Why and how to track employee lifetime value (ELTV)
When it comes to building and sustaining a high-performance culture, it’s not enough to track any HR metric – you need to track the right HR metrics.
This is particularly true in our current climate, where companies are under high-stakes pressure to reinvent themselves and rise to the challenges of generative AI, climate change, and fluctuating market changes. Leaders must be able to make complex decisions about their people and culture quickly – but without the right data to inform those decisions, it’s as good as guesswork.
While there is a wide array of HR metrics that are useful to track, one particularly useful metric to track in today’s context is the employee lifetime value (ELTV). No metric is better for helping leaders quantify the long-term value of their workforce or for helping HR professionals prove the ROI of investing in people. Moreover, as Luka Babic, VP of Product at Culture Amp, explains, “ELTV extends beyond being just a metric; it’s a mental model—a heuristic that helps simplify the value of HR to the business.”
Below, we explore ELTV as both a metric and as a mental model, and share additional expert insights from our VP of Product, Luka.
What is employee lifetime value?
Employee lifetime value (ELTV) is a metric that estimates the total net value an employee brings to an organization throughout their tenure. It considers the employee's contributions, performance, and productivity relative to the costs of employment.
A relatively new concept, ELTV is derived from customer lifetime value, a well-known marketing metric that measures the total value a customer brings to a business over the course of their relationship.
In the same manner, ELTV takes a future-oriented approach to quantifying value; it’s not just about what an employee does for the organization at present, but what value the employee will bring over the course of the entire employee lifecycle, from recruiting and onboarding to performance, promotions, and exit.
The goal of HR is to maximize this value for each employee by focusing on the employee's growth, retention, and productivity.
How to calculate ELTV
At its essence, ELTV measures the total value an employee provides to an organization over the duration of their employment, minus the costs of hiring, training, compensating, and managing that employee.
Breaking down this definition:
- Value: This refers to the positive contributions an employee makes (measured by performance, innovation, revenue, or customer satisfaction).
- Costs: These include recruitment, onboarding, salary, benefits, and ongoing development costs.
A complex metric, ELTV can be visualized as a combination of metrics that span the entire employee lifecycle. As there are multiple ways to quantify “value” and costs,” incorporating multiple metrics produces a more holistic and accurate idea of what the true ELTV is.
Some key metrics linked to ELTV include:
- Time to full productivity: How quickly do new hires become productive?
- Turnover rate: How often do employees leave? What’s the cost of that turnover?
- Employee tenure: How long do employees stay?
- Employee engagement: How engaged are employees?
- Revenue per employee: What is the employee’s contribution to the organization’s bottom line?
Because of how complicated it is to calculate the ELTV, many companies instead opt to track only average ELTV, which can be roughly calculated with the following formula:
Average ELTV = (Average annual revenue / Total # of employees) * Average employee tenure in years
This formula can help you understand how much value, on average, each employee contributes over the course of their tenure at your company. However, it’s important to note that this metric isn’t suitable for making specific HR decisions, as it produces an average value. For that reason, ELTV is far more helpful than average ELTV for making strategic HR decisions.
It’s also possible to track the entire ELTV model as a single metric, calculated as:
ELTV = (Revenue / [Average recurring revenue per employee - Cost per employee]) * Average tenure
However, Luka stresses, “The real value comes from connecting each step of the journey to the 'area under the curve' or the employee productivity surplus. The core thesis of the ELTV model is that employees who have optimal experiences throughout their journey with the company achieve better results and higher productivity.”
He continues, “We assume a positive correlation between ELTV and various metrics along the employee journey, from hiring and onboarding to promotions, engagement, and retention. By measuring and assigning values to each of these elements, we can identify which aspects of the employee experience have the most significant impact on productivity. This understanding, in turn, allows us to better assess the ROI and impact of HR investments.”
Why is it important to measure and track ELTV?
ELTV is a key metric that provides a holistic view of each employee's return on investment (ROI). It enables businesses to assess the long-term value of their workforce and make data-informed decisions that maximize ELTV and thus drive employee and organization success.
Specifically, ELTV is extremely useful for:
- Aligning talent management with business goals. By quantifying the value an employee generates relative to the resources invested in them, leaders can make strategic, aligned decisions about hiring, training, and retention.
- Prioritizing HR initiatives. HR can use ELTV to prioritize investments based on potential lifetime value, allowing leaders to make data-informed decisions around questions like, “Should we invest more in onboarding or employee development?” or “How can we design HR policies that extend the productive lifespan of employees?”
How to use ELTV to prioritize HR initiatives and maximize value
Luka recommends using ELTV as a mental model for understanding HR as a function through a first-principles approach. This approach involves breaking down complex problems into their most fundamental elements and building solutions from there.
In this case, ELTV is the fundamental element or “first principle” on which HR decisions are based.
Luka continues, “Using ELTV as a first principle shifts the focus of HR from being purely operational to being strategic, centered on value maximization. Every HR initiative or policy can be evaluated by its impact on ELTV.”
For example, you can use ELTV to evaluate and prioritize your:
- Talent acquisition strategy: How does the quality and efficiency of the hiring process influence the long-term value of employees?
- Employee experience: How do work environment, culture, and benefits contribute to retaining valuable employees and extending their productive tenure?
- Learning & development: What are the returns on investment in training programs in terms of employee skill growth and performance improvement over time?
- Compensation & rewards: How can compensation structures maximize performance and retention without disproportionately raising costs?
You can then use ELTV to prioritize the various people initiatives within your organization based on their potential lifetime value.
Maximize employee lifetime value
There are multiple ways to optimize ELTV at your company – and the most effective approach ultimately depends on your organization’s specific culture, objectives, and current state. And while ELTV isn’t everything, it’s an indisputably powerful tool for making the strategic HR decisions that are key to powering a high-performance culture.
In general, ELTV can be improved by:
- Investing in employee development to improve employee retention and commitment
- Improving the onboarding experience so employees can ramp up more efficiently
- Prioritizing retention to mitigate the high cost of retention
However, we specifically recommend applying ELTV as your “first principle” when approaching strategic HR decisions. In doing so, you can turn HR into a function centered on optimizing the value an employee delivers over their time with the organization. Every aspect of HR – from recruitment, development, and retention to offboarding – can be systematically analyzed and improved to enhance both employee and organizational success.
Advanced tools like Culture Amp’s employee experience platform are especially helpful for maximizing ELTV across the employee experience. This all-in-one platform can help you pinpoint gaps in the employee experience that are negatively impacting ELTV, and give you the tools you need to make a positive difference. Equipped with people analytics capabilities, Culture Amp also makes it easy to collect key HR metrics like ELTV and transform that data into actionable intelligence leaders can quickly act on.
