What makes a good employer? Why do people stay at some organizations, whilst others struggle to retain talent? The truth is, when we’re talking about employee engagement and retention, we have to delve into details. Overall good vibes and small interactions, such as a smile or an offer to help out a colleague should not be overlooked, it is important to look deeper and check in at different points of an employee’s journey. That is where employee lifetime value (ELTV) comes in handy.
Deriving from the concept of the customer lifetime value, ELTV is a framework suggested by Maia Josebachvili. It is getting more and more popular among HR professionals in the aftermath of the pandemic, with the great resignation, growing need for resource optimisation, and an increasing struggle to attract and retain talent.
ELTV is defined as a quantitative measure of the long-term contribution that an employee provides to an organization over their time (lifetime) with the company. Professionals also refer to ELTV as an ROI that touches upon all HR initiatives in the workplace.
The answer is quite simple – the obvious benefit of ELTV as an ROI is that it helps to test, amend or justify your people strategy and all activities related to investment in people and talent.
In a sense, ELTV helps to see the big picture and encourages management to focus on a long-term point of view instead of basing their decisions on short-term transactional terms. Using the framework can help not to overlook employee temperature at different stages in their lifetime value and develop a healthy and stable relationship with your employees, at the same time maximizing the output of the team member.
This graph showcases lifetime value, with the X axis representing time from the start to the end of the employment, and the Y axis representing employee contribution. Here are the stages to focus on:
> Stage 1: At this point, the employee has not started to provide any output and is taking the resources such as recruiting, hiring, and onboarding. Therefore, the contribution is negative.
> Stage 2: This stage encompasses a fully trained and motivated employee who just started their new role and is actively providing value to the business.
> Stage 3: The max potential stage emphasizes the point at which career development and knowledge growth flattens. They might feel like they have outgrown the role and start thinking about new opportunities elsewhere.
> Stage 4: At this point, the decision to leave the company is made and the employee productivity, along with their focus, has shifted and is decreasing rapidly.
> Stage 5: Employee’s contribution stops with their last day at the workplace.
Calculating employee lifetime value can be relatively simple when data is correct and ready to collect. The more information on employee performance, productivity and training you can gather, the more accurate and helpful the results are going to be.
Mike West suggests 4 steps to calculating ELTV:
> Estimate the average human capital ROI (HCROI).
> Estimate the average annual compensation cost per segment.
> Estimate average tenure per segment.
> Calculate the estimated ELV per individual or segment by multiplying it out.
You can find more information on each of these steps in this useful LinkedIn article.
The 3 yellow circles in the graph represent actions that must be taken to maximize employee lifetime value from the beginning of the employee’s journey with your company.
ELTV is one of the leading frameworks to measure employee output and help to inform decision-making when it comes to building an effective people strategy. When it comes to people, you have to think about the details. Whilst ELTV works as an ROI for all HR efforts, it also points out things to look out at the different stages of the employee lifecycle and helps to adopt some practices to help with employee engagement and retention.
