A
common misconception linked with employee engagement is that there is no
connection to an increased financial return. Investing energy and company
resources to create a more inspired, productive and skilled work force is often
thought of as developing non-translatable soft skills. The reason for this
misunderstanding is that measuring the effect an individual employee has on the
bottom line can be quite challenging. Honing in on the direct benefits to the
bottom line will be key to successful employee engagement programs in the
future and is exactly what the C-suite wants to see. As one would expect, 92
out of 96 Fortune 500 CEOs were most interested in learning the business impact
of their training programs according to a study conducted by the ROI Institute
in 2011.1 In this post I will uncover some trends and practices
around employee engagement and what affects these have had on the bottom line.
Some
of the key performance indicators (KPI) where engagement is thought to affect the
bottom line are productivity, customer ratings, employee turnover and
absenteeism and workplace safety. In 2012, Gallup conducted an extensive
meta-analysis that utilized information from 263 research studies across 192
organizations in 49 industries and 34 countries. Their goal was to examine the
differences between engaged and actively disengaged business/work units. The
results represent the difference between the top-quartile and bottom-quartile
units. Here is what they found:
-
21% higher productivity
-
10% higher customer ratings
-
65% lower turnover in “low-turnover” organizations
-
25% lower turnover in “high-turnover” organizations
-
37% less absenteeism
-
48% fewer safety incidents
*This
study represents the most extensive, long-term employee engagement research
conducted to date. 2
Whether
increased productivity is generated through benefits like additional paid days
off or a safer environment, it is directly linked to a company’s financial
success. Between 1987 and 2000, Alcoa (the world’s leading aluminum manufacturer)
drastically increased employee productivity as accident rates decreased thanks
to Paul O’Neill’s, then CEO, focus on worker safety. Over this time period,
annual income increased 500%.3 On a similar note, companies that
focus on paying higher wages regularly see higher productivity per employee
resulting in higher revenue per employee. Dell Computers has been able to
steadily increase employee pay because they’ve focused on doubling revenue per
employee over the past decade. Revenue per employee has increased from $500,000
to almost $1 million at Dell. 4
Customer
ratings showed the smallest difference between top-quartile and bottom-quartile
units. While Gallup research has linked employee engagement to customer ratings
that directly affect or reflect the bottom line,2 this category
seems to be the most difficult to measure. Through my research it was difficult
to find case studies or specific examples that directly link increased customer
satisfaction to higher sales. Furthermore, if you are thinking customer
satisfaction at least leads to customer loyalty, think again. In his column “Customer Satisfaction Is
Not Customer Loyalty,” Mark Klein
writes. “The real shocker about customer satisfaction is that it says nothing
about a customer's future behavior [loyalty].”5 These contrasting
points of view between the Gallup research and various articles mystifying the
relationship between customer satisfaction and loyalty leaves me wondering just
how a customer is affected by employee engagement.
Regardless
of the “high/low-turnover” category of business/work units, employee turnover
with any size organization can be lowered through various engagement
strategies. In a quantitative analysis of effective engagement strategies, the
Corporate Leadership Council found highly committed employees try 57% harder,
perform 20% better, and are 87% less likely to leave than employees with low
levels of commitment.6 For those employees that either left a firm
voluntarily or were fired (regardless of the reason) from 1992 to 2007, the
typical cost of turnover (for positions earning less than $30,000 annually) is
16% of an employee’s annual salary.7 This category covers more than
half of U.S. workers!
*From a report published by the Center for American Progress on November 16,
2012.7
Absenteeism
is clearly reduced by having a more engaged workforce and significantly affects
the bottom line. A report put out by Circadian, a workforce performance
consultant, in 2005 states:
“Absenteeism has a material effect on
the bottom line of most companies, yet few managers really understand the
magnitude of the problem at their company. The unscheduled absenteeism rate in
the U.S. hourly workforce is approximately 9%1; almost one in ten workers is
absent when he or she should be at work. There are considerable direct and
indirect costs associated with absenteeism.”8
The report points out that excess absenteeism is manifested
as costs in lost productivity, high cost replacement workers and excess
staffing. It also provides a detailed outline of the potential direct
costs of absenteeism in both hourly and salaried employees.
Safety
incidents arguably have the most substantial affect on company costs with
engaged work units having 48% fewer safety incidents than disengaged work
units. In a study published in the Journal of Occupational and Environmental
Medicine, from 1999 to 2012, companies that focus on worker wellness and safety
significantly outperform the stock market and yield greater value for investors.9
OSHA reports that businesses spend $170 billion a year on costs associated with
occupational injuries and illnesses -- expenditures that come straight out of
company profits. Additionally, lost productivity from injuries and illnesses
costs companies $60 billion each year.10
This
information represents just a slice of the available information around
workforce performance, employee engagement and their affect on financial return
of a company. While most of this data supports the argument for employee engagement
and its positive affects on the bottom line, there is also research that contradicts
or complicates the issue. From what I seen however, an engaged workforce is
central to a company’s long-term success considering the potential negative
affects to the bottom line if the performance outcomes presented here are
ignored.
In
my next post I will attempt to outline various practices and metrics used in
employee engagement and answer the following questions. How does the financial
data in this post come to fruition? If I am interested in implementing a
training program for my employer, how can I build a convincing case that will
show direct benefits to the bottom line? What details does management look for
in such a program? Ultimately, investing time and company resources to develop
a workforce (small or large) should result in improved skills and an elevated
sense of purpose and responsibility reducing costs and increasing profits.
Sources:
(1) Stern, Gary M. “Company Training Programs:
What are They Really Worth?” Fortune Online. http://management.fortune.cnn.com/2011/05/27/company-training-programs-what-are-they-really-worth/
strategicconsulting/164735/state-global-workplace.aspx.
(8) Circadian. “Absenteeism: The Bottom Line
Killer.” 2005. http://www.
workforceinstitute.org/wp-content/themes/revolution/docs/Absenteeism-Bottom-Line.pdf.
(9) Fabius, Raymond MD et al. (2013). The Link
Between Workforce Health and Safety and the Health of the Bottom Line: Tracking
Market Performance of Companies That Nurture a “Culture of Health”.
Journal of Occupational & Environmental
Medicine, 55(9).
993–1000.
Retrieved from
http://journals.lww. com/joem/Abstract/2013/09000/The_Link_Between_Workforce_Health_and _Safety_and.1.aspx.
(10) Occupational Safety & Health
Administration. “Safety and Health Add Value…To Your Business.” U.S. Department of Labor. https://www.osha.gov/Publications/safety-health-addvalue.html.
