Measuring Employee Engagement And Its Cost
You know that your team should be investing more in employee engagement, but it seems impossible to measure the real return on any initiative.
It’s a good idea in theory, but because you’re unable to convince others, it ends up going back to the bottom of your priority list.
We understand. So we put together an employee engagement ROI guide to give you all the tools you need to make a strong case and be able to invest where it counts the most: your people.
There are 4 main aspects to consider to calculate the ROI of employee engagement.
- Speed of Onboarding
Let’s go through each one quickly.
A group of U.K. researchers say they’ve provided1 the first scientifically-controlled evidence of the link between human happiness and productivity: Happier people are about 12% more productive, the study found.
Fortunately, there are numerous ways to make employees happier and more productive at work.
Companies with high employee engagement saw 37% lower absenteeism, according to Gallup 2.
There is a 43% correlation3 between engagement levels and turnover. When engagement goes down, turnover goes up. If engagement goes up, turnover goes down.
Speed Of Onboarding
In the book The First 90 Days by Michael Watkins, he explains how it usually takes 90 days before an employee starts adding real “value” to a company.
In the book, he explains why the onboarding process is so important. If you can figure out how to optimize your onboarding process, employees can start creating value much faster.
If you don’t have a proper onboarding process set up, employees can take even longer before they start adding value, costing your company money every day.
How Much Does It Cost To Replace An Employee
On average, it costs about 20% of an employee’s annual salary to replace them4 (although this number can be as high as 200%).
Some studies have found that it can cost up to $150,000 to replace a good employee5, but many studies are all over the place in terms of the actual figure.
When you think about everything that goes into replacing an employee, you see how this can add up very quickly:
- All the costs associated with hiring a new employee, like advertising, interviewing, screening, etc.
- The costs of onboarding. As mentioned earlier, it takes about 90 days before an employee starts adding any real value.
- Any training expenses associated with the new employee
More than that though, the emotional effects of replacing an employee need to be looked at too. Many people that are in similar roles will start to worry if their job is in jeopardy, and that unnecessary stress leads to lower productivity.
One of the biggest reasons the actual cost of replacing an employee is so hard to calculate is because every company is different in terms of how they go about hiring, training and onboarding.
Also, most companies don’t have proper systems in place to measure the costs at every step, this takes collaboration from many different departments.
The Financial Benefits Of Employee Engagement
There is a vast amount of research that shows that engaged employees lead to more profitable businesses.
In the book Make More Money by Making Your Employees Happy, there are many stories of how happy employees lead to higher profits. From the book:
A Jackson Organization study shows that companies that effectively appreciate employee value enjoy a return on equity & assets more than triple that experienced by firms that don’t. Fortune’s “100 Best Companies to Work For” stock prices rose an average of 14% per year from 1998-2005, compared to 6% for the market overall.
Here are a few more studies that show the clear ROI of employee engagement:
- Standard Chartered Bank found that branches with a statistically significant increase in levels of employee engagement (0.2 or more on a scale of five) had a 16% higher profit margin growth than branches with decreased levels of engagement. 6
- Fabick CAT improved the “percent of industry net sales” by 300% by focusing on employee happiness7
The reason for all of this lies in a concept called the Service Profit Chain8.
The service profit chain is the chain from the way your employees work internally all the way to customer loyalty.
It all starts with having happier employees. Without them, they won’t treat the customers right, and without good customer service, you’ll never see repeat business from customers.
Calculating Employee Turnover
Employee turnover, along with retention metrics are important to calculate so that you know where you stand and if you’re improving year-over-year.
The calculation is simple, but can be misleading if not combined with other metrics to get a more complete picture.
To calculate your simple turnover rate, you take the number of employees that left during a period of time (often a year), and then divide that by the number of employees at the beginning of the year and the number of employees at the end of the year divided by two.
As an example, let’s say you have a 300 person company. If 40 employees leave you throughout the year, but 25 other people were hired during the year, at the end of the year you have 285 employees.
The calculation would be
The Center for American Progress put together a report that breaks down in detail the costs of employee turnover:
Absenteeism In The Workplace
According to Absenteeism: The Bottom-Line Killer9, a publication from Circadian, absenteeism costs roughly $3,600 per year for each hourly worker and $2,650 each year for salaried employees.
The main reasons for this absenteeism are stress related.
Consider these statistics from an infographic about mental health issues at work:
- 1 Million U.S. employees miss work each day due to workplace stress
- Productivity losses related to health problems cost employers around $225 Billion annually
- Depression accounts for more days missed than heart disease, hypertension, and diabetes
- 69% of employees report that work is a significant source of stress
Besides the financial effects, this is a serious issue that leaders need to start being more compassionate about.
8 Employee Retention Strategies
Employee retention is incredibly important because it’s much easier to work on retaining employees than to have to hire, onboard, and train new employees.
Two very clear statistics that show the power of employee retention are:
- Employees with lower engagement are four times more likely to leave their jobs than those who are highly engaged
- 66% of highly engaged employees reported that they had no plans to leave their company
Improving employee retention is actually quite easy.
It comes down to treating employees with respect and making sure they’re comfortable at work.
Here are a few simple strategies that you can try.
Focus On Personal Growth
Find ways to help employees grow and get better at what they do. Employees are naturally motivated intrinsically to master their skills, but as a good leader, you can help them map out their career path and help them get to where they want to be.
Measure Engagement In Real-Time
You need to know how your employees feel in real-time to be able to solve any issues before they become major problems.
Using an employee engagement software, you can keep a pulse on employee satisfaction throughout the year.
Good employee engagement platforms will allow you to identify which of the 10 key metrics of employee engagement is the lowest (and no, it’s not just about “employee happiness”).
This will allow you to focus your efforts and resources at the right place.
Being able to measure and react quickly is a key part of maintaining that employee happiness.
Collect Employee Feedback Frequently
You should have a way to collect employee feedback in real-time. Show employees that you value their opinion and want them to be happy at work.
The most important part of the process is being able to react quickly to that feedback.
Create a feedback loop within your team and encourage employees to speak up honestly about their concerns.
Understanding what’s on their mind and showing them that you care is a key part of employee retention.
Pay Employees Fairly
Employees value whether the work they’re putting into the company is equal to the output they’re getting in the form of compensation.
This is known as equity theory, and is an important part of retaining employees.
If you’re not able to directly adjust salary, there might be some ways you can make employees happier through perks.
Take Time Hiring
This is easier said than done, but it all starts with who you hire. You need to take the time to hire the right person that will fit into your culture.
Research from the firm Rainmaker Group found that hiring accounts for 80% of retention issues.
Offer Good Perks
Good employee perks aren’t necessarily things like free beer and lunch, they’re things that show employees that you respect them and are willing to treat them like adults.
Things like flexible schedules, unlimited vacations, and remote work all imply trust, which is the secret to retention.
Employees will return that respect with harder work and better quality, so it’s in your best interest to try offering good perks.
Promote Work-Life Balance
Especially as technology becomes more apparent in our lives, we need to give employees the work-life balance they deserve.
After a certain point, your productivity caps off and every additional hour that you work, you’re more likely to make mistakes.
As a leader, you need to be a good role model for employees. They might be scared to leave work on time if they always see you at the office late at night. It’s important that employees don’t become burned out and overworked.
Have A Budget For Learning
Employees that are more knowledgeable will bring more value to your organization.
Employees want to learn more and get better at what they do. As a good leader, you could set up a budget to allow employees to do things like go to conferences, take online classes, etc.
- http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/proto/workingpapers/happinessproductivity.pdf ↩
- http://www.gallup.com/strategicconsulting/163007/state-american-workplace.aspx ↩
- http://www.conferenceboard.ca/e-library/abstract.aspx?did=831 ↩
- http://www.americanprogress.org/wp-content/uploads/2012/11/CostofTurnover.pdf ↩
- http://www.jdapsi.com/Client/articles/coh ↩
- http://dera.ioe.ac.uk/1810/1/file52215.pdf ↩
- http://businessjournal.gallup.com/content/24874/a-caterpillar-dealer-unearths-employee-engagement.aspx#1 ↩
- https://books.google.ca/books/about/Service_Profit_Chain.html?id=i_JXqsrbZ6IC ↩
- http://www.workforceinstitute.org/wp-content/themes/revolution/docs/Absenteeism-Bottom-Line.pdf ↩
Employee Engagement ROI Toolkit
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