How to calculate EVA of your employees

CALCULATING Economic value added OF YOUR EMPLOYEES Employee value added metrics are those that measure the relationship between profit in relation to human capital employment cost, including compensations, training and development and bonuses. In other words they measure financial impact or contribution of current HR policies and processes to organisation performance. In corporate finance generally, economic value added is the profit earned by the firm less the cost of financing the firm's capital. Since EVA is a trademark by Stern Stewart, I will refer to same idea as economic profit. Economic profit may be understood simply as how much more valuable the company has become in a given period. Thus employee value added measures personnel role in value creation. Employee value added is a performance indicator, simply because it is a metric under company control. Case study: Deutsche Telekom Group Deutsche Telekom is a leading telecom company in Europe and one of the largest carriers in the world. The company serves more than 140 million wireless phone customers in Europe through its T brand. It's Germany's #1 fixed-line telephone operator, providing domestic and international wireline long-distance voice services under the T banner. In addition, it is a leading ISP with more than 25 million broadband subscribers, offering other data and multimedia services such as Entertain-branded Internet television. HRseconds.com Step 1: Get your variables straight NET REVENUE SHAREHOLDERS EQUITY HEADCOUNT In million EUR In thousand. Or 0, 252 million employees In million EUR 62 421 → () 252 000 → (n) 42 245 → (e) PERSONNEL COSTS NOPAT COST OF CAPITAL In million EUR Net operating profit after tax in million EUR. Own calculations EBIT Cost of capital or capital charge is defined as 15 071 → (1) Operating profit, In million EUR invested capital multiplied by weighted average 3 126 → (a) cost of capital or WACC. For our calculation we used WACC approximation value of 6%. In million EUR 5 505 → (p) 7 054 → (c) Step 2: Culculate economic profit DIFFERENT WAYS TO CALCULATE ECONOMIC PROFIT AS IN FINANCE SARAGOTA INSTITUTE FITZ-ENZ (2009) BURKHOLDER (a - c) x a - c - 10% (e) a 15 071 (3 126 - 7 054) × 15 071 + 7054 3 126 - 7 054 0,252 3 126 - (0,1 × 42 245) 0,252 5 505 + 15 071 0,252 0,252 - 15 587€ - 4 357€ 81 651€ - 10 599€ HEVA - The basic economic profit formula is given a human capital perspective by dividing by This simple formula, which may be found in Fitz-enz book (2009), aims to measure Human Capital Development Contribution (HCDC) is published by Burkholder et al. but initially developed by Holton and Naquin. The main idea is Wealth created per FTE is another formula to assess value added with adjustment for FTES. This formula was created by Saratoga Institute, PriceWaterhous Coopers. It is close to HEVA in use and interpretation. value added as the difference between average headcount or FTES. Economic profit is defined as NOPAT minus the cost of capital. NOPAT is not mentioned in the financial statements, but may be calculated from information disclosed. In most organisations, a good estimate of the cost of capital is easily obtained from the Finance department, particularly for the entire company. to calculate the returns attributable to human expenses except for labour costs to produce a product, and all revenues. It generates an adjusted profitability figure by each employee in the organisation (if any capital by multiplying economic profit or EVA by human capital contribution percentage or HCCP. HCCP is ratio of personnel costs to summ of personnel costs and capital charge. It thus avoid flaws of Fitz-enz formula by accounting for the role of financial capital. contingent labour is employed, full-time equivalents or FTES are used in denominator). Because total expenses are not shown in financial statements, I used Originally they divided the outcome by total compensation in order to estimate value added par dollar of compensation. In my opinion, it can be divided by FTEs or headcount alike to get a value added per employee. EBIT as difference between revenues and expenses. One of the drawback of this formula is in The economic profit number tells us that, despite generating 3126 million euro in after-tax net operating that it attributes all profit to human capital and ignores the role of financial capital. Let's say, honestly, that not only employees will make you money. Equipment, buildings and other assets are a part of profit creation process alike. For more precise calculation profits, Deutsche Telekom did not quite cover its cost of capital. Of course, it fully serviced its debt, but lost 15 587 euro of economic profit per employee over the year. look formula from Burkholder. Step 3: Compare BENCHMARKING YEAR-TO-YEAR DEVELOPMENT 6913 3454 4813 These metrics are meaningless unless you put them into perspective. There are two ways to do this: benchmark and year-to-year development tracking. -3671 -10599 -15587 2010 2011 2012 Deutche Telekom BT Vodafone Versatel SOURCES HRseconds.com www.investopedia.com "The New HR Analytics" By Jac Fitz-Enz www. humancapitalstrategy.blogspot.com www.blog.kissmetrics.com "Ultimate performance" by Burkholder et al SIGN UP FOR OUR NEWS-LETTER TO GET www.pwc.com LATEST UPDATES FOR FREE www.telekom.com www.hoovers.com