By: Helios on March 16th, 2017

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Do You Know the Real Cost or Value of Your Employees?

Total Rewards | Business Management & Strategy | Best Practices | Employee Relations | Talent Acquisition

One KPI You Should Be Tracking!

Now that the first quarter is almost over, it is time to focus on how the strategic goals set for 2017 are tracking to last year's results. Organizations spend an immense amount of time and resources tracking revenue and retention of clients, as well as the value of each client in terms of spending. Since payroll is the largest controllable expense on almost every company’s P&L, why then aren’t more leaders also tracking the value of their employees?

How is that possible?

Using the statistics from surveys reporting on employee engagement, we can apply certain averages to every organization. According to a study of 2,000 office workers, employees stated that “they only spend 45% of their time at work actually completing their primary job duties”. They stated that 55% of their time is wasted on non-work activity such as social media, talking on the phone or IM’ing one another, etc. Furthermore, 7 out of 10 employees in the U.S. state they are disengaged, meaning that a logical conclusion is that only 3 out of 10 employees are accomplishing a full 40 hours of work they are being paid to do. The other 7 falling into the category of the 45% of actual work time.

Let’s break that down to a very simplified calculation:

Our team consists of 10 employees with a median salary of $50,000, not even counting payroll taxes and administration expenses, you are paying out $9,615 weekly in payroll for $4,327 worth of actual work.

Let’s surmise that we have a key client, who on a historical average has been spending $5,000 a year for our services, and according to our records, they spent $2,005 in 2016. Did we retain this client? If we only look at the number of clients, there would be no change. If we only look at top end revenue, we probably gained the lost $2,005 in new client revenue, so we would still not see a change. However, this does not truly capture the loss of value in this client in any way.

The same is true with our employees!

If we had an actively engaged team member, who has since fallen into the 70% category and is now spending 20 hours or less on actual work, our turnover/retention rate of employees is not affected. In fact, many times when one of our employees begins to complain of the workload, the answer is to enlist the help of another employee to offset some of their tasks. What we do not look at is if our team is becoming disengaged and are we are getting less output from our team.

You have 30 employees, all of whom you retained in 2016. If we only look at retention rates, just like with our clients, this means that you have zero turnover. Let’s look at that another way: out of your 30 employee workforce, using the statistics of engagement, only 9 employees are putting in a true 40 hours of work for a total of 360 hours. The other 21 are only contributing 378 hours total based on the 45% output admission. If all 30 were engaged you would be achieving 1,200 hours, but your total workforce only achieved output for 738 hours of work, so your real retention rate is only 62% of your workforce.

the real cost of employees

Another simple yet interesting calculation is to break this same calculation down to dollars spent. Of course, there is value in tracking employee retention just like client retention. If we measure the percentage of revenue retained during a year, as well as the total spend of clients, we can more strategically target the coming year. If we budget in revenue to engagement against the revenue lost from disengagement, we can also more strategically develop a plan for greater profitability with our teams:

  • Take your actual payroll numbers and utilize the statistics above to get a dollar number of “wasted value’.
  • Speak to your leadership team and use this figure as a catalyst for an open dialogue around engagement and productivity.
  • Using your teams as resources, make engagement a targeted plan; focusing on your people is one, if not the most strategic investments you may make all year!

By using this as a key performance indicator, your decisions become much clearer. Maintaining client spending is crucial. As always, customers showing value erosion should get immediate attention, instead of waiting to see the loss on the P&L. To truly be strategic, it is also time to apply this logic to our teams of employees.