May 14, 2012

Employee Value

In sports, we look at statistics.  Statistics help us understand the value a player brings to the table.  For instance, last year, Price Fielder posted the following statistics for the Milwaukee Brewers:

  • 162 Games Played.
  • .299 Batting Average.
  • 38 Home Runs.
  • 120 Runs Batted In.
  • .981 OPS (on base percentage plus slugging percentage, the metric is highly correlated with runs and wins, average is a bit over .700).
We observe statistics like that, and we say, "wow".

As a result, Prince Fielder signed a free agent contract with the Detroit Tigers, for more than $20,000,000 a year.

The numbers directly correlate to the market value of an individual.

Now, let's assume you are the CEO of a company.  You have an email manager.  This person gets things done.  The person who used to have her job posted the following metrics:
  • Annual Emails Delivered = 100,000,000
  • Open Rate = 20%.
  • Click Through Rate (as a percentage of Opens) = 30%.
  • Conversion Rate (as a percentage of Clicks) = 5%.
  • Average Order Value = $100.
  • Total Demand = 100,000,000 * 0.20 * 0.30 * 0.05 * $100 = $30,000,000.
  • Profit Flow-Through Rate = 40%.
  • Email Program Cost = $1,000,000.
  • Total Profit = $30,000,000 * 0.40 - $1,000,000 = $11,000,000.
But this young lady, well, my goodness, look at what she was able to accomplish in one year, on the same size email list:
  • Annual Emails Delivered = 100,000,000
  • Open Rate = 22%.
  • Click Through Rate (as a percentage of Opens) = 32%.
  • Conversion Rate (as a percentage of Clicks) = 5.5%.
  • Average Order Value = $95.
  • Total Demand = 100,000,000 * 0.22 * 0.32 * 0.055 * $95 = $36,784,000.
  • Profit Flow-Through Rate = 40%.
  • Email Program Cost = $1,000,000.
  • Total Profit (not including employee costs) = $36,784,000 * 0.40 - $1,000,000 = $13,713,600.
This one individual, by herself, caused a $6.8 million increase in demand, and a $2.7 million increase in profit.

You're paying this person $75,000 a year.

What is the value of this employee to your company?  What is the potential value of this employee to the future of your company?  Are you compensating this person in a fair manner, given her contribution to your profit and loss statement?

In the same department, you have a social media manager.  You're paying this guy $70,000 per year, less than the email manager.  This person is able to quantify the following contribution to the company.
  • Facebook Likes increased from 11,439 to 14,903 in the past year.
  • Twitter Followers increased from 9,493 to 13,771 in the past year.
  • 401 F-Commerce orders and 345 Twitter click-through orders, at $100 AOV (neither program existed in the year prior).
  • $74,600 annual demand.
  • Profit Flow-Through Rate of 40%.
  • Total Profit (not including employee costs) = $74,600 * 0.40 = $29,840.
What is the value of this employee to your company?  What is the potential value of this employee to the future of your company?

You calculate employee value, don't you?

At Nordstrom, I had a scorecard.  Every employee in my department was listed as a row on the scorecard, and an estimate of annual profit contribution was listed in a column on the scorecard, based on tests we conducted and projects each employee worked on.  When I attended a meeting and an Executive questioned the value of an employee, I had an immediate response --- "We're paying Sandy $49,000 a year, and she made improvements to her area that generated $983,000 of incremental profit last year ... she ranks 9th out of 24 employees in the department".

You're probably doing this, right?  You know the actual value each employee generated to the business last year, incremental, above-and-beyond what was done the prior year, correct?

As a boss, you have to have a tool like this in place.

If you are an employee, it is even more important to have a tool like this in place.  It is the only way that you can fight for your paltry 3% salary increase (which sure doesn't align with the profit contribution of the email manager in our example, does it?) ... it is one of the most effective ways to argue for a promotion.

Why not take a hour today, and calculate employee value?  You may be surprised by the employees who are truly contributing to your bottom line!

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