ELTV: Employee Lifetime Value and Breakeven Point… or the cost of an early leaver
The cost of someone leaving, or when a person starts being profitable for the company, sounds hard, impersonal, a number, a figure, and politically incorrect but that’s business. I personally, and New Work as a company are focused on people and “for a better working life”. Before numbers, there is a PERSON and a TEAM, that will experience an emotional and organizational impact which is often priceless. But today I’m writing a practical article — I’m focusing on the cost. The numbers for someone leaving, from the pure and cold monetary perspective. How much does it cost? Or how profitable was the person during his/her working period at the company? How much money has the company spent and recovered in the specific moment the person leaves? What’s the minimum time so that the new hire is productive and generates benefit to the company?
Let’s dive into it!
Steps and things you need to consider…
Step 1 — Cost of Recruitment Process
Even BEFORE the new hire starts, the fact of hiring has already generated a cost:
- Cost of opportunity while the vacancy is empty,
- Cost of the job advertisement and/or headhunter fees,
- Cost in time (salary) of all the people involved in the recruitment process in terms of, time for interviewing, reviewing tests or challenges, debrief and feedback meetings, (recruiters and other stakeholders e.g., managers, other specialists’ peers).
- Admin costs, payroll, benefits/perks, possible relocation costs, signing bonus, etc.
Step 2 — Cost of Onboarding and training
Even the most senior and experienced professional needs a period of adaptation, learning the new context and tools. The faster they are fully onboarded, the faster they’ll start generating benefits. That’s why investing in good onboarding is key to new-hire success. Here we consider:
- Time of co-workers explaining context, tools, helping the new colleague build momentum
- Cost of training if external
- Equipment needed
- The productivity loss, while the person is learning and until they master the job.
Remember, when calculating time in salary, add company and structure costs.
Looking for the breakeven point… When does the collaborator start generating benefit for the company? How can we calculate this? Bad news: true, is not exact math, there are far too many factors that influence, but trying to find an approximate and objectivize it as much as possible.
To the practice! Open an Excel and you need to create these columns: here’s a sample of how it could look like. With an example of someone joining at a base salary of 45k gross per year and an accumulated training time of 5 weeks.
A: Timeframe — we will do it in weeks. Week 0, 1, 2…
B: Cost — you need to have done some previous calculations (steps 1–2). The first rows will look a bit different, but it becomes easier as you progress, and you just need to make small changes.
o Week 0 (prior to joining): Cost of the Recruitment process, new colleague lands with a “backpack” of cost.
o Weeks of training (week 1 to x) “x” would be the when the training finishes. If training is full-time, that’s easier to allocate. If it’s not, you can sum up all the training hours and accumulate them in weeks. Allocate in each week, the weekly training cost plus the weekly salary.
o From the week that the person is “fully” on “working time” (training time done) you just need to specify the salary cost.
C: Income — how much does the person generate or produce for the company? Some roles are more complicated to calculate (e.g., services, how much does an HR person generate? Is the product of the company “of growth”?) In that case let’s look for creative solutions, e.g., you could divide the total revenue of the previous year and divide by the number of employees. Then divide that figure by 52, that’s roughly the income per week (bear in mind, we’re trying to simplify, be aware of holidays and so many other things).
o Also, during the training time, the income equals 0, for they are not selling, or coding, or producing the company asset. Plus, we must be realistic, the adapting time, during the first months, the person is not producing like a fully onboarded employee. Reflect upon how many months on average it needs for that role to be developed at 100% level, you can consider aspects such as the complexity of the role, tools, business, synergies, and ask Team leads about their experiences with new colleagues… could it be 6 months? 3 months? During this time, I suggest you divide the income/productivity by 50%. Once you reach the “fully onboarded” week, then make it 100%. Or progressively, as you consider, you need to understand your business!
D: Benefits — easy formula, column Income minus cost (C-B). You will see that the first weeks are purely negative, don’t panic, that’s normal — we are investing! After the “training weeks” you’ll see a smaller number (still in negative probably). And great news! Once the person is fully productive the benefit will increase considerably! :) See? You want to do a great onboarding to provoke this ASAP!
o But wait! Will the company already make money then ? Nooooooo
o Really? Sorry, that’s the truth, remember you’re paying (or should be!) a decent salary and also the mere fact of hiring had a cost (sometimes very high!) so you want to have great engagement culture to keep your people motivated and remaining at your company.
o PLEASE, Where’s the breakeven week? It may be repetitive, but I like to duplicate the week in another column, just to see it more comfortably, but it’s unnecessary. Otherwise, the next column will be:
E: Accumulated — that would be E (previous week) + D, benefits of the current week. Again, it will happen as in the D column that starts negative, but THIS is the one that indicates WHEN the breakeven happens.
Now that you have the basics, you can “play” with things that may happen along with the employee history, e.g., a bonus, extra training, long leaves, salary increases, a training or conference, etc.
With this done, you can easily pass this data to a (nice) graph (see the example) and for sure this will help you and your stakeholders, Teamleads, Business, C-Levels, visualize, realize and be conscious that a good onboarding, follow up, and engagement policies result in a win-win, happy colleagues, long-lasting relationship… benefit for all.
The breakeven week will differ from company to company, job role, and if we went to the detail, per person. But you can work with an average that will help you to quantify and obtain a first approximation.
In your team’s recent hires… When does the breakeven happen?
