Thursday, April 2, 2009

Profit per Employee - Understanding and Quantifying Your Worth

Face it, you don't have a job because the business you work for "enjoys your company" (unless you are an entertainer). Everyone knows that you have work to do and that you play a role in the success of the team. But these pretty words and pleasant philosophy shouldn't prevent you from trying to understand and quantifying your worth.

While some jobs may be more easily measured than others (productivity in line assembly work, revenue generation metrics for sales staff, completes in a call center etc) some maybe more difficult to classify.

However, a relatively new and unique model is being proposed based on profit per employee. By comparing the value add by your employment, what is the profit margin that employers are getting based on your current salary. For instance, if you are a a new hire what is the marginal value that the company expects your work to generate? Look at an example:

At a top engineering consulting firm, a junior engineer is hired at a salary of $60k (~$30/h). However, under the supervision of a P.Eng and colleagues, the junior engineer's work is billed at a rate or $80/h. Assuming a 75% engagement rate, the profit the organization is gaining off the junior engineer would be

Profit margin= ($60 - $30) / $30
or 100%

While this example is terribly oversimplified, it should highlight the idea that whatever your salary is, the company you are working for should be benefiting more (otherwise, the incentive to hire you disappears as does your job possibly).

If the value you calculate is completely out of whack (as compared by relevant benchmarks), it could indicate the following:
  • You are adding tremendous value to the organization - time for a promotion
  • You are under paid - maybe it's time for a move (conversely the organization may need to re-evaluation it's compensation programs)
  • The nature of your job has high multiples on return
  • The company may have a strategic interest in hiring more people to undertake similar work
  • There are external factors at play - this job is attractive for other reasons - scheduling flexibility, intellectual challenge etc
While hardly a perfect model by any means, it does provide an interesting alternative for looking at individual performance. Also this type of mindset will really help anyone at the salary negotiating table (regardless of which side you are sitting on).

No comments: