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Valuing a Key Employee

Valuing a Key Employee

There is not an easy method for determining the value of a key employee. Business owners customarily use one of three methods to estimate the worth of an employee to their company.

Multiple of Compensation

One method involves annual compensation multiplied by a selected factor determined in part by the difficulty the business will have in replacing the employee. (This method does not work well if the employee is an owner who is being paid only a small salary that does not accurately reflect his or her value to the business.)

Contribution to Profits

In the second method, the company's total excess profit is multiplied by the percentage of the company's profit attributable to the key employee, which is then multiplied by the number of years needed to find and train a competent replacement.

Cost of Replacement

The third method totals the direct, out-of-pocket costs involved in finding, hiring, and training a replacement, as well as the estimated "loss of opportunity" costs.

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Last Updated: 12/14/2017