Companies spend a lot of money in employee engagement activities. But, just a strategy isn’t enough. There should be a way to measure returns on investment.
Every revenue exercise goes through the intense debate of Outlay vs. Outcome. Outlay refers to the amount of expenditure and outcome focuses on consequences. Unfortunately, most budgets focus solely on the outlay part of planning strategies.
Much has been said about the holy grail of employee engagement and the impact it can and has on business success. But the subjectivity around employee engagement continues to linger.
How can CHRO’s calculate the return on investments made to engage their workforce?
How can enterprises ensure that the investment that it has made in terms of money, time and effort has achieved a worthwhile result or increased value in the future?
The Outlay Approach
According to Bersin and Associates, $720 Million a year is spent on employee engagement.
It is estimated that this investment will grow to about $1.5 billion! (Source – TLNT).
This is a massive amount spent on measuring employee engagement. Most of this money is spent on reward programs, benefits and incentives. The Incentive Marketing Association also reports $46 Billion being spent on recognition programs every year!
Engaged employees take fewer sick days, deliver increased productivity, are more likely to stay in their jobs, have greater understanding of their customer’s needs and are more likely to recommend their company and its product to other people.
~Thomas Otter, Group Vice President, SAP – SuccessFactors
To understand the ROI of employee engagement, let us first look at what are the opportunity costs that disengagement can lead to. The reason why companies spend so much on employee engagement is because there is a cost (quite a huge one) when it comes to having a disengaged workforce.
A disengaged employee costs an organization approximately $3400 for every $10,000 in annual salary!
If we talk about ROI in terms of employees, an investment in the workforce should help employees to achieve their full potential, improve their motivation and make them more engaged – all of which will help an organization successfully achieve its goals. As per Sage, the difference between engaged and disengaged workers can equate to success or failure and disengaged employees are estimated to cost the U.S. economy as much as $350 billion per year in lost productivity, accidents, theft and turnover!
Studies that show the link between employee engagement and business revenues
Numerous studies show a direct correlation between employee engagement and business results.
– A 2013 Blessing White study demonstrated a correlation between engagement and retention and found that 85% of engaged employees planned to remain with their employer for ten or more months.
– Gallup Consulting also discovered that high-engagement firms grow their earnings-per-share (EPS) at a faster rate of 28%, while low-engagement firms experienced an average EPS growth rate decline of 9.4%.
– David Mcleod and Nita Clarke had conducted a study for the UK government which found that companies with low engagement scores earn an operating income 32.7% lower than companies with more engaged employees. Also, companies with a highly engaged workforce experience a 19.2% growth in operating income over a 12 month period.
The Outcome Approach
Are you creating a Service Profit Chain?
It all starts with the fact that companies need to create an environment where employees are happy. If employees are unhappy and disengaged, they will not give their best, which will hamper the quality of products and services. In the absence of good products and services, customers will also be unhappy – not forgetting to mention that disengaged employees will also not treat customers’ right. Without good customer service, a company will never be able to repeat business from them.
In terms of profits, a study by the Corporate Leadership Council found out that engaged companies grow profits as much as 3X faster than their competitors!
There are some key aspects to consider which justify why enterprises need to focus more on outcome, rather than just laying down the budget to be allocated every year to employee engagement initiatives.
1. Employee turnover
The rate of employee turnover of your organization could cost you heavily! As per a study by the Centre for American Progress, it costs businesses about one-fifth of a worker’s salary to replace that worker. For businesses that experience a high level of turnover, this cost could be a massive amount! Very highly paid jobs at the senior or executive levels tend to have disproportionately high turnover costs as a percentage of salary (upto 213%)! Workforce policies that improve employee retention can help companies reduce their turnover costs.
Employee turnover rates can make you pay through your nose.
The cost of employee turnover could be very high in terms of its direct and indirect costs. Direct costs include –
– Separation costs such as exit interviews, severance pay, and higher unemployment taxes, etc.
– The costs of temporarily covering an employee’s duties such as overtime for other staff or temporary staffing.
– Replacement costs such as advertising, screening applicants, verification costs, etc.
Indirect costs could include –
– Lost productivity due to the need to hire temporary employees
– Coping with a vacancy or giving additional work to other employees
– Reduced morale, etc.
According to Absenteeism: The Bottom Line Killer – a publication from Circadian, absenteeism roughly costs $3,600 per year for each hourly worker and $2,650 each year for salaried employees.
The main causes of absenteeism are stress related – 1 million US employees miss work each day due to workplace stress. As per a study by Hay Group, engagement is a great predictor of future financial performance. Engagement affects business outcomes and business outcomes affect engagement. The two are closely correlated and symbiotic. In good times, engagement is bolstered by high profits, in difficult times, engagement drives up profits.
Given the above facts of how a disengaged workforce can burn a hole in the funds of organizations, it might be a good idea to find ways to adequately measure employee engagement and be able to correlate it with the business objectives of your organization. Unless you want to pay up your top dollars.
The culture of your organization can make or break your company. You need to know what the current people in your organization feel about their work and colleagues. You need to measure the components that define a company’s culture. The four main components of a company culture are individual behaviours, organizational behaviours, the business outcomes they produce and the drivers behind it.
Individual behaviours are the basis of engagement in the workplace. You will have to figure out a way to gain a deep insight into how employees feel every day, based on their work performance, or on their interactions with management and their colleagues. A good way to do this would be to take employee feedback on a regular basis and use this information to define what your company culture is. For example, if your company culture if flexible or rigid, do people feel valued or threatened, etc. It might also be a good idea to link business outcomes to your employment engagement strategy which will help you to adequately measure your ROI.
As per a study by Alex Edmans, PhD (MIT) and Professor of Finance at the London Business School for over a period of 27 years, a 3.8% increase was found in stock price for companies with happy, satisfied employees. Companies who registered profit growth had a 70.3% employee engagement score.
4. Employee advocacy
If any of your employee is asked about their feelings towards working with your company by an outsider, do you think their responses will be positive? If you are not sure, it might be a good idea to create such opportunities for employees within the organization so that they feel proud to be associated with your brand name. Only when employees are truly happy and engaged, they will genuinely promote your brand through social media and word of mouth.In this era of corporate transparency and the rise of social sites like Glassdoor, LinkedIn and Facebook and the like, the culture of your company can be known is not information restricted just to yourself or the management. Bad reviews can hamper the way people view your company and destroy your brand.
The wrap up
While most enterprises would focus on the outlay part of it, the outcomes also need to be thought of clearly.
Having an employee engagement strategy is not enough. Employee engagement should be carefully planned in a way that allows ROI. Your employee engagement strategy should focus on essential KPI’s such as retention rate, company culture and employee advocacy as discussed.While most enterprises would focus on the outlay part of it, the outcomes also need to be thought of clearly. What have you focused on?
Want to learn more about employee engagement? Learn about the Top 5 ways to ensure it.
About the Author
Bhaswati is a Product Specialist at Capabiliti, a mobile-first training and engagement solution for enterprises. Passionate about Economics, Bhaswati also loves storytelling. She has a keen interest in start-ups, food and travel. In her ‘me time’ she picks up fiction novels, tries different cuisines or explores routes to less traveled places on the world map. Follow her on Twitter at @Bhaswatibh