In professional sports, almost everyone readily agrees that a top-performing athlete is worth their weight in gold. That value is clearly reflected in their compensation, where for example a top-performing NFL quarterback can get paid 10 times more than the third-string quarterback on the same team. The value of adding a LeBron James, Peyton Manning, or Lionel Messi to your team can easily exceed hundreds of millions of dollars in revenue. The same is true in entertainment, where adding the right actor to a film or rock star to a concert can easily double the gross over an unknown performer.
Unfortunately in the corporate world, the HR function has failed to come up with a credible method for quantifying the “performance differential” between an average employee and a top performer in the same job. And as a result of not having this economic justification, executives have all too often been reluctant to fund the leading-edge recruiting, retention, and management processes that are required in order to successfully attract and retain these highly desirable top performers and innovators. In last week’s article, I demonstrated how to calculate the negative costs associated with hiring and keeping weak performers, and in this companion article, I highlight how to calculate the performance multiplier of top performers.
Calculating the Performance Multiplier of a Top Performer
There are seven steps in the process for calculating the top-performer multiplier.
Step I — Begin by working with the king of metrics
Before you begin putting a dollar value on top-performing employees, consult with the CFO’s office (the undisputed king of metrics) with the goal of getting them to partner with you throughout the calculation process. With their help, you can not only avoid any major calculation errors but you can also use their credibility in order to avoid any future criticism from other executives. For similar reasons, including the COO’s office in the process is also a good idea.
Step II — Quantify the value produced by an average employee
You of course should start with the premise that top performers by definition produce above-average results. So begin by determining the “baseline results” that an average employee produces. The accepted method is to use the average revenue per employee (the total corporate revenue divided by the number of employees) as a baseline and a fair indicator of the worth produced by “the average” employee over one year. This baseline measure has an advantage because even organizations that do not produce a profit can calculate it. For example, at a company like Sears, the average revenue per employee is $138,200, and at a better-performing organization like Apple, the revenue per employee is just over $2 million per year.
Step III — Consider using external performance multiplier data
On occasion, company executives or the CFO will accept external data as representative of the performance multiplier of a top performer over the average employee at your firm. If that is true in your situation, the following historical data points of multipliers may be useful.
A top 1 percent performer produces:
- 10 times higher value than average — GE, Yahoo, and the U of Indiana study by O’Boyle and Aguinis
- 25 times higher value than average — Apple
- 28 times higher value than average — Bradford Smart at Top Grading
- 300 times higher value than average — Google
Step IV — Determine the “top performer differential multiplier” between an average employee and a top-performing employee in the same job
Your next step is to determine the percentage or multiplier above the previously determined average output that a top performer produces. This is known as the “top performer differential multiplier” and it is represented by a “percentage” if it is less than 100 percent higher (i.e. 33 percent above the average) or a “multiplier” (i.e. 10 times the average). For clarification purposes, a top-performing employee’s performance ranks in the top 1 percent and an innovator produces product or process features that improve it by at least 25 percent.
The performance differential definitely varies based on the job being analyzed. For example, the performance differential percentage between top and weak employees in “easy-to-learn routine jobs” will be much smaller than in jobs that require innovation, creativity, and continuous adaptation to new technologies and business challenges. Start with product design jobs.
Work with design executives to identify the creative ideas, product feature ideas, and product ideas that were originated by each design employee during the past two years. Next, use a small team of executives to estimate the dollar value and business impact of each idea. Next you create a “ranked from best to worst list” starting with the design employee who produced the highest total economic value down to the value produced by the lowest-performing design employee.
Remember that the estimated value of the ideas and innovations doesn’t have to be perfect; however, the process used to estimate them must be consistent across each employee. Once the best-to-worst list is completed, simply calculate the percentage difference between the value produced by the average employee on the list and the value produced by the top-performing design employee on the list.
Next, conduct the same differential analysis on other creative or design jobs like web designers and programmers. Follow that up with an analysis of jobs that require a high level of adaptiveness and problem solving, like managers, traders, and those who work in highly competitive environment. And finally conduct analysis on easy-to-quantify jobs like sales and customer service.
Eventually you’ll get some pretty good estimates of the “top-performer-differential multiplier” for each major job family throughout the firm. The multiplier percentage may range between a low of 33 percent and a high of 1,000 times. Obviously when you find a high multiplier in a job family, that means that you should prioritize and direct the best HR resources towards hiring and retention in those jobs. If you find a zero or low performance differential between top and bottom performers you must conclude that either you have an effective top grading hiring process or you have a serious labor issue that is unnaturally restricting employee performance.
Step V — Quantify the added value of a top performer using the multiplier
The next step is to multiply the average revenue per employee by the “top performer multiplier” to get an average dollar impact. For example, at a company like Sears, the average revenue per employee is $138,200, so a 10 times multiplier would mean that a top-performing employee would produce an additional $1.3 million in revenue each year. At a higher-performing organization like Apple with revenue per employee of $2 million per year, using its actual multiplier of 25 times, a single top-performing programmer would produce an astounding $48 million per year in added value each and every year. This may seem like an outrageous economic impact, but if the employee invented the iPod, the iTunes site, or the Siri feature on the iPhone, it may actually be an underestimate.
Step VI — Consider including additional “top performer value” factors to the calculation
If you really want to get sophisticated, you can add some additional value-added factors based on the premise that top employees create value in areas that average or top performers do not. These additional value-added factors are always estimated, based on the documented impacts from a few representative top-performing employees.
- Game changers — pioneers and purple squirrels may move beyond simply having new ideas, and instead create innovations that are so powerful that they literally disrupt the industry and provide your firm with a competitive advantage. Having these innovators on board may also provide your firm with a first-entry advantage.
- Relationship building — because of their powerful contacts, top performers may be capable of building relationships with key customers and strategic partners that an average employee could never pull off.
- Attract new customers — these innovators may be industry icons who have the capability of attracting customers and vendors who otherwise would never consider your firm.
- Speed — because these innovators learn and adapt incredibly fast, they may provide your firm with the speed required to be first to market.
- Patent value — these innovators may create patents that give your firm a competitive advantage, as well as bringing in additional revenue.
- Monetization — top performers and innovators are much more likely to be able to successfully monetize already existing features.
- Problem solvers — these top performers may be able to forecast and solve strategic problems that no average worker could.
- Recruiting magnets – these innovators may be industry icons who have the capability of attracting dozens of other top performers to the firm. Their staying at the firm may also cause others to stay longer.
If you find that top performers and innovators regularly produce any of above-listed positive unique impacts, you should add their estimated value to your “revenue per top-performing employee” calculation.
Step VII — Determine whether top performers can be developed internally
Once you realize the tremendous value of top performers, you may also want to find out if above-average-performing employees can be developed into top performers after undergoing leadership development, coaching, and training. This is done by waiting 12 months after applying an intervention, and then measuring whether the employee’s performance improved up to the 1 percent top-performer level. It is much faster and there is a much higher ROI that results from externally recruiting top performers and innovator as opposed to developing them. This advantage comes in part because the business impact of recruited top performers is immediate and adding them to your staff will help your firm, while simultaneously hurting your competitors when they lose their top talent.
The Normal Top Performer Multiplier
Because organizations vary in the amount of change, adaptiveness, and innovation that they encounter, it’s hard to set a single benchmark standard for a top performer multiplier. However, using the very best high-tech firms like Apple, Google, and Facebook as a model, here are some guidelines that you might be able to use as a benchmark.
- Minimum top-employee performance multiplier — +33 percent of the average revenue per employee (+ $606,000 each year in the Apple example), or three times their $200,000 annual salary.
- Average top-employee performance differential — +10 times the average revenue per employee (+ $20 million each year in the Apple example), or 100 times their annual salary.
- An exceptional innovator — expect +100 times the average revenue per employee for exceptional innovators (+ $200 million each year in the Apple example), or 1,000 times their annual salary each year.
To some, these calculations in the Apple example may, on the surface, be outrageously high, but remember the overall value of a major innovation at a firm like Apple can reach into the billions. And if your new hire was a college dropout named Mark Zuckerberg or Steve Jobs, few would argue over the tremendous value that they would bring to the firm.
All organizations should know the value of their assets, but especially their top-performing employee assets, which are so essential to corporate innovation and business success. Because so many firms publicly state that their employees are “our most important asset,” it is surprising that only a few firms have taken the time to calculate the “positive performance differential” that is provided by top performers and innovators. And at the firms that have actually done the calculation, it has not come from the HR function.
I hope I’ve given you a head start in the process of determining the value of a top performer. Even if you under-calculate the value of top performers by a huge amount, don’t worry because the actual value is so high that it’s almost impossible not to come out with a high positive ROI for hiring and retaining top performers and innovators.