Two Approaches to Measuring the ROI of Employee Engagement

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When you enter the field of human resources, it only takes a few months to observe an indisputable natural law: engaged employees do better work.

Subtle signs that indicate engagement, such as creativity, energy, and enthusiasm, may seem optional to higher levels of leadership — after all, some jobs don’t require passion to get them done — but human resource professionals know that these subtle signs combine to signal an environment that maximizes productivity, efficiency, and profitability.

While HR professionals understand the power of people, it is difficult to translate that power into a clear return on investment (ROI). This difficulty to connect the power of people and ROI often leaves directors and managers struggling to make a case for significant investments in employee engagement and corporate culture.

The result? One of your company’s most powerful tools is pushed quietly off the radar of leadership teams looking for a competitive edge.

Now for the good news– the study of employee engagement and company culture has enjoyed increased popularity among researchers, publications, and thought leaders for the past several years. One of the biggest benefits of this attention is an understanding of the profound impact of employee engagement on company success. It’s never been more apparent that employee engagement should be a top organizational priority, and it has never been easier to define and measure the ROI of employee engagement initiatives.

Defining Employee Engagement

Before we can make the case for employee engagement, we have to define it. While in recent press the term often conjures images of espresso machines, brightly lit open offices, and paid vacations, authentic employee engagement is not a tangible benefit; it’s the culmination of value signals that your company sends each employee.

Another way to look at it is the definition offered by Deloitte University Press in their Global Human Capital Trends 2016 report.  According to the report: “Culture describes ‘the way things work around here,’ while engagement describes ‘how people feel about the way things work around here.'”

The Society for Human Resource Management’s “Employee Engagement and Commitment” assigns a few universal signs that demonstrate employee engagement: employees are more likely to participate in work initiatives  with enthusiasm, bring more brainpower and creativity to their daily tasks, and “go the extra mile” for large projects and initiatives. Engaged employees are also five times less likely to voluntarily leave the company. These engagement indicators have an obvious surface-level value in the workplace, but their long-term effects are even more powerful.

Measuring the ROI of Employee Engagement

Many aspects of employment are measurable, including employee output and productivity, length of service and rates of turnover, and actual dollars tied to a particular position. For some organizations, the biggest obstacle to measuring employee engagement is determine what exactly to measure.

One way to approach the data is to divide it into two groups: how much money is lost through disengaged employees and how much money can be gained by engaging or re-engaging them.

The Cost of Employee Disengagement

Gallup’s “State of the American Workplace” report shows that up to 70 percent of employees are disengaged in the workplace, costing companies $450-550 billion every year from the following profitability drains:

  • Lack of productivity slows down the delivery of internal and external products and services.
  • High turnover rates increase the costs of recruitment and training.
  • Employee theft– both of objects and of time spent on non-work activities performed during working hours– eats away at budgets and productivity.
  • Unhappy employees spread dissatisfaction to other employees and negatively influence clients.

Depending on your company’s level of sophistication, you may not have ready statistics associated with the above bullet points. However, gathering anecdotal evidence of situations where lack of engagement affected client satisfaction or your company’s ability to deliver throughout the year is a good place to start to building a case for the cost of employee disengagement.

The Promise of Employee Engagement

When it comes to measuring the positive day-to-day ROI of employee engagement, the problem is not that there is no data, the problem is that the data is too large to distill into a simple equation.

In its report “15 Stats that Prove the ROI of Company Culture,” Glassdoor found that companies with engaged employees outperform those without by more than 200%, and companies that invested 10% more in employee engagement also increased company profits by $2,400 per employee per year. In addition, the report also found the following:

  • High-performing companies hire candidates who are a good fit, decreasing turnover rates.
  • Organizations see enhanced productivity and buy-in among newly re-engaged workers who engage in and contribute to the workplace culture.
  • A strategic approach to employee engagement and company culture inspires employees to advance the employer brand, saving companies both recruiting (22%) and cost-per-hire fees (50%).

Your challenge will be to track improvement metrics in the workplace. For example, investing 10% more in employee engagement may increase company profits, but it may also decrease employee time spent in meetings and increase employee time spent working. Monitoring and analyzing these employee engagement metrics will help craft a case for investing in employee engagement.

What About Culture?

While measuring the ROI of employee engagement is crucial to understanding your organization, it doesn’t provide the whole story of what is happening to drive that level of engagement  Since employee engagement is a result of company culture, you must measure company culture in addition to  employee engagement.  
There’s a reason company culture has not been measured too much in the past — it’s difficult to assign a quantitative quality to a concept that is unique to each company. However, quantifying a qualitative characteristic is easier than it seems; you identify specific qualities that determine your company culture and assign metrics to them. You can then use this model to prioritize your engagement strategy based on how employees feel about different parts of your culture.

To learn more about this process, check out this infographic or download our white paper Building a Business Case for Company Culture.

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