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Abstract: This practitioner-oriented research brief examines why and how companies can strategically track employee lifetime value (ELV) metrics. ELV refers to the total financial contributions and indirect cost savings an employee provides over their career both within and beyond their tenure at an organization. After outlining the scholarly foundation demonstrating ELV as a key driver of competitive advantage, productivity, revenue and firm performance, the brief delves into methods for quantifying ELV. Two primary components are contribution value from direct compensation and indirect support roles, as well as retention value from avoided replacement expenses and future referral potential. Examples are given of calculating ELV through estimating average tenure, forecasting contribution streams, incorporating various rates and modeling knowledge depreciation. The brief then analyzes how leveraging robust ELV insights supports strategic decisions around talent deployment, succession planning, training investments, and evaluating alignment of strategies to sustain ELV. Finally, real-world case studies from the technology and financial services industries demonstrate multi-billion dollar impacts achieved by companies that proactively track and maximize employee lifetime value through workforce planning and positive engagement of employee networks.
As an HR consultant and researcher who has studied talent management strategies across diverse industries for over two decades, I've concluded that one of the most impactful yet often overlooked practices is tracking employee lifetime value (ELV). While many organizations focus heavily on onboarding, engagement, and retention efforts for current employees, few take a strategic long view of the value employees bring over their entire careers - both within and beyond their tenure.
Today we will explore the research foundation for why tracking ELV is crucial, explain how to calculate and leverage these metrics, and provide real-world industry examples of companies that have successfully applied this approach. By gaining a deeper understanding of ELV, HR and business leaders can make more informed decisions to cultivate a dedicated talent pipeline that yields ongoing returns.
Why Track Employee Lifetime Value? The Research Foundation
A wealth of scholarly literature establishes that employees are among a company's most valuable assets. Research by Fitz-enz (1990, 1995, 2000, 2009) was seminal in quantifying this concept and labeling it employee lifetime value. His work showed that the costs of turnover, replacement, and retraining new hires often far outweigh the short-term savings of cutting compensation. Later studies have built on this foundation to demonstrate additional benefits of tracking ELV beyond just reducing costs.
For example, Boudreau and Ramstad (1997, 2007) found that maximizing ELV allows organizations to identify their most strategic talent and invest accordingly to develop "sustainable competitive advantages" from this human capital. Other scholars have linked ELV metrics to productivity gains (Pfeffer, 1998; Pfeffer & Veiga, 1999), revenue growth (Huselid, 1995; Way, 2002), and overall firm performance and market valuation (Collins & Clark, 2003; Wayne, Shore & Liden, 1997). This research provides a strong business case for why HR and finance should collaborate to systematically quantify the long-term returns individual employees provide, both during and after their tenure.
How to Calculate and Leverage Employee Lifetime Value Metrics
With the research foundation established, the next question is how exactly to track and utilize ELV insights. There are two primary components to calculating an individual employee's lifetime value:
Contribution Value - The total financial contributions the employee makes through wages, benefits, commissions, bonuses, and other compensation over their career lifetime. This includes direct revenue generation as well as indirect support roles.
Retention Value - The indirect cost savings and future referral value realized from the employee staying with the organization for an extended period rather than being replaced. This incorporates avoided recruiting/onboarding expenses, knowledge transfer costs, productivity dips, and potential future new hires referred.
By estimating these metrics for a "typical" or "examplar" employee in each role and level, organizations can proactively build a detailed picture of workforce value across divisions, locations, generations, and other segments. For example, Fitz-enz (2000) advocates estimating average tenure by level and function and forecasting the net present value of contribution streams over time to calculate an "employee ROI factor". Advanced calculation models also incorporate attrition and promotion rates, revenue attrition effects, knowledge depreciation curves, and more (Way, 2002).
With robust ELV data in hand, companies can take several strategic actions to maximize returns:
Inform compensation, benefits, and support decisions to retain top talent.
Guide talent deployment and succession planning for mission-critical roles.
Target training investments toward developing future leaders and high-potential employees.
Calculate true net impacts of layoffs, acquisitions or shutdowns on long-term value generation.
Evaluate alignment of organizational strategies and performance to sustain ELV over decades.
Leveraging ELV insights allows a long-term, proactive mindset for talent decisions that elevates HR to a strategic partner for growth. The following two industry examples demonstrate how these principles have paid dividends for leading companies.
Applying ELV Tracking in Practice: Industry Examples
Example 1: Technology Company ELV Tracking
A major tech firm I consulted for calculated ELV projections in the late 1990s for projected employee cohorts joining over the next decade. Cost-benefit analyses examined training different specializations versus retaining generalists. By targeting rapidly growing roles like data analytics and AI, they estimated gains of over $2 billion in added ELV just over the cohorts' first 5-10 years from increased productivity and lifetime tenure (Way, 2002). This strategic workforce planning led to successful talent pipelines supporting ongoing dominance in key markets.
Example 2: Financial Services Cross-Selling Impact
A large bank's Customer Lifetime Value (CLV) modeling factored in projected cross-selling from branches' existing clients and employees' own networks. Research showed employees referring an average of 3 new customers annually who kept accounts 5+ years generated $200,000 in added CLV (Reicheld & Teal, 1996). Targeting branches with highest referral rates through recognition and incentives, they estimated $500 million in added CLV over 5 years just by positively engaging existing workforce networks.
Conclusion
Tracking employee lifetime value is a strategic practice that yields significant long-term returns if applied systematically across the talent management cycle. While calculations can initially seem daunting, even rough estimates provide invaluable insights to guide strategic decisions for cultivating top talent. Research shows maximizing ELV directly links to competitive advantages, productivity gains, revenue growth and shareholder value - making it a priority for progressive HR and business leaders. Looking beyond short-term costs is key to developing a sustainable talent pipeline powering an organization's future success. I hope these takeaways encourage more organizations to adopt quantitative ELV tracking approaches and reap multifaceted rewards.
References
Boudreau, J. W., & Ramstad, P. M. (1997). Measuring intellectual capital: Learning from financial history. Human Resource Management, 36(3), 343–356. https://doi.org/10.1002/(SICI)1099-050X(199723)36:3<343::AID-HRM8>3.0.CO;2-R
Boudreau, J. W., & Ramstad, P. M. (2007). Beyond HR: The new science of human capital. Boston, MA: Harvard Business School Press.
Collins, C. J., & Clark, K. D. (2003). Strategic human resource practices, top management team social networks, and firm performance: The role of human resource practices in creating organizational competitive advantage. Academy of Management Journal, 46(6), 740–751. https://doi.org/10.5465/30040667
Fitz-enz, J. (1990). Getting and keeping good employees. Personnel, 67(8), 25–29.
Fitz-enz, J. (1995). How to measure human resources management. New York, NY: McGraw-Hill.
Fitz-enz, J. (2000). The ROI of human capital: Measuring the economic value of employee performance. New York, NY: AMACOM.
Fitz-enz, J. (2009). The ROI of human capital: Measuring the economic value of employee performance (2nd ed.). New York, NY: AMACOM.
Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38(3), 635–672. https://doi.org/10.2307/256741
Pfeffer, J. (1998). The human equation: Building profits by putting people first. Boston, MA: Harvard Business School Press.
Pfeffer, J., & Veiga, J. F. (1999). Putting people first for organizational success. The Academy of Management Perspectives, 13(2), 37–48. https://doi.org/10.5465/ame.1999.1899547
Reicheld, F. F., & Teal, T. (1996). The loyalty effect: The hidden force behind growth, profits, and lasting value. Boston, MA: Harvard Business School Press.
Way, S. A. (2002). High performance work systems and intermediate indicators of firm performance within the US small business sector. Journal of Management, 28(6), 765–785. https://doi.org/10.1177/014920630202800605
Wayne, S. J., Shore, L. M., & Liden, R. C. (1997). Perceived organizational support and leader-member exchange: A social exchange perspective. Academy of Management Journal, 40(1), 82–111. https://doi.org/10.2307/257021
Additional Reading
Westover, J. H. (2024). Optimizing Organizations: Reinvention through People, Adapted Mindsets, and the Dynamics of Change. HCI Academic Press. doi.org/10.70175/hclpress.2024.3
Westover, J. H. (2024). Reinventing Leadership: People-Centered Strategies for Empowering Organizational Change. HCI Academic Press. doi.org/10.70175/hclpress.2024.4
Westover, J. H. (2024). Cultivating Engagement: Mastering Inclusive Leadership, Culture Change, and Data-Informed Decision Making. HCI Academic Press. doi.org/10.70175/hclpress.2024.5
Westover, J. H. (2024). Energizing Innovation: Inspiring Peak Performance through Talent, Culture, and Growth. HCI Academic Press. doi.org/10.70175/hclpress.2024.6
Westover, J. H. (2024). Championing Performance: Aligning Organizational and Employee Trust, Purpose, and Well-Being. HCI Academic Press. doi.org/10.70175/hclpress.2024.7
Citation: Westover, J. H. (2024). Workforce Evolution: Strategies for Adapting to Changing Human Capital Needs. HCI Academic Press. doi.org/10.70175/hclpress.2024.8
Westover, J. H. (2024). Navigating Change: Keys to Organizational Agility, Innovation, and Impact. HCI Academic Press. doi.org/10.70175/hclpress.2024.11
Jonathan H. Westover, PhD is Chief Academic & Learning Officer (HCI Academy); Chair/Professor, Organizational Leadership (UVU); OD Consultant (Human Capital Innovations). Read Jonathan Westover's executive profile here.
Suggested Citation: Westover, J. H. (2024). Tracking Employee Lifetime Value: Strategically Leveraging Metrics to Grow Your Talent Pipeline and Bottom Line. Human Capital Leadership Review, 15(1). doi.org/10.70175/hclreview.2020.15.1.5
