With Boss' week upon us, have you often wondered how much you're worth to your boss or employer? Or, if you're a business owner leading a team, would you like to know what your employees are worth to you? Here's a method for calculating that value.
First, accounting is both an art and a science. The science aspect embodies everything that is quantifiable, such as salaries, benefits, equipment depreciation and other costs. The artistry in accounting, sometimes challenged by the IRS, is the assigning of value to elements such as employee morale, good will and similar intangibles, which can't be measured in dollars and cents. (If the IRS is challenging you, check out Surviving The IRS Audit.)
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So, in calculating an employee's value to an employer, these elements combine to create a balance sheet, the bottom line of which reflects this elusive, and, perhaps, somewhat arbitrary value. Below are the principle factors that must be taken into account to determine employee value to the employer. When all the employee costs are subtracted from the employee's assets, the remainder is the employee's value.
Employer ExpensesRecruiting Costs
Advertising for employees, screening applications, interviewing selected candidates and ultimately hiring costs time and money. If the search for a qualified employee takes time and advertising continues, the expenses accumulate. If an employment agency is used for the search, a commission must be paid for that service. So, even before a new employee is added to the staff, expenses have already been incurred.
The cost in time, and perhaps lost productivity, in writing, placing and following up on advertising, may also be calculated into the initial expense of hiring new personnel.
Salary is a fixed cost, which may increase annually as an employee becomes more valuable to the employer. An employee's steady accumulation of experience, specific to the job, their understanding of and accommodation to the company culture, makes the employee more valuable and periodic raises may be awarded to reflect this increased value.
New hires may require training to perform their work. Again, the time and effort must be calculated into the cost. During the training period, the employee will not be as productive as they will be when the training is completed. (For more on the cost of new employees, read The Cost Of Hiring A New Employee.)
Health insurance, dental plans, sick days, paid vacations, retirement plans, tuition reimbursements and other benefits all add up to a major employer expense. Often, the value of a benefits package can exceed an employee's salary. Nevertheless, an attractive benefits package may be necessary to attract experienced, high-quality personnel, who in some cases have their choice of jobs.
Social Security and Other Expenses Mandated by Law
In certain circumstances, employers must pay Social Security/FICA taxes, 6.2 % on the first $106,800 of the salary. Medicare and workmen's compensation expenses are also incurred by the employer.
Expenses Assigned to Physical PlantUtilities, Maintenance, Rent or Mortgage Costs and InsuranceThese expenses may be divided equally among the number of employees to determine their individual costs against these total expenses. Whether the building in which you work is large or small, there are numerous costs involved in its operation and maintenance. Mortgage or rental costs top the list. The cost of utilities – electricity, gas and water – are additional major expenses. Maintenance and repairs also figure into the equation, as do waste disposal, landscape work, snow removal and other incidental expenses.
Computers, telephone service, cell phones, the use of an automobile and other equipment, required by the job, and supplied by the employer is another major expense that figures into the equation.
Incidental ExpensesFirms employing traveling sales people may incur expenses for travel, food and lodging. These costs can also add up to a substantial monthly expense. If a salesperson doesn't produce sales for a week or two, while the expenses accumulate, the loss to the company can be significant.
The above represents the major expenses that must be taken into account when calculating an employee's value to a company. The total of all these employer expenses must be subtracted from the quantifiable value of the employee to arrive at the employee's net value. There are also other various ways to calculate this number, which are explained below. Now, let's look at an employee's assets and values.
Employee Assets and ValueProductivity
A common way to calculate an employee's worth, to a company, is to divide the firm's net income by the number of employees. But, this method produces only an average number for the worth of all employees, and not by individual worth.
A more accurate method would be to calculate an employee's productivity – an easy task if the employee works on an assembly line and turns out 100 widgets per hour, which the company sells at a net profit of 10 cents per widget. The employee's productivity can be quantified, and all expenses, direct and incidental, attributable to this employee are deducted to arrive at a net worth. Salary and benefits, as mentioned previously, will most often be the top expenses for the employer.
A sales person's worth to the company may also be similarly calculated. The formula is net value of sales minus expenses.
For other employees, such as information technology employees, accountants, graphic artists, human resources personnel and other knowledge workers, the calculation is more difficult because the productivity of these employees cannot be given a specific, accurate number. Arbitrary productivity values must be assigned to each such employee.
The Bottom LineThe net value of an employee to an employer is not easily calculable, except in some simple cases. For small businesses with a limited number of employees, the employer usually monitors the goals and objectives set for each worker, and then measures how quickly, completely and how much cost was related to the achievement of those goals and objectives. Figuring into this key performance indicators formula are any mistakes, delays or breakages caused by the employee and what they cost the employer. Whatever number is ultimately arrived at, it will reflect only an individual's partial worth.
There are employee intangibles as well – attitude, punctuality and willingness to "go the extra mile" - that can't be quantified, although they add substantially to an employee's value. (Once you have discovered your value, use it by reading Can't Get A Raise? Negotiate Your Benefits.)