What is employee lifetime value (ELTV)?
Employee lifetime value (ELTV)
Employee lifetime value is a metric that measures the total expected value of the contributions an employee will make to an organization over the lifetime of their employment. ELTV relates to the marketing concept of customer lifetime value, which measures the total value a customer will bring to a business over the lifetime of that relationship.
Likewise, rather than focusing only on the value an employee can provide today or over the next year, ELTV takes a more long-term approach to provide additional insight. Employee lifetime value begins on an employee’s first day at a company and ends on their last day working for that company.
Employee lifetime value formula
Employers can calculate the average employee lifetime value at their companies with the following formula:
Average ELTV = (average yearly revenue / total number of employees) * average length of an employee’s tenure in years.
Using this formula, employers can see, on average, how much value each employee contributes while working for their companies. However, this employee lifetime value calculation only produces an average value and isn’t helpful in hiring or other specific HR decisions.
For an individual employee’s ELTV, employers must either calculate the metric after the employee has left the organization or make estimates. Estimating an employee’s ELTV early on in the employer-employee relationship can be helpful. Even though the figure is not a guarantee, it can provide some guidance and offer a deeper understanding of how valuable an employee or potential employee is.
Why does employee lifetime value matter?
Human resource departments need to optimize their resources, particularly in competitive hiring markets. Calculating employee lifetime value is a way to help ensure the best possible return on investment for hiring decisions.
Each time companies hire new employees, those decisions represent significant investments in the business. Employee lifetime value analysis is a mechanism for gauging the potential returns from those investments. If one potential hire’s employee lifetime value is much higher than another’s, that’s a strong signal that the company should hire the first employee.
Information about employee lifetime value will also help leadership justify investments in the workforce. Ideally, investments in HR initiatives will increase employee lifetime value at the company beyond the cost of those investments. For example, incentives for bonuses at the end of the year, company retreats, and even happy hours can all boost morale among employees, thus boosting ELTV.
Companies that ignore or overlook ELTV risk making poor investments in their workforces, such as hiring an employee that may not be ideal for the company or even releasing an employee too early. Recruiting and training new employees is expensive as well, so it’s worthwhile to consider hiring and making HR decisions with as much information as possible to avoid making costly mistakes.
How to improve employee lifetime value
Employee lifetime value isn’t necessarily a stagnant value. There are steps companies can take to increase the ELTV of their workforce.
Offering more training and development opportunities
Companies that invest more in employee training and development opportunities have better retention rates. For example, opening a manager role or providing goals for leadership opportunities within different departments can help retain employees who may want to reach higher titles but not leave the company. With better retention rates, employee lifetime value increases as well.
Improving company culture
Engaging employees and ensuring that they feel respected and appreciated will also improve ELTV. Activities that can help boost company culture include scheduling monthly happy hours, celebrating holidays in-office, scheduling company retreats, or providing incentives for time off around the holidays or year-round.
Creating a better onboarding program
The costs associated with onboarding often drag down employee lifetime value. Employers should address any inefficiencies in their onboarding processes so new hires can contribute value as soon as possible. Inefficiencies include:
- Not providing easy access to HR
- Not providing resources that streamline the workday
- Not providing clear goals for the new employee
Employee lifetime value is a valuable tool for HR departments at both the individual and company-wide levels. Tracking this metric over time can provide insights into the value a company receives from its workforce—and whether it’s improving.
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