Measuring ROI of Employee Engagement: A Practical Guide
Employee engagement is essential for business success. However, if you’re not tracking the ROI of employee engagement, it can be tough to justify the investment and focus your energy on the right initiatives. How do you measure the ROI of employee engagement? Let’s find out.
Why is employee engagement important?
How to measure ROI on employee engagement
– Employee productivity
– Employee turnover
– Revenue per employee
– Employee absenteeism
– Customer satisfaction
Overall employee engagement ROI
Why is employee engagement important?
Human beings have an inherent longing for relationships that are emotionally valuable and mutually beneficial. People who find this type of connection at their workplace are inspired to commit themselves and contribute to the company’s well-being. Instead of just taking what they can get from their employer, they also want to reciprocate by performing at their best.
Organizations that have engaged employees reap the benefits of:
- Boosted productivity
- Improved retention
- Reduced absenteeism
- Higher customer satisfaction
For the reasons mentioned above, it is certainly worth investing in an employee engagement plan. Your senior leadership may understand this in theory, but they are probably very data-focused and want to see what ROI their investment actually brings.
You need to see beyond the sentimental aspects of employee engagement efforts and be able to quantify their value. This is why it’s important to measure and communicate the ROI of employee engagement.
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How to measure ROI on employee engagement
Employee engagement ROI is one of the key employee engagement metrics. Evaluating the ROI on employee engagement can start with external research and benchmarks to get a general estimate of its tangible advantage.
For instance, Gallup did a meta-analysis of 339 research studies that encompassed 230 organizations from 73 countries in 49 different industries. This analysis concluded that employers ranking in the highest quartile in employee engagement surveys were the ones with better business performance.
Breaking it down further, the report found that companies with an engaged workforce:
- Enhance profits by 21%.
- Increase productivity by 17%.
- Reduce absenteeism by 41%.
- Experience 24%-50% less turnover, depending on whether they are atypically high or low turnover rate business.
- Achieve a 20% increase in sales.
- Show a 10% improvement in customer ratings.
Clearly, the positive effects of an engaged workforce are displayed in a variety of outcomes. Let’s take a closer look at the way several of these metrics relate to employee engagement and how to calculate their ROI.
Employees who feel a strong connection to their employer will enjoy and be more emotionally invested in their jobs. They will be motivated to put more effort into their work rather than just going through the motions. This leads to being more mindful of safety and quality while going about their duties since they see themselves as making an impact on the company’s success. Overall, their productivity rises.
Collaboration is easier and more common among engaged employees who see themselves as team members who have to join forces to win. A “group effort” mentality encourages employees to share ideas that will spread sound strategies and best practices throughout the company.
Productive employees get more work done which drives up profits. The equation for measuring employee productivity is total input divided by total output. Here is an example in US dollars:
Output = Amount of goods or services produced ($100,000)
Input = Labor hours required for production (1,750)
100,000 divided by 1,750 equals 57 ($57 of production per hour of work)
If you compare this rate to that of pre-employee engagement initiatives, you should be able to show increased productivity. You can also make forecasts about how much extra money would increasing employee engagement by, let’s say, 1% bring.
A commitment to employee engagement helps differentiate your organization and keep you competitive as an employer. Engaged workers are likely to have higher job satisfaction and loyalty which leads to staying with the company longer. Better employee retention means your workforce has a wealth of knowledge and experience from long-term employees and prevents them from taking it elsewhere.
Retaining talent saves money. According to SHRM, the price of replacing an employee is about one-third of their annual earnings. This estimate factors in both the hard costs of recruiting and the soft costs of lost productivity from a vacant position.
Employee turnover rate data will help you explain the ROI of employee engagement. Here is a simple formula with examples:
- Calculate the average number of employees you have for a set period of time. (125)
- Divide the number of employees who leave during that time by the average number of employees. (22 / 125 = 17.6% turnover rate)
Decreasing turnover rates will quantify the cost savings from having engaged employees who stick around.
Revenue per employee
Since employees are often a business’s highest expense, it’s essential to know that investing in them pays off. According to an Aon Hewitt analysis of 94 global companies, each percentage point of employee engagement improvement correlated to 0.6% in sales growth for the organization.
With employee engagement decreasing turnover and driving up employee output, the returns each person generates are bound to increase. You can demonstrate this with a simple revenue per employee calculation:
Total revenue ($1,000,000) / Average number of employees (500) = $2,000 revenue per employee
Comparing this ratio to your organization’s historical data and to other companies in the same industry can be useful for reflecting ROI. Organizations that rely on revenue per employee data will place their growth and success on the value of employee engagement.
You could also make projections based on the Aon Hewitt findings or other benchmarks. In the above example, if you improve employee engagement by 2%, it would lead to an extra $12,000 in total revenue and an increase of $24 in revenue per employee.
Employees who have a cohesive relationship with their employer are more committed to their jobs. They respect the parameters of their work schedule and aren’t as likely to find excuses for not being there.
When employees don’t show up, it costs time and money to pay replacement workers or adjust others’ workflows. Therefore, decreasing unexcused absenteeism will reduce the financial burden on your organization.
E x A / E x D = Annual absenteeism percentage
E = Average number of employees for the year (500)
A = Total number of unplanned absences (600)
D = Total number of workdays available per employee (260)
(500 x 600) / (550 x 260) = Annual absenteeism percentage
300,000 / 130,000 = 2.31% annual absenteeism of total workdays
Next, you can figure your cost of absenteeism per employee to indicate the impact of one employee’s absence on your bottom line:
R x A + S x A = Absenteeism cost per employee
A = Absentee rate (2.31%)
R = Revenue per employee ($2,000)
S = Average employee salary ($48,000)
(2,000 x .0231) 46.2 + (48,000 x .0231) 1,108.80 = $1,386 absenteeism cost per employee
Determining the cost of absenteeism per employee will display the savings realized from lowering the absenteeism rate through increasing employee engagement.
Maintaining a solid customer base leads to more stable revenue and can be the key to success. A sense of belonging spurs workers to take ownership and have passion for the product or service they’re selling, inspiring customers’ enthusiasm as well.
Engaged employees seek to build strong relationships with customers and provide exceptional service. They are more likely to have a positive attitude than disengaged employees, and they will practice more patience to meet customers’ needs, even the demanding ones. Satisfied patrons require less time and attention than dissatisfied ones, and they tend to be return customers.
Employees who feel taken care of at work will take good care of their customers. The level of engagement employees feel with their employer can relate to how they serve and interact with clients or customers. Not only can customers sense when employees have a positive connection with their employer, but they may also view it as a reason to support a company with a reputation for treating its employees well.
Improved customer relationships convert to higher customer satisfaction and loyalty to your business. Research done by The Institute of Customer Service proposes that raising employee engagement by one point can be associated with a 0.41 increase in customer satisfaction.
Your organization’s customer service surveys and data can be used as points of reference to show a pattern of improvement and ROI as your employee engagement increases.
Overall employee engagement ROI
Higher employee engagement works in two ways to affect your bottom line. It supports better revenue from higher productivity and customer satisfaction and decreases costs from lower absenteeism and turnover.
No matter how simple or sophisticated your tracking methods are, you can showcase how employee engagement contributes to your organization’s operation and achievements.
Here is one way to come up with a specific value for overall employee engagement ROI:
First, add up the amount of revenue gained:
X% increase in employee productivity + amount saved from X% reduction in absenteeism and X% decrease in turnover = Net benefits
Then factor in the costs of implementing employee engagement initiatives:
(Net benefits – Cost of initiatives) / Cost of initiatives X 100 = ROI
Net benefits (500,000) – Cost of initiatives (400,000) / Cost of initiatives (400,000) = 25% ROI
To supplement the numbers, you can use anecdotal evidence from situations where a lack of employee engagement hindered service delivery or affected clients’ contentment with your organization.
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Just as it does in personal relationships, fostering a compelling connection between your employees and the organization will build up both parties. Promoting a culture of engagement is undoubtedly the right approach to take, but it also pays off when employees believe they are stakeholders in the company’s success and future. The win-win of employee engagement is something that HR must be able to articulate.
Measuring ROI on employee engagement will help you prove to leadership that employee engagement actually does positively impact the business. That way, you’re able to secure prioritization and more resources for your employee engagement initiatives. Leadership’s full endorsement also helps set the right tone from the top of the organization.