Tag Archives: succession planning

How You Can Accurately Value Your People

How would you go about determining the dollar amount value for each of your employee’s contributions to your organization? How would you do that if they were not in a revenue-generating role like Sales? In other words, how do you measure the return on your employee Return on Investment ((eROI):\

For instructional purposes, let’s us the example of a Mid-level Accountant in the New York Metro area, $66,000 per year in a 20-person firm with $5m in annual sales. (Source)

We begin by identifying the Revenue contribution for each employee, whether they are in a revenue generating (sales, client acquisition/retention), a direct client service role, or other admin type function with no direct contact with clients. The most straight-forward approach is to simply divide your firm’s revenue (the $5m) by the total number of employees (20) to determine revenue per employee ($250k). This is the most basic, simplistic approach to use, when factoring revenue by employee regardless of their role in contributing to revenue creation.

The problem with this approach is it really doesn’t get to the heart of the VALUE of each employee. It’s an average and thus not really helpful at all at assessing EACH individual. We can dive deeper to obtain a more detailed insight into that Mid-level Accountant’s specific contributions by including any contribution the staff accountant makes to retaining existing clients, servicing accounts, saving at-risk clients, upselling new services/product offerings to existing clients. So , these are all useful metrics to apply in terms of client acquisition, retention, and indirect contribution to the products and services they utilize. Right?

BUT again, this is a very limited approach and not entirely revealing of that employee’s true “worth.” To truly understand the “total value” of an employee, we have to expand our approach to consider what contributions they make in coming up with new ideas to find revenue generating processes, steps OR how have they helped in cost-saving measures the employee makes by improving processes, removing waste/duplicate steps in processes, helps automate functions, etc.

Further, we can also track their indirect contributions such as bringing in new talent through referrals, and their actions that helped increase the performance of their peers through coaching and mentoring. But to truly get a complete picture of that Staff accountant’s full contribution, how have they helped to market the firm, by speaking as a subject matter expert at events and conferences, give testimonials about why the firm is a great place to work, get involved in community engagement activities.

So, you can see that to truly measure an employee’s total worth requires a rethinking of how you measure the value and contributions of all of your people. But again, this eROI analysis of employee value only measures the revenue side. To obtain EROI we also must assess the COST side of the employee equation.

We can begin to determine the “total cost” associated with an employee by applying an approximate factor (typically 1.2 to 1.4 times an employee’s base salary ($66,000). This factor covers a wide range of the total benefits, health insurance, admin services, bonuses, training, continuing education and other offerings we provide to our employees. So, in this case if we apply a multiple of 1.4 to their base salary of $66,000, the staff accountant’s total adjusted cost is $92,400.

We deduct cost from the employee’s revenue contribution as follows:

Revenue – $5 million divided by 20 employees ($250,000) – the adjusted cost of $92,400, or $157,600 for that Accountant’s employee “profit” / margin eROI. In the same way that we had to dive deeper then surface level of the revenue side of the eROI equation, we can understand an employee’s cost by determining how successful the employee is in their role, by seeing how well they performed in achieving their goals (Key Performance Indicators, KPIs). employee value/contribution is measured using revenue per employee ($250k) times the percentage of the employee’s aggregate KPIs that were achieved. The percentage completion of KPI is a way of answering their performance assessment:

“How close were they to achieving their established goals?” So, if the employee’s last (2022) performance review outcome was they achieved/exceeded their primary goals at 85%, then their revenue ($250k) * 85% leads to an adjusted performance-based contribution of $212,500. Applying such a formulaic calculus to your people’s contributions (eROI) no doubt can risk coming across as a very cold-calculating way to put a price tag on the value of employees. I mean, we are not a number, we are vital contributors to an overall organization performance through many aspects of work which may not be easily measured. Things like brainstorming, collaboration, being supportive of our co-workers…. How do you measure these vital aspects of our people’s jobs. In other words…how do employers actually feel about eROI, and is it being utilized?

* New hire performance metrics are used by 51% of companies.
* Turnover and retention metrics are used by 48% of companies.
* Hiring Manager satisfaction rates are used by 41% of companies.

Again, this approach to quantifying eROI in terms of an employee’s measurable impact is only a starting point. We also need to factor in the overall QUALITY of your organization’s workforce, to determine how well you are doing at finding the right people for the right roles at the right time and then putting them to work.

The three most effective tools at our disposal to measure the Quality of Hire in our organization are performance, productivity, and retention:

1. Performance – consider the average of all new hire performance ratings/reviews.
2. Productivity – as defined by their KPIs.
3. Retention – % of new hires on-board at the end of the year.

Ex. Using these 3 ratings/metrics, If your firm scored an 80%, 85%, and 90% on these three criteria, then the average QoH you achieved is 85% (B-B+ range). To apply eROI and QoH across your organization, conduct an audit of your QoH against your competitors and an industry/sector “average”. This will enable you to identify your baseline eROI and QoH.

Ethan L. Chazin, MBA is an expert in the field of organizational transformation and learning & development. He specializes in Employee Training & Development, One-on-One Executive Coaching, Growth Mindset Consulting, Culture Building, and Strategic Planning.

Your Business Neeeds a Succession Plan

Have you created a succession plan to ensure your future business continuity and survival?
Does your business have a succession plan in place, in case your leader is unable to lead? What happens if your current President/CEO, owner leaves or is unable to lead your business? Do you have a succession plan (a formal written document) that defines a specific course of action, should your CEO leave, become incapacitated, retire or pass away?
With the increased complexity of running a business due to constant technological advances, rapidly evolving industry trends and technologies, and the global nature of business competition, you need to have a plan in place to guide you in transitioning your leadership, whether its a single owner/CEO, partners, or an entire management team.
Do you have a succession plan in place already? If so, when was the last time you revisited it, to ensure that it’s still relevant and accurately reflects your current business situation? If not, you are playing a dangerous game of Russian roulette by hoping you don’t need one.
If something happened to your leader, you won’t have the time required to develop a succession plan to guide you through identifying the ideal candidates from outside your organization through recruiting, then interviewing and hiring your new leader. the time it takes to develop a plan on the fly will likely prevent you from successfully navigating through the crisis and your business will likely suffer tremendously if not fold outright due to the lack of continuity in leadership.
So, what’s a succession plan, you ask?
Having a succession plan will enable you to identify employees who are capable of taking over upper and senior management positions. Most succession plans begin by creating a list of qualified candidates and narrowing the list down, until the right person (people) has been chosen. According to Marshall Goldsmith, a well-developed succession plan should emphasize/include the following four elements/considerations:
1.Change the name of the process from Succession Planning to Succession Development: Plans do not develop anyone — only development experiences develop people. We see many companies put more effort and attention into the planning process than they do into the development process. Succession planning processes should develop individuals you identify as possessing the requisite background, experience, values and desire to take over.
2. Measures your desired outcomes, not the process: This change of emphasis is important for several reasons. First, executives pay attention to what gets measured and what gets rewarded. If leadership development is not enough of a priority for the company to establish goals and track progress against those goals, it will be difficult to make any succession planning process work. Second, the act of engaging with senior executives to establish these goals will build support for succession planning and ownership for leadership development. Third, these results will help guide future efforts and mid-course corrections.
The metrics a company could establish for Succession Development might include goals like the percent of executive level vacancies that are actually filled with an internal promotion vs. an external hire, or the percent of promotions that actually come from the high-potential pool. Too often, we find companies measure only the percent of managers that had completed succession plans in place.
3. Keep it simple: We sometimes find companies adding excessively complex assessment criteria to the succession planning process in an effort to improve the quality of the assessment. Some of these criteria are challenging even for behavioral scientists to assess, much less the average line manager. Since the planning process is only a precursor to focus the development, it doesn’t need to be perfect. More sophisticated assessments can be built into the development process and administered by a competent coach.
4. Stay realistic: While development plans and succession charts aren’t promises, they are often communicated as such and can lead to frustration if they aren’t realistic. The bottom line is, don’t jerk around high performing leaders with unrealistic development expectations. Only extend the promise of succession IF there is a realistic chance that they will be chosen.
Here’s to your success in starting a new business in 2013. May it be the start of an entirely new path for you!
Ethan Chazin, The Compassionate Coach