Computing Employee Value

For those companies who truly believe in their people assets, here’s how the Saratoga Institute calculates it.

Do People Really Add Value?

As businesses, if people are our most important asset, why are we changing to a predominantly contingent workforce?

There will always be an expense-reduction battle and it will always start with cutbacks in the employee base so long as management believes that people are an expense, not an investment. We’ve all heard the “people are our most important asset” platitudes mouthed by CEOs at human resource conferences days before they launch another “rightsizing.” After a series of these over the last decade, it would seem that they should have gotten it “right” a long time ago. But the fact is that they will never get it right so long as they believe in their hearts that human capital, especially knowledge workers, cannot be managed for value.

Ironically, an executive is signing off on a mega-million capital investment in information technology – which he or she admittedly doesn’t understand – on the unsubstantiated promise of the consultants and with the other hand is signing the career death warrant of a couple hundred or even a thousand employees. But who will make the technology work? The data flow?

Logically, no one hires an employee primarily because just to spend money – they expect that for every dollar they spend on pay and benefits they are getting back more than a dollar in profit. If this does not happen the result is called: BANKRUPTCY. So, since most companies are not bankrupt, it must follow that people are actually returning more than a dollar for each dollar invested in them. That is the only explanation. The buildings, machines and materials don’t make products or serve customers … people do!

The  ‘biggest-fastest-shiniest’ computers do not add value until a trained human being applies them to a business task. In fact, the b-f-st computers are nothing more than depreciating assets until the poor schmuck, who is labeled “expense” by management, turns them on and makes them work.

If you are still with me, here is the solution. Learn how to monitor the output of a business unit or process and show that it is adding value as expressed in dollars. The combination of people, facilities and material unite to create something. The unifying force is the person, because those facilities and material ain’t movin’ until the person moves them. The following are a couple of simple formulas that even us math-phobics can use to show human value.

If you don’t have a copy of your corporate annual report, Get One! I’ll wait. Now, flip towards the back to the page called Income Statement. Write down the total sales and service revenue of the company. It’s usually on the top line and labeled Sales or Revenue. Subtract from it all Operating Expense except Interest and Depreciation. Talk to a friend in accounting to get payroll and benefits costs. Subtract that from Operating Expense as well. Now we have a figure representing all non-employee operating expense. When you subtract that from Revenue the resulting number is what we call Adjusted Profit. Now, divide that figure by the number of full time equivalent employees in your company (include contingent workers if you can). This gives you the amount of profit generated per FTE. Below is a picture of it. Don’t let the letters scare you, but for algebra types, it’s

A – (B-C) = D. D /E = F

(A) Revenue minus

(B) operating expense only for facilities, machinery, materials and supplies

minus (C) Payroll and benefits cost equals

(D) Adjusted Profit ÷

(E) Number of Employees Equals

(F) Profit leveraged per employee (FTE)

In Saratoga Institute’s 1999 Human Resource Financial Report, the average for 891 companies in 25 industries was $110,429 per person. This varied from under $50,000 to a high of over $500,000. Who says people don’t make a difference?

If you are feeling frisky, you can also divide Adjusted Profit by Payroll and Benefits to get what we call Human Capital Return on Investment. For every dollar spent on pay and benefits you got more than a dollar back (I hope). The average in the 1999 Report was $1.82 for every $1.00 invested.

Economists will tell you that expenditures for machinery are leveraged through production to something more than what the equipment cost. This, they claim, is how companies make money. I agree with them so long as they acknowledge that the bloody machine didn’t do anything until a human being turned it on and used it the way it was supposed to be used. And the better trained he or she was the better the machine performed; that’s human leverage, and that’s where profit comes from.

How do we convince management to spend money to retrain people rather than lay them off? Show return on the training investment. If you teach people to do something you must be able to see them do it when the training is put into play. What can the people do better now than before the training, and what is that worth? Start with clerical and production skills. Make your case there. Then, you can move up to professional and managerial training where there is more judgment and less routine.

You’ve been patient and persevered to this point, so I would like to offer this thought in closing. You might feel that you are so busy you don’t have time to show value added. If that is the case, get your resume ready because soon management will see you as an expense too.