I remember reading an investment banking interview prep question a while back about how one might value an apple tree and the answer was the same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree's cash flows (intrinsic valuation). The interview guide went on to state that you could do a DCF for anything.
This had got me thinking recently. If a company were to value one of their employees or a potential candidate using some sort of valuation technique, which technique(s) could they use? How might one factor in a candidate's experience, skills, education (including GPA, major, school ranking/prestige), any licenses, and proficiency in any languages or specific applications (i.e. excel, python, SQL, etc.)?
Ideally I would like to use this feedback to try and build out a model. No idea if it will actually work but it would be interesting to build all the same.
The top non-target kids would all be undervalued lol
Well of course you can look for an existing employee with a similar background (comparable) and see how much revenue he has generated for the firm each year... DCF?
Income Approach: Look at the money the employee adds value to the firm at through increasing revenue or decreasing costs (Efficiencies)
Market Approach: Similar candidate credentials opportunity costs
Cost Approach: Amount it would cost to complete job without candidate and/or cost of employee to grow skill-set (education) to do job
I was thinking that when a firm hires an employee and presents an offer letter with stated compensation that is essentially an LBO...right? How much they'd be willing to pay someone in return for their work to get a target amount of production for their firm.
What if we were to value an employee based on skills and qualifications relative to the job available. For example, I am an IB firm and looking to hire an entry level analyst and wanted to differentiate 3 candidates from one another based on relative value.
Candidate 1: Graduating this May from a target school (Target school 3.4 GPA). IB Internship with boutique firm summer prior and an internship in wealth management the summer before that. No licenses. While in school held no jobs.
Candidate 2: Graduated 2 year ago this May (Non-Target school 3.8 GPA ). 1.5 years of experience in consulting for Big 4 firm. No licenses. Prior to graduating, worked for same consulting firm as an assurance intern. While in school worked as TA for university's economics department.
Candidate 3: Graduated 3 years ago this May (Non-Target school 3.6 GPA). 2.5 years of experience in financial sales at a Bulge Bracket firm. Hold Series 7 and 66 licenses. Prior to graduating, interned with Fortune 500 firm doing clerical accounting work as well as presentation and excel sheet prep for managers. While in school worked as a research assistant for the university's Tech Transfer program.
How would we try and value these three candidates? Maybe using a SOTP valuation? How would I try and put a value on each of these skills/experiences/licenses/etc?
You don't need any valuation for that. Either you want one candidate for the work hes able to produce or for status of having attended a brand name school
Candidate 1 went to a target so he's your status candidate (important to small boutiques when hiring)
Candidate 3 is obviously the most qualified and the 3.8 vs 3.6 is hardly a difference. Candidate 3 has his licenses as well so you don't have to pay for that. And he's already worked at the BB level.
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