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Calculating the Value Added by Top Employees' Contributions

Thursday, February 6, 2014

By Larry Reynolds  

“All organizations should know the value of their assets, especially top-performing employees; unfortunately most don't,” John Sullivan, professor of management at San Francisco State University, told Bloomberg BNA Jan. 27.

One way to determine the worth of an employee is to calculate the dollar-value difference between the performance of an average employee and an above-average employee doing the same job, he said.

Several major technology companies, including Google Inc., use variations of this formula to help determine which employees should be promoted and what they should be paid, which employees should be released and where additional hiring is needed, Sullivan said.

Calculations

First, a baseline must be created by calculating the value produced by a typical employee. “The accepted method is to use the annual average revenue per employee, which is the total corporate revenue divided by the number of employees over a year, as an indicator of the average worker's worth,” Sullivan said.

At the retailer Sears, Roebuck and Co., the average annual revenue per employee is $138,200, whereas at a company such as Apple Inc., the average annual revenue per employee is a little more than $2 million, he said.

The next step in the calculation is to determine the difference between what is produced by an average worker and what is produced by a top-performing employee in the same job, Sullivan said. “This is known as the top-performer differential multiplier,” he said.

A percentage figure is used for a top-performer's multiplier if their production is greater than 33 percent above the production of an average worker.

A multiplier is used if the production of a top-performing employee is at least 10 times the production of the average employee, he said.

The performance differential varies based on the job being analyzed, Sullivan said.

Determining sales staff's top-performer differential multiplier is a straightforward process of adding up the sales that were made, he said.

For positions where the correlation between an employee's direct contribution to company sales is less obvious, such as a product designer, the compensation staff should work with design department executives to identify and calculate the value of the creative ideas and product features originated by each design employee over the past two years, Sullivan said.


Major technology firms have procedures to quantify the dollar value of each employee.  

 


Once the top-performer differential multiplier is determined, the next step is for a team of executives to estimate each designer's dollar value and effect on business, Sullivan said. Employees are then ranked based on the value of their contribution, he said.

This analysis is used by the executive team to calculate the difference in each job category between the value of what was produced by an average employee and the value of what was produced by a top-performing employee, Sullivan said.

“The estimated value doesn't have to be perfect,” he said, but the process used to evaluate all jobs must be consistent.

Identifying Differentials

A top-performer differential multiplier should emerge from the calculations for major job classifications.

A company either has an effective hiring process or a labor issue that unnaturally restricts employee performance if there is no differential between average and top performers for a specific job group or if the differential between the two is very low, Sullivan said.

The job functions that have a high multiplier “should be made a priority when it comes to hiring and retention because the indicator is they produce a greater proportion of revenue,” Sullivan said.

The current multiplier for a high-performing organization such as Apple, with its average annual revenue per employee of about $2 million, is 25, Sullivan said. This means it is possible for a single top-performing programmer to produce $48 million in added value in a year, Sullivan said. “This may seem outrageous, but if the employee invented the iPod, it could actually be low.”

Other factors may be added to the calculation, such as the value created by employees who go beyond introducing new ideas to implementing innovations that give the company a competitive advantage, he said.

The calculation also may consider an employee's ability to build relationships with customers and strategic partners, to quickly learn and adapt in a way that reduces the time it takes to get a product on the market and ability to anticipate and solve strategic problems that the average worker does not have, Sullivan said.

After performing its own calculations, a company may want to compare its results against the current top-performer multipliers used by Apple Inc., Google Inc. and Facebook Inc. to identify and quantify the contribution of their top workers.

Based on this benchmark, top workers produce at least one-third more in value than average employees or three times their own salaries. In comparison, star performers produces 10 times more value than average workers or 100 times their own salary.

 

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com

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