Employee Engagement ROI
5% higher engagement equates to 10% of payroll
When implementing Voice Project's employee engagement surveys we often get asked about the return on investment from higher employee engagement. So I've pulled together some of the stats from our research and research from others. Yes, this inevitably involves some maths.
From statistics in one of our peer-reviewed scientific publications (Langford, 2009), and applying conservative assumptions (so these calculations are most likely underestimates), we've calculated that for organisations paying an average salary of A$65,000, a 5% higher employee engagement score is associated with A$3,700 higher productivity, A$1,500 lower turnover costs, and A$150 lower absenteeism costs, totalling $5,350 in value per employee. We also see higher employee engagement is associated with lower safety costs and higher customer satisfaction and innovation, although it is harder to pin down dollar values for these outcomes. Adding what we believe are underestimates of these additional gains . . .
A conservative estimate of the benefit of 5% higher employee engagement is 10% of payroll.
That is, for an average employee on A$65,000, there are likely to be at least gains totalling A$6,500. Taking these calculations one step further and looking at ROI and profitability, if the same company had A$200,000 in revenue per employee, a 10% profit margin (ie, A$20,000 profit per employee), and spent 5% of payroll each year to reach and maintain the higher engagement, that translates to . . .
An ROI of 100% and an improvement of profitability of around 16%.
Supporting these results, in a 2013 report based on applicants for their Best Employer awards Aon Hewitt found that 5% improvement over time in engagement was associated with a 14% increase in profitability.
These estimates of ROI and profitability will of course depend on your own revenue per employee and current profitability. For your own organisation, you can estimate the benefit in profitability with the formulae:
Change to profitability = (% change in engagement score x 2 x payroll) minus (investment in improving engagement) all divided by (total current profit).
For example, if a company with a revenue of $20 million increased engagement by 3%, had a payroll of $10 million, invested $250,000 in improving engagement, and had a current profitability of $2 million, the improved engagement score is likely to have increased profitability by: ((3% x 2 x $10m) - $250,000)/$2m = 17.5%.
Finally, there are strong reasons to assume that if you have a predominantly white collar professional workforce, then the returns from engagement are even greater than I have stated above, because changes in the productivity and discretionary effort of these workers tend to have a bigger impact on bottom line results.
So, does this ring true for your experience? What are your observations about measurable benefits from improved engagement (or, indeed, losses from lower engagement)? We'd love to hear your real world experiences in terms of reduced employee turnover, better absenteeism, improved safety, improved customer satisfaction, or any other outcomes you may be observed.
Reference: Langford, P. H. (2009). Measuring organisational climate and employee engagement: Evidence for a 7Ps model of work practices and outcomes. Australian Journal of Psychology, 61 (4), 185-198.
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