Make Better Bets on People: Framework for Talent Valuation
the Challenge
A common question that many companies struggle with is “what is the value of [Name]?” - The question, of course, is not as explicit as this, but can come in many forms “what should the salary of a new hire be?”, “How much should we raise their salary?”, “Should we bump up the salary for a good employee who has another offer?”
Despite the materiality and irreversibility of these decisions (both in dollars and emotions), the frameworks needed to guide these decisions are lagging. Consequently, compensation decisions are often left to our “gut”, stuck with unsophisticated policies and procedures for salary bands, hedging using bonuses and commissions, or anchored to salary guides that just perpetuate existing biases (i.e., higher precision, but low accuracy). In all scenarios the end decision never seems convincing for all parties. So it’s not surprising that we have gender and diversity pay gaps, perceptions of unfairness by employees, perceptions of concessions by employers, etc. And in the War for Talent (as coined by Mckinsey in 1997), understanding the value of an employee matters - otherwise you risk retaining bad employees and losing good ones. An analysis of more than 600,000 researchers, entertainers, politicians, and athletes found that high performers were 400 percent more productive than average ones (O’Boyle E. and Aguinis, H., 2012). That is, you would need to hire 4 average performers to replace one high performer.
To provide businesses with more guidance for how to value their talent, we developed the Talent Valuation Framework. Based on the finance concept of Intrinsic Value, the goal of this framework is to organize key talent metrics and align them to strategic objectives, providing a more objective view on employee value and an overarching narrative about the role and its contribution to business strategic outcomes.
the Objective
We built HUELLA’s Talent Valuation Framework with the following objectives:
Design a financial framework for valuing talent that provides 2nd and 3rd order insights on how the individual and the role is contributing to business growth today and can contribute to business growth in the future.
Leverage this framework to reframe how we make decisions about employees, shifting to asset based decision-making (and focusing on future value) versus cost based decision-making (and focusing on return on investment).
Have a wide range of applications for key talent decisions, including
Talent Management - Bring together market, turnover, employer brand, competitor attractiveness, and financial data into a single, value-based framework within which the performance of the individual can be assessed, opportunities for training and development could be identified, and the financial contribution of the individual and the role to the business quantified.
Strategy/Business case development - Assess potential impact of strategic human capital investments and build business cases for compensation and employment decisions. Communicate with language and data that is more likely to persuade senior management and financial teams.
Financial - financial application for talent valuation is not limited to individual compensation decisions, but can also be scaled up to value and evaluate the entire workforce and inform workforce architecture and investment decisions.
the Talent Valuation Framework
When it comes to determining the value of an employee and making value judgements (salaries, bonus), we tend to over-index on historical performance (performance reviews, KPIs, past experiences, etc.) as a predictor of future performance (or “potential”). This may seem reasonable if the market demand and supply for a role, the business’ strategic objectives, and employees’ lifestyle and preferences remain fairly static from one year to the next, however this is rarely the case. Just like how a good investor would deconstruct a company to its key performance drivers so as to understand how it could navigate upcoming headwinds and tailwinds, roles and people should similarly be deconstructed to understand contributions to current and future strategic objectives. Without this level of rigor, we may miss or undervalue the linchpins in our organizations as a result of overvaluing the cogs.
Below, we provide an overview of our Talent Valuation Framework - a 6 stage process that provides the same level of rigor required for valuing a company to valuing people.
Role Analysis
The underpinnings of our framework are based on deconstructing the individual/role into its core competencies, which are essentially the behavioral outcomes of knowledge and skills that drive performance. We then mathematically compare and rank these competencies based on strategic value (improving the efficiency and effectiveness of the firm, exploiting market opportunities, and/or neutralizing potential threats) and scarcity (rare, specialized, or firm-specific).
Benchmarking Analysis
The purpose of this stage is to understand the current market pricing and hiring strategy for this role, providing a benchmark of how others are acquiring and pricing the required competencies for this role. This analysis is driven by both technicals and norms underlying decisions in the market.
Utility Analysis
This stage calculates the dollar value an employee brings to an organization based on their performance across competencies required for the role. This is the Utility that the employee brings to the organization, and is defined as the satisfaction (or removal of discomfort) that an employer gets from hiring an employee less the direct and indirect costs of the employee (e.g., salary, training & development costs, recruitment costs, overhead etc.).
For some roles utility will be easier to define. For example, in sales roles, utility can be tied to the revenue that an employee is expected to drive. In other roles, utility may not be as easy to define. However, difficult does not mean impossible, and we need to remember that the objective is not to be exact but to build a model that provides reasonable guideposts for determining value. For example, In the case of an HR role, we can model utility to the quantity and mastery of competencies the individual/role has/requires compared to internal or industry averages.
Turnover Analysis
This stage evaluates the probability of the employee / role turning over, referred to as the Turnover Probability Index. This is based on industry norms at the macro level and turnover shocks (events that prompt people to reconsider whether they should stay with the organization - e.g., COVID) and job embeddedness (connectedness between employee and organization) at the micro level. This index is utilized to calculate the Expected Utility, which is the probability of receiving the Utility calculated earlier in the future.
Replacement Analysis
This stage determines an employer’s ability to acquire top talent in the current market by evaluating an Employer’s Value Proposition (EVP) and Talent Selection Process (TSP). EVP is determined by comparing the employer against its competitors across 3 attributes: Awareness, Attractiveness, and Competitiveness. TSP is determined by the base rate of top talent within the employer’s candidate pool (“number of fish”) and the precision and accuracy of hiring processes to select for key competencies (“how you fish”).Performance against these two factors is used to calculate the time to hire top talent.
This estimate can be converted to a discount rate that follows a convex-curve discount rate, whereby employers who can fill an open spot with top talent faster have a higher discount rate (which lowers Talent Valuation for the person/role), and those who take longer have a lower discount rate (which increases Talent Valuation for the person/role).
Intrinsic Value Calculation
In this stage, the discount rate is applied to the Expected Utility. The sum of the present value of Expected Utility represents the Intrinsic Value.
We don’t stop here however. To inform strategic decision-making, we apply an inductive method, called “Reverse Engineering” to understand “what must be true” for us to see shifts in the calculated Intrinsic Value. This method consists of leading with hypotheses about strategic outcomes (or desired Intrinsic Values), and then asking the question: “What must be true in either the internal (e.g., investment choices) or external environment (e.g., market forces) for us to accept those Values as achievable?” Reverse-engineering what needs to happen based on what you must believe in to accept them helps ensure that all research and analysis is completed in a focused and purposeful way.
the Imperative
Some may argue against the level of complexity and the materiality of this framework - it’s more effort than just looking at a salary guide. But companies can’t suck and blow at the same time - that is, we can’t say that “people are assets” and then avoid the same level of rigor that we should/would apply to any asset decisions. We developed this framework to help companies become more intelligent and confident about their workforce decisions, and to help all employees have a more objective assessment of their value / contribution to the organization. This last point is especially important as we believe that taking a more comprehensive and quantitative view of an individual and their role will provide more clarity for all parties on how to drive more value from people, whether it’s identifying and investing in the key competencies that will drive the greatest value or seeing alternative opportunities to leverage someone strengths.
Dhushan Thevarajah is the Founder and CEO of the Human Elevation Lab ("HUELLA"). A company that was borne out of Dhushan's own journey to elevate and reach his potential - both physically and mentally. He saw how simple shifts in his mental models and leveraging technology to make the "invisible" visible helped him achieve faster and further. Combining this experience with his work experience of building and leading teams, designing decision tools to help model and inform choices, and fighting the daily fires across the functions of finance, HR, operations, and strategy of a growing company, Dhushan saw an opportunity to support companies shift their financial and mental frameworks and apply better decision tools for their talent acquisition and growth strategies. In turn, helping workforces reach their maximum potential.
Previously, Dhushan was the Chief Strategy Officer and Chief Operating Officer at BEworks, the world’s first commercial consulting team dedicated to the application of Behavioral Economics to real-world challenges. His blended interest in behavioral science and data analytics brought a more evidence-based and metric-driven approach to these roles. Dhushan also led multiple consulting projects in the banking, insurance, loyalty, and software industry, tackling diverse behavioral problems such as closing the gap between consumer intentions and actions, designing incentives and measures to drive key behaviors, and building training programs to optimize for learning and sustainability. Dhushan holds an M.Sc. from Queen’s University, where he studied and published work on the neural basis of strategic decision-making and holds an MBA from the Rotman School of Management.
