Learning from Practice: How we calculated the added value of an employee wellness intervention
At one point in my career, I was working as an HR-manager for a subsidiary of Belden, a company which, at that time, was making cables and wires for electronic equipment, like shavers, TVs, and computers.
During this time the company had a relatively large proportion of “blue collar employees”. Supervisors were struggling with a lot of “troubled” employees showing undesirable behaviors such as predictable absenteeism patterns, tardiness, arguments with fellow employees, unusual on-the-job accidents, increased spoilage or broken equipment through negligence, involvement with the law, financial problems, and so on.
In an attempt to cope with these kinds of behaviors, the company hired a company doctor (part-time) and employed a company counselor. Supervisors and HR-managers often referred to these “specialists” to help these “troubled” employees. These specialists, in turn, sometimes referred to more specialized parties in case of financial problems, drug abuse, etc. All in all, we knew that the company was spending some 200 thousand euros per year on this intervention. The financial controller asked me to estimate the benefits the company was having from investing this amount of money.
What is the logic of investing in health and wellness?
In the literature on employee health and wellbeing, there is a clear distinction between workplace health promotion (WHP) and Employee Assistance Programs (EAP).
Whereas WHP programs focus on prevention, EAPs focus on rehabilitation. An EAP is a system that provides confidential, professional care to employees whose job performance is or may be adversely affected by a variety of personal problems. It is estimated by EASNA, the American trade organization for EAPs, that for every dollar employers spend on an EAP, the return on investment (ROI) is $3, making an EAP a sound investment for businesses of all sizes.
So what is this ROI on investments in health, wellness, and welfare based on? Investments will lead to changes in behavior, which lead to greater physical and mental health. In the end, changes in behavior should lead to improved financial outcomes. This includes fewer insurance claims, lower overall medical costs, a reduction in the costs of employee absence, lower accidents and turnover, and a higher sales value of products and services (Cascio & Boudreau, 2011).
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The cost-benefits analysis of the EAP of Belden
As shown in the picture above there are a few options to calculate the benefits of investments in Employee health and wellness. Let’s focus on the Employee Assistance Program in the Belden company and the related benefits in terms of increased performance value/productivity and decreased turnover.
Cost of decreased productivity
To calculate the cost of decreased productivity, there are a number of factors that we need to account for. Let’s take the following equation
Number of workers in the workforce
x proportion of workers with “(personal) troubles”
x annual earnings
x productivity decrease attributable to personal problems
= cost of “personal problems related to reduced productivity”
In Belden, the company doctor and employee counselor meticulously recorded these so-called “troubled employees”. The data showed that they made up about 15% of the workforce. It was more difficult to estimate the productivity decrease attributable to these personal problems. Here we had to rely on literature which indicated a percentage of around 18% (Parker et al, 1984; Masi, 1984). Adding these figures together with data from the Belden payroll system the inputs for the equation were as follows:
x 15% of employees with personal troubles
x annual earnings of 40.000 euro per worker
x 18% productivity decrease attributable to personal problems
= Cost of “personal problems related to reduced productivity” of 918,000 euros.
So now we have a rough estimate of the productivity loss due to troubled employees. How can we estimate the amount of money that could be saved in terms of increased productivity through our EAP?
In Belden, we did not have clear data on which amount of employees did benefit from the EAP. In other words, the actual success rate was missing. Here again we relied on literature which indicated that approximately 50% is a reasonable success rate of an EAP (Wagner, 1984).
So, multiplying 918,000 euro (our estimated loss of productivity) x 50 percent = 459,000 euro. This was the potential amount of money that could be saved per year.
If we calculate an ROI (benefit-cost/cost) the equation will be as follows:
This is an ROI of 130%, or a net return of 1.30 euro for every 1 euro invested.
Cost of employee turnover
An additional benefit from the EAP was a reduction in turnover, which was also shown in the picture above by Cascio & Boudreau. From exit interviews in Belden we knew that a part of the employee turnover was caused by the problems with “troubled employees”. This reduction in turnover could be qualified as “opportunity savings” because they reflect costs that were not actually incurred.
In Belden, we were dealing with an average of 7% turnover per year amounting to some 60 employees leaving the company. The average wage per employee was approximately 40,000 euro per year. A review of Bouchy & Glynn (2012) based 27 case studies concluded that the average costs to replace an employee amounted to 21% of their annual salary
Let’s assume for our Belden employees that the employee separation costs (separation, replacement, induction, and training costs) per employee is 25% of their annual wage (10,000 euros). The total turnover costs would then amount to 600,000 euros.
Knowing that some 15% (N=9) of the “potential leavers” were making use of the Belden EAP our “adjusted turnover costs” would then amount to 15% x 600,000 = 90,000 euros.
Taking the same “success rate” of our EAP as mentioned above, the total amount of savings can be calculated as 50% x 90,000 = 45,000 euros.
If we recalculate our ROI, incorporating both productivity and turnover reduction benefits, the equation will be
We believed this percentage was an underestimation of the actual level of savings Belden could realize. The benefits of lower absenteeism and savings in supervisors’ time were not (yet) taken into account.
In conclusion, estimating the benefits of certain EAP and WHP programs is worth it. It helps to show employers the ROI that can be achieved for them by improving employee health, wellness, and welfare.