Durham Business School's Dr Nikos Bozionelos looks at how to calculate the cost of your employees.
What's an employee worth? Can we measure it? Managers need to know both the price and the value of their employees. In fact given the huge financial losses or gains that depend upon employee performance, they can't afford not to know.
So what monetary value does an employee need to add so that the organisation is not losing money by employing him or her?
The obvious answer is that an employee needs to produce as much as he or she costs in income and benefits. But pay is only one of the many costs that an organisation has to meet. Other costs include equipment, telecommunications, utilities, transport, real estate, etc. So no organisation whose employees produce, on average, monetary value that equals their gross salaries would be able to survive for long, let alone be profitable.
As a general rule, therefore, an employee needs to generate double their gross salary in income to make their employment profitable although this can vary greatly across types of businesses.But what about comparing the cost of employing individuals who under-perform against the value of those who perform well?
The monetary difference for the employer between an employee who has average performance and an employee who has good (but not outstanding) performance equals one half of their gross salary. So the value added by a good performer compared to an average performer is half the amount that the employer is paying them.
The difference for the employer between an employee who has poor (but not outrageously bad) performance and an employee who has good performance equals their gross salary. And at the extremes, the difference between an employee in the top 5% and one in the bottom 5% equals twice their annual salary.
Remember, though, that these are averages developed with reference to traditional industries and occupations. In areas where skill levels and margins are high, such as e-businesses, these multipliers can reach five or even 10.
However menial the job, these differences can translate into significant amounts. Years ago, researchers in the USA had estimated that the average annual difference between a good and a poor cleaner is US$ 5,800. This is a respectable amount. And in case it does not appear impressive, losses or gains can be huge if the number of cleaners employed is large.
As levels of skill and accountability increase, the numbers these multiples represent become very significant indeed. For example, the annual difference between a good (but not outstanding) and a poor (but not outrageously bad) senior manager whose annual salary is £100,000 ranges from a minimum of £100,000 to a maximum of £1m. So at senior levels, we are in the realms where the difference in skill and performance can mean the difference between success and failure for the entire organisation – which is why the selection of individuals for senior positions is so critical.
So how do we assess performance - and how can we be sure that the people we are hiring are 'high-performing'?
Questions of performance can be broken down into task performance (how good someone is at their job) and contextual performance (do they go the extra mile? Do they say 'yes' to additional duties to help the team out, and so on).
A supervisor's judgement has been shown to be a good indicator of actual workplace performance. But it is very poor at the recruitment and selection stage. Here, all manner of irrelevant factors may unconsciously be taken into account. Things like what someone is wearing, how tall and how good-looking they are have been shown to have a big influence on hiring decisions, but absolutely no impact on performance.
Of course, recruitment is only the start of the challenge. Motivating and managing people has a huge impact on performance – particularly contextual performance. So hiring and employing people are functions that need to be treated for what they are: major investment decisions that have a great bearing on whether or not the business succeeds.
The rigour has to be applied consistently throughout the process: from the original hire, to the management and measurement of performance, deploying proven methods to assess return on investment. Precision cannot be guaranteed, but the scope to reduce guesswork and waste is immense.
Dr Nikos has a background in Mathematics (Ptychion, Patras, Hellas), Psychology (MA, Liverpool) and Management (MPhil, Cranfield and PhD, Strathclyde). He is a Chartered Psychologist and Representative at Large for the Careers Division of the Academy of Management. His Editing activities include being Associate Editor for Career Development International and for the Careers Forum of the Academy of Management.
