How do you develop a formula to establish a dollar value on the financial impact of a key employee’s death? As difficult as it may be, you need to come up with a figure as a guide to how much insurance coverage to buy.
Look at the employee’s responsibilities and value how important they are to you annually. If, for example, the employee is responsible for a certain volume of sales, the loss is the profit derived from the person’s sales, less the profit that could be expected from a replacement.
Additional costs might include replacing the employee with the same or similar income, and the costs associated with hiring the replacement: HR expenses, moving costs, possibly a higher salary.
So what are key decision-makers really worth? Unfortunately, there is no tried and true formula that transcends industries and business cycles.
Step 1: Examine each department and define all the required tasks and their value to your organization. This will give you a basis for benchmarking compensation against industry standards.
Figure out which positions have the most impact on overall performance, based on a variety of financial metrics–sales, earnings, return on capital and the like. Be sure to consider how certain positions affect others–poor performance in one area could be the result of problems in another. Then, rank each job in order of importance, based on these factors.
Step 2: Canvass the competition. Try to establish a fact base for the role you’re hiring. Look at industry data. Remember that pay scales for certain roles vary considerably by industry, geography and company size.
According to Salary.com , top executives in the finance, insurance and real estate industries do better on average, while construction and health care execs– UnitedHealth ex-chief William McGuire notwithstanding–go wanting. As for geography, companies in the northeast United States, for example, tend to compensate key executives at higher rates than companies elsewhere in the country. Finally (and not surprisingly) size does matter: Overall, larger companies pay 20% to 70% more for key players across all executive positions than do businesses on the whole.
Salary-benchmarking surveys from major human resources consulting firms like Mercer can cost up to $5,000, but you don’t need to pay that much. Comparison sites PayScale.com and Salary.com sell compensation reports for as little as $20 a pop. The Bureau of Labor Statistics provides salary data by industry for free online. Yet another data option: Look at Securities and Exchange Commission filings by smaller, publicly held companies in your industry.
In Pictures: How To Figure Out What That Key Guy Is Worth