lifecycle, with time on the X-axis, “Employee Value” on the Y-axis, and three points representing a few of the more obvious inflection points in an employee’s lifecycle. When we talk about ELTV, we’re talking about the area under this curve.
Most ELTV graphs have two common factors:
- The relative value of an employee is negative from the time of their hire through their first day and onboarding period. This is because most new hires typically don’t make measurable contributions until after onboarding has been completed.
- The value of an employee typically decreases to zero after they make the decision to leave. This is because their measured contributions also decrease until their last day.
While most ELTV graphs include a decrease to zero at the time of an employee’s departure, one may choose to adjust the rate of decline or remove it entirely based on the contributions.
THE ANGLE – DESCRIPTIVE, PREDICTIVE AND PRESCRIPTIVE
By following best practices in employee onboarding, positively influencing employee motivation, and employer advocacy and retention strategies, the value of ELTV can be enhanced.
More than 70% of companies now say they consider people analytics to be a high priority. The field even has celebrated case studies, like Google’s Project Oxygen, which uncovered the practices of the tech giant’s best managers and then used them in coaching sessions to improve the work of low performers. Other examples, such as Dell’s experiments with increasing the success of its sales force, also point to the power of people analytics.
While only 9% of companies believe they have a good understanding of which talent dimensions drive performance in their organizations (Deloitte Study), there are numerous way in which People analytics can help the organizations study employee behavior – Attrition modelling can bring out patterns of potentially disengaged employees, data analysis and modelling on Employee Engagement/Reward Survey questions text analysis on open comments data can give the areas the organization needs to focus. People’s interactions are the focus of an emerging discipline we call relational analytics. By incorporating it into their people analytics strategies, companies can better identify employees who are capable of helping them achieve their goals, whether for increased innovation, influence, or efficiency. Firms will also gain insight into which key players they can’t afford to lose and where silos exist in their organizations.
WHERE AND HOW TO FOCUS – A PERSPECTIVE
The employee generational landscape is changing. Gen Y is bigger – with over 2 billion globally, this section will make up for 75% of the workforce by 2025(Deloitte Study). 86% of HR Professionals say that Millennials are different from previous generations. An average Gen Y wants feedback 71 times per year (Credit: ORC International). In order to maximize ELTV, HR must consider the type of employee it needs to focus on. GenY will have different motivational factors than GenX, the latter may be less demanding as generally perceived while the former may want a lot of freedom and trust. Millennials tend to like a work culture which embraces innovation and gives a great amount flexibility and open environment. For example, millennials being more tech savvy than any other generation, by and large, would be easily motivated if their manager keeps them hooked to learning new technology. This idea may or may not
work for GenY employees.
Another important aspect to be considered is the retention of top performers. High performing employees are very clear in their career goals, are ambitious and attractive to other organizations. Hence, to be able to engage them a manager needs to challenge them in the right direction, provide right development opportunities, role clarity and an environment which makes them feel valued and recognized.
Notwithstanding the challenges in measuring ELTV in various job families and organizations, the concept is really useful to modern day HR as it focuses on the return on investment an organization gets out of its employees.
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