Impact of employee engagement on profitability

November 2012

Employee engagement has a number of implications for an organisation's profitability. This impact of is largely indirect. Through improving retention, customer loyalty, productivity, and safety; organisations are able to keep their bottom line healthy while engagement strengthens all of these factors. The diagram below illustrates this relationship.

Impact of employee engagement on profitability

It has been found that organisations enjoy 26 percent higher revenue per employee when employees are highly engaged (Taleo Research, 2009). Furthermore, it was found that organisations with highly engaged employees earned 13 percent greater total returns to shareholders (Taleo Research, 2009). Furthermore, a meta-analysis (Harter et al, 2002) showed that businesses in the top 25% for employee engagement (of those studied) produced up to four percentage points in profitability. Repeating the study in 2009, it was found that the top 25% increased their profitability by 16%.

Research by Towers Perrin (2003) indicates that the more engaged employees at an organisation are, the more likely it is to exceed the industry average in one-year revenue growth. Specifically, there is a trend showing that highly engaged employees work for organisations that had revenue growth at least one percentage point above the average for their industry, while the organisations of the most disengaged employees work for companies where revenue growth falls one or two percentage points below the average (Towers Perrin, 2003). However, it should be noted that there is probably another factor at work here, in that organisations that are performing better may be more likely to attract more engaged people.

The growing body of research into employee engagement also yields information on how engagement impacts specific aspects of organisations, as outlined below.

Shrinkage

The amount of profit lost to shrinkage (theft) is also lower when engagement is increased. Harter et al. (2009) showed that there is a 27% drop in shrinkage when comparing business units scoring in the top and bottom 25% on engagement. This represents a significant amount of money.

Productivity

SHRM Foundation's research found a significant difference between performance related costs in the sales team of one organisation in 2005. Low engagement teams fell behind high engagement teams so much that the difference in performance-related costs was in excess of $2,000,000 (Lockwood, 2007).

However it is not just in sales teams that the productivity of engaged employees can affect revenue growth. They can have a significant indirect affect by breaking new ground in terms of innovations to boost sales, or simply through supporting other employees (Towers Perrin, 2003). Furthermore, cost of production is lowered when engagement is increased due to more focused and efficient workers (Towers Perrin, 2003)

Safety

As discussed, there are both human and financial costs of safety incidents in the workplace. The organisation at the centre of SHRM Foundation's research saved in excess of $1,700,000 in safety costs in one year by improving employee engagement (Lockwood, 2007).

Retention

Retention has a twofold impact on profitability. Firstly, replacing an employee can cost one and a half times their salary. Secondly, once an employee has been replaced, it takes the new employee a period of time to adjust to the role and start being productive. The impact of this on profitability is especially evident in sales, where it can take years for a new employee to generate the same amount of revenue as an established one.

Customer loyalty

It is common sense that having loyal customers who promote a business helps grow and maintain revenue. Cultivating the employee-customer relationship will enable any organisation to be a low-cost provider and achieve superior results (Heskett, Sasser & Schlesinger, 2003). The key to this is having engaged employees.

Other employee engagement resources


Sources

Harter, J. K., Schmidt, F. L., Killham, E. A. & Agrawal, S., T. L. (2009). Q12® Meta-Analysis: The Relationship Between Engagement at Work and Organisational Outcomes. Retrieved 5 June 2011, from www.gallup.com/consulting/File/126806/MetaAnalysis_Q12_WhitePaper_2009.pdf

Heskett, J., Jones, T., Loveman, G., Sasser, W. E., and Schlesinger, L. (1994). Putting the Service-Profit Chain to Work. Harvard Business Review, March-April,164-174.

Lockwood, N. R. (2007). Leveraging Employee Engagement for Competitive Advantage.SHRM Research Quarterly, 2-11.

Taleo Research (2009). Alignment Drives Employee Engagement and Productivity. Retrieved 29 May 2011 from http://www.taleo.com

Towers Perrin (2003). Working Today: Understanding What Drives Employee Engagement. The 2003 Towers Perrin Talent Report.Retrieved 15 June 2011, from http://www.towersperrin.com/tp/getwebcachedoc?webc=hrs/usa/2003/200309/talent_2003.pdf