Chapter 2

The Hard Sell: Making a Business Case for Employee Engagement

In This Chapter

Understanding why employee engagement is such a big deal

Recognizing the dangers of disengagement

Identifying the relationship between engagement and innovation

Finding and developing champions of engagement within your organization

Setting goals and objectives for your engagement program

No offense to employee engagement, but it's a bit “soft.” That is, it has to do with people and their investment in their jobs and their companies. That may make it a bit of a hard sell for the powers that be — CEOs, CFOs, and others. These folks tend to be, well, a bit “harder.” That is, they're about hard data — numbers and such.

That's what this chapter is about: the hard data that makes a business case for employee engagement. In this chapter, you discover the business areas that are most affected by employee engagement, the dangers of disengagement, and the importance of finding and developing engagement champions within your organization. Armed with the information in this chapter, you'll be able to explain to even the most hardened executive how employee engagement is not just good for the bottom line, but the very foundation of a healthy business.

What's the Big Deal? Why Employee Engagement Matters

Employee engagement results in lower absenteeism and turnover, as well as higher productivity and profitability. But don't just take my word for it. A 2012 Gallup study — which examined nearly 50,000 business or work units and roughly 1.4 million employees in 192 organizations across 49 industries and in 34 countries — concluded that employee engagement has a huge impact on these and other key organizational outcomes, regardless of the economic climate. Indeed, even during difficult economic times, employee engagement is a key competitive differentiator.

According to the Gallup study, titled “Engagement at Work: Its Effect on Performance Continues in Tough Economic Times,” which measured the difference between the top 25 percent of employees and the bottom 25 percent of employees when it comes to employee engagement, employee engagement affects the following performance outcomes:

• Absenteeism: Organizations with the most engaged employees have 37 percent lower absenteeism than companies where employees are least engaged.
• Turnover: Even among high-turnover organizations, those with the most engaged employees experience 25 percent lower turnover. The number is even more impressive in low-turnover organizations: 65 percent.
• Shrinkage: On average, a highly engaged workforce results in 28 percent less shrinkage. Shrinkage refers to a loss of inventory that can be attributed to such factors as employee theft, shoplifting, administrative error, vendor fraud, damage in transit or in store, and cashier errors that benefit the customer. In other words, shrinkage is the difference between recorded and actual inventory.
• Safety incidents: Are safety incidents a concern in your organization? If so, it should interest you to know that organizations with the most engaged employees experience 48 percent fewer safety incidents than their least-engaged counterparts. And if you're in healthcare, where patient safety is critical, you'll be pleased to find that organizations with a highly engaged workforce experience 41 percent fewer patient safety incidents.
• Quality incidents: For many industries, quality — that is, lack of defects — is key. Not surprisingly, organizations with highly engaged employees experience 41 percent fewer quality incidents.
• Customer metrics: Organizations with highly engaged employees boast 10 percent higher customer metrics than those whose employees are least engaged.
• Productivity: Highly engaged employees are significantly more productive than their least-engaged counterparts. Indeed, organizations with a highly engaged workforce enjoy 21 percent higher productivity.

Considering all these points, it's probably no great surprise that business or work units that score in the top half of their organization in employee engagement have nearly double the odds of success of those in the bottom half. Moreover, those at the 99th percentile have four times the success rate of those at the 1st percentile.

Here are a few other interesting tidbits about employee engagement, these from a 2012 study published by Temkin Group, “Employee Engagement Benchmark Study”:

• Compared with disengaged employees, employees who are highly engaged are 480 percent more committed to helping their organization succeed.
• Highly engaged employees are 250 percent more likely to recommend improvements.
• Employees who are highly engaged are 370 percent more likely to recommend their company as an employer (which, as discussed in Chapter 12, increases the chances of your organization hiring additional highly engaged workers).

In the following sections, I dig deeper into two key benefits of an engaged workforce: customer satisfaction and profitability.

Grow your own: Cultivating customer satisfaction with employee engagement

Have you ever gone into a restaurant, hotel, or retail outlet and encountered a disinterested or, worse, rude employee? If so, chances are, you have no plans to revisit that establishment — not now, and not ever. Often, the same employees who are rude and disinterested are also — you guessed it — disengaged. And if those employees are the ones representing your organization to the public, it can do a real number on your business. Conversely, employees who are engaged can serve as drivers for customer satisfaction and, by extension, profitable growth.

The bottom line? Engaged employees drive customer satisfaction. If your employees aren't engaged, your customers won't be either.

In any enterprise you can imagine, at any scale, if you can't satisfy the demands of your clients, you'll lose business. And the way to reach extraordinary levels of client and customer service is through engaged employees. Employees’ dedication speaks volumes to clients and customers. A company's employees truly are its greatest asset. But don't just take my word for it. According to a study conducted by Serco, increased employee engagement was accompanied by a 12 percent increase in customer satisfaction!

Profit margin: Driving profits with employee engagement

Employee engagement and profit can seem like difficult metrics to square. As mentioned in this chapter's introduction, employee engagement is “soft,” having to do with people and their investment in their jobs and their companies. Profit, however, is “hard” — it's all about the numbers. Most leaders (including many, many CEOs and CFOs) are highly analytical and are, therefore, more comfortable with hard data. “Soft” initiatives like engagement are rarely intuitive for the very people who need to be sold on them. No executive team will sign off on a plan to increase employee engagement without some assurance that the holy grail — discretionary effort, with its corollary increase in productivity and, ultimately, in profit — is a likely result.

To state the case plainly: Engagement leads to profit, and profit, when wisely publicized and distributed, leads to engagement. That said, it may take time for these two metrics to square satisfactorily. But having seen effects on the bottom lines of dozens of companies, I can tell you that having profit without employee engagement is very difficult. Moreover, engagement, once it's established, can see a company through leaner times and help to build it back up.

Want proof? How about this: That same Gallup study I mention earlier reports that organizations that enjoy high engagement among employees also boast 22 percent higher profitability. Another study, the 2010 Hewitt Associates Survey on Employee Engagement, reports that organizations with engagement scores above 65 percent outperformed the total stock market index, even in volatile times. In contrast, organizations with engagement scores below 40 percent saw a shareholder return that was 44 percent lower than average. And the 2008 WorkTrends Report by Kenexa Research Institute concluded that the top 25 percent of corporations, as measured by employee engagement, saw a five-year total shareholder return (TSR) of 18 percent. This was in contrast to the bottom 25 percent of corporations, which saw a TSR of –4 percent over the same period.

Danger, Will Robinson! The Dangers of Disengagement

As I outline in the previous section, engagement is good… and disengagement is bad. Really bad.

Unfortunately, disengagement is also quite prevalent. Since the Great Recession of 2008–2009, a “perfect storm” of company layoffs, marginal opportunities, minimal pay increases and bonuses, limited opportunities for promotion, and reduced training and development has resulted in rising levels of disengagement. According to a 2012 Dale Carnegie white paper, “What Drives Employee Engagement and Why It Matters,” 45 percent of employees are only partially engaged, and a horrifying 26 percent are disengaged! This lack of engagement is costing companies billions of dollars in lost productivity and reduced levels of client service, resulting in declining profits and worsening client satisfaction.

In boom times, disengaged employees simply seek other opportunities. But in a recession, the disengaged have no place to go. They hunker down, fearful for their jobs. Although management may view the current economic circumstances as helping to separate the wheat from the chaff, rationalizing that the people who stay are the truly dedicated employees, this may not be the case. These people may well just be the employees who are the most disengaged.

To exacerbate matters, many people are postponing retirement to give their 401(k) plans and other retirement funds a chance to rebound. The result? A workforce composed of employees who don't want to be there and retirees hanging around for “one more year.”

In a situation like this, it becomes even more urgent to increase employee engagement — and perhaps even more important, to capture the discretionary effort of the engaged before their frustration with their disengaged colleagues’ apathy takes a further toll on the workplace and the economy at large.

Don't be afraid to prune. In fact, given the strong link between poor performance and disengagement, a good place to start may be the aforementioned staff who are disengaged but staying put!

Things won't get easier with a turn in the economy. Indeed, they could get harder, as employees take advantage of the rising tide and, well, jump ship. Indeed, there is a real threat that many businesses will soon be faced with a staff exodus, and the waste — in training and intellectual capital, but also in revenue — will be colossal. The war for talent will officially resume. And when it does, those companies that have continued to engage employees during the downturn will have a distinct advantage.

So, what does it matter if turnover is high? Well, at the most basic level, employee turnover is expensive. According to some industry sources, the cost of turnover is, on average, the annual salary of the person being replaced — or significantly higher (think 200 percent to 250 percent) if the employee who exits is part of your managerial or sales team. It's not just running ads and/or commissioning a recruiter that empties company coffers; the more difficult and more expensive outlay involves the loss of productivity while the empty position is unfilled. And that's not even counting the intellectual property that the person who leaves takes with her or the waste of the financial investment a company has made in that person, not to mention the very real likelihood of the employee leaving your business to join your competitor.

The damage doesn't stop there, however. Turnover has a Pied Piper effect. As people walk, others talk. They wonder, “Why did Jamie quit?” Even if an employee is leaving on the best possible terms, those who stay are bound to ask themselves, “What did Jamie know that I don't? Should I be looking around, too?” And if the terms of the parting of ways are less than ideal, or if people are quitting in droves, the impact on morale is even more detrimental. Even the sunniest internal communications spin on the situation can't entirely eradicate gossip, speculation, and skepticism.

Not all turnover is created equal. In fact, losing your underperformers will strengthen your business. When disengaged employees or those who are known underperformers leave, you'll almost always experience a spike in engagement from remaining, hard-working employees. Companies that “get” engagement understand that to engage their top performers, they must prune their underperforming employees and address their disengaged employees.

Enlightened companies track voluntary turnover (employees who quit, often to seek opportunities elsewhere) and involuntary turnover (layoffs, termination due to poor performance, and temporary employees, such as interns, who leave because their assignments have ended). Some companies also track “key” employee turnover. Losing a superstar is significantly more painful than losing a “steady Eddie” employee. Identifying your top performers and tracking their turnover is a must for any company looking to build a high-performing business.

Breeding Ground: Engagement Breeds Innovation (Or Is It the Other Way Around?)

Too often, people think innovation is limited to research and development, technological advances, or filing a new patent. But really, innovation can occur in any industry, regardless of company size or maturity. It can also occur in any department, by any employee. Any change leading to a successful business process improvement constitutes innovation. The bottom line: Whether you realize it or not, innovation is critical to the health of your business.

Researchers overwhelmingly agree: Engaged employees drive innovation. Engaged employees are empowered to seek ways to innovate, whether that means improving the customer experience, boosting profitability, building the brand, improving marketing, improving quality, or simply being more creative. Indeed, recent research by Gallup found that 61 percent of engaged employees feed off the creativity of their colleagues, compared to a mere 9 percent of disengaged employees. In addition, it found that 59 percent of engaged employees believe their job brings out their most creative ideas, compared to only 3 percent of disengaged employees. This links to the customer side of the business as well; Gallup found that 74 percent of engaged employees give their customers new ideas, compared to only 13 percent of disengaged employees. And in an interesting chicken-or-egg type way, innovation also drives employee engagement.

Unfortunately, many leaders fail to create a safe environment for employees to contribute ideas. Worse, they create an environment in which new ideas are met with rejection. I often tell leadership teams that if they want to kill employee engagement and initiative, they should simply tell employees that they can't do something “because that's not how we do it here” or “because we've tried that before” or “because management will never accept that” or “because it isn't policy.” This type of “because” culture ultimately maintains the status quo — and the status quo simply doesn't breed creativity or innovation. Companies fail when they stop evolving their product or service, become complacent, are afraid to fix what isn't yet broken, worry about the investment necessary to innovate, or worry about failure.

If your company has a “because” culture, odds are, it's lacking in innovation, empowerment, and engagement. I also suspect your firm's growth is lower than its peers, your client satisfaction levels are lower than the industry average, and voluntary employee turnover is higher than your competition. You're also most likely retaining only your marginally engaged employees.

All too often, leaders become protective of what they've created and fail to engage their employees to help them create or innovate. Countless leadership teams surround themselves with people who think just like them. Birds of a feather may flock together, but they don't innovate!

Instead of a “because” culture, why not try for a “why not?” culture? Instead of rejecting employees’ ideas “just because,” give them a whirl, just to see what happens. Even better, seek out those ideas. Sure, you'll have some misses, but you'll also have some hits! Continuous improvement is about challenging the norm. Besides, actually listening to employees allows them to become even more comfortable about expressing their ideas, which naturally increases their level of engagement. (Of course, not all ideas will be winners. For some guidance on which ideas to pursue and which to set aside, check out the idea priority matrix in Figure 2-1. As you can see, it favors ideas that are low in cost and high in impact over all others.)

Ask yourself: Does your culture underwrite creativity, or is it afraid of mistakes? Do risk takers get punished? Companies that foster a higher level of expression from their employees (and that accept that missteps are part of the creative process) will not only see more innovation, but also have more engaged employees.

When it comes to innovation, engagement is both a chauffeur and a passenger — that is, it both drives and is driven by innovation. Indeed, innovation is a key engagement driver. Employees want to create, be current, evolve, contribute new ideas and approaches, and work for the market leader.

Has all this talk about innovation and engagement gotten the gears in your noggin turning? Here are some tips to help you convert those thoughts into action:

• It starts at the top. Your leader and his or her leadership team need to become champions of innovation. Frequent and consistent companywide communications must highlight innovation and recent successes and encourage employees to challenge the status quo.
• Establish a “why not?” campaign. Go big with posters, training, and supporting communication, all focused on helping leaders and employees recognize when they lapse into “because” thinking. Make it fun! Encourage your employees to catch others saying “because” and correct them with the appropriate “why not?” response.
• Expand your definition of diversity. As I discuss in Chapter 12, diversity is not simply about some Equal Employment Opportunity Commission charge to eliminate discrimination in the workplace due to gender, age, or race. Instead, it's about one's thinking style, culture, heritage, generation, tenure, organizational level… the list goes on. Diversity is about inclusion, and inclusion leads to innovation.
• Budget and measure innovation. The old adage “You get the behavior you measure” is certainly true with innovation. Are you establishing an innovation culture by budgeting for innovation? Some companies earmark a percentage of total profit or revenue or a set number of hours per employee per year. Regardless of your metric, reporting on progress and highlighting successes are essential. (For more on metrics in general, see Chapter 15.)

  Don't shoot down those who innovate and fail. A key ingredient of innovative cultures is the acceptance of failure. If your employees are afraid to fail, you'll never build a culture of innovation.

• Establish a task force to oversee innovation. Populate your team with left- and right-brain thinkers from both the full- and part-time staff, including recent hires. ( Remember: The “architects of the present” can rarely see what needs to change!) Also, make it a point to include Millennials (also known as Generation Y); they have great ideas on leveraging technology, using social media as a branding and communication tool, and the direction we're heading with mobile technology. Give the task force a budget to oversee and manage, and ask them to report on progress. You may even go so far as to establish your innovation task team as a permanent part of your organization, with one- to two-year rotating terms. Finally, consider instituting an idea process to encourage both guests and employees to suggest new ideas.
• Look outside your own industry for ideas and talent. I'm flummoxed by the fact that many firms continue to run in the same race as every other firm in their niche. That is, they do external benchmarking only against other firms within their same sector. If you want to come up with an innovative idea that is the first of its kind or is disruptive to your competition, you need to see what other industries are doing.

  Don't be afraid to hire people from outside your industry. You want to surround yourself with people who think differently from you!

• Provide an “innovation box.” I've never been a fan of suggestion boxes. In my experience, they tend to become clogged with complaints, often of the pettiest sort. A better approach is to use an innovation box — a feedback mechanism geared toward soliciting specific suggestions for innovation: How can we improve our proposal system? How should our technology evolve? Should our billing be centralized? What can we be doing better in terms of customer service? Are there new markets we need to penetrate? What technologies are we missing? An innovation box establishes a direct connection between the individual's contribution and the welfare of the organization as a whole. It further funds trust, and a sense that the individual is being heard. And perhaps most important, it provides a means by which new ideas — the fuel of a company's future — can flourish. This is engagement at its best.

  At one company I worked for, we formalized this process by adding an “innovation light bulb” to our intranet home page and made it clear that we were looking for proactive, well thought-out ideas on how our employees could help the company innovate. Everyone who sent in an idea was recognized for it and rewarded with a small gift card. A committee, including members of the senior leadership team, reviewed all suggestions and responded to all submitters, letting them know if their ideas were or weren't implementable (and why). The cream of the crop were sent to the company's CEO. Many of these ideas made their way into our policies and processes, and even new and enhanced service offerings.

• Follow the 125 rule. Some experts claim that to foster a culture of innovation while avoiding bureaucracy, you must prevent your chain of command from exceeding 125 employees. Richard Branson, CEO of Virgin, keeps his profit units as small as possible to keep them fleet of foot, to foster innovation, and to encourage entrepreneurial drive.
• Build a career lattice. Most people think of careers as being a ladder — something you climb up. But enlightened organizations understand that engagement increases in cultures that support job rotation — that is, not just up, but across, like a lattice. The advantages are many:
  • Continually promoting people upward is expensive; employees often look for more money as they advance in their careers.
  • There are only so many promotional opportunities. Employees are far more willing to accept a lateral move if they feel they're learning a new skill that will help their careers.
  • A job lattice increases not only engagement, but innovation as well. People who have been in the same department often struggle to develop new ideas, approaches, and process improvements. A career lattice minimizes job stagnancy and complacency.

We Are the Champions: Finding and Developing Engagement Champions

Just having your company leaders talk about engagement isn't enough. You must embed engagement champions throughout your workforce. Identifying the right employees as your engagement champions is key to building a culture of engagement. Failing to do so will severely hamper your engagement efforts.

To identify your engagement champions, first you need to understand your own culture. What behaviors and traits does your firm value? For instance, Southwest Airlines values a sense of humor, Apple values creativity, and Nordstrom values customer service. More often than not, your most engaged employees are those whose personal traits mirror the traits of the firm's culture. Those employees will make for great engagement champions.

Look, too, to your most respected and well networked employees. Malcolm Gladwell (author of such books as The Tipping Point and Outliers, both published by Little, Brown) calls them “connectors.” You want to make sure your engagement champions are connectors within your firm, because you'll need them to serve as engagement ambassadors.

Although committees are often overused and improperly chartered, if you're new to engagement, you may consider bringing together a group of engaged connectors to help give the initiative some traction.

After you locate your engagement champions, it's on you to help them develop. Here are a few ideas:

• Identify an organizational need or a problem that needs fixing and put your engagement champions in charge of a team aimed at solving it. Give the group a budget, a voice at the leadership table, and a timetable to recommend a plan. Just remember that if your leadership team is unwilling to consider the team's solution, the result will be a disengaged champion.
• Send your engagement champions to a conference or trade show to present a technical paper or work the booth. Even if they're not marketing types, they'll be great brand ambassadors, representing you to your customers.
• Invite your engagement champions to participate in your college recruiting program or at job fairs. These standouts can act as brand ambassadors to potential employees in much the same way they can to customers. Also, invite them to mentor new hires or those who have been promoted.
• Reward your engagement champions to a weeklong executive development program. These programs are frequently offered at major universities. Also, ask them to participate in (or perhaps even present at) executive leadership team meetings.

Objective Case: Setting Goals and Objectives for Your Engagement Plan

This chapter is about making a business case for employee engagement, right? Well, you can't expect to make a credible business case for employee engagement if you don't include a set of business goals and objectives.

If your leadership team wanted to increase sales, they would put in place sales objectives. If they wanted to decrease defects in manufacturing, they would outline quality objectives. If they wanted to reduce shrinkage in the retail chain, they would outline your objectives to minimize theft and returns. But something funny often happens with employee engagement. Something happens in the firm — for example, employee turnover spikes — and someone cries, “Let's focus on employee engagement!” and off you go. No goal, and few objectives.

Employee engagement should be viewed as part of your overall strategic planning process. As such, it needs to be budgeted, tracked, and championed. Most important, it needs to follow a set of organizational objectives. Anything short of this, and you run the risk of turning employee engagement into a “flavor of the month”–type program. And as I make abundantly clear in Chapter 1, employee engagement is not a program!

Here are some engagement-related goals and objectives that would apply to most any firm:

• Become an “employer of choice” in your industry. Employers of choice — think Apple, Google, Southwest Airlines, Procter and Gamble, Whirlpool, Timberland, 3M, Starbucks, and so on — receive more résumés than their competitors. It follows, then, that these companies enjoy the benefit of choosing from more qualified candidates. Indeed, according to Dr. Wayne Cascio, author of Investing in People: Financial Impact of Human Resource Initiatives (FT Press) and a distinguished professor and instructor at the University of Colorado, firms that make Fortune magazine's annual “Top 100 Places to Work” list receive twice as many applications as firms that are not on the list. It's a simple concept, really: If you receive twice as many résumés from qualified candidates for a position as your competitor, you'll be able to select higher-caliber talent. Engaging your workforce is the first step in becoming an employer of choice — and of gaining all the associated benefits.
• Improve employee retention. Employee turnover is extremely expensive. Studies show that the cost to replace one person who resigns is, on average, equivalent to that person's annual salary, but can be much more depending on the person's role in the company. Fortunately, you can improve employee retention through engagement. Improving employee engagement will also help you retain your top employees, which will boost your image as a high-performing organization, which will help you draw even more engaged employees.
• Build a culture of high performance. Hopefully, you're beginning to see that an improvement in employee engagement leads to an increase in productivity and, over time, an increase in company performance (and profits)!
• Improve customer satisfaction. As you'll see throughout this book, engaged employees lead to improved customer satisfaction. Customers will always be put off by employees who are disengaged; it follows, then, that customers will generally respond more positively to employees who are engaged.
• Increase shareholder value (for companies with shareholders). Not to be all “broken record” about it, but the evidence is overwhelming. Companies with engaged employees outperform their peers. These companies enjoy increased revenue, reduced absenteeism, reduced shortages, improved safety, improved quality, stronger innovation, and reduced business costs. That translates to increased shareholder value!
• Reduce absenteeism. You should track by department your employee absenteeism and set goals to improve your metrics. Chances are, those business units that have high absenteeism also have higher disengagement.

Other objectives you might want to consider depending on need include increasing revenue, improving safety and wellness, increasing the number of innovative ideas, increasing the number of new hires that join the firm through employee referrals, and of course, improving the overall employee engagement survey metrics.

The ultimate goal here is employee engagement, not employee satisfaction. But of course, if done well, employee engagement can lead to employee satisfaction.

It's not enough to simply say, “Employee engagement is of critical importance to this company. We're going to invest in it and measure it.” Even if you have the best intentions, this will sound to your staff like so much hot air because it's simply too broad. Chances are, your employees have some idea of the specific challenges your organization faces in terms of engagement, and will appreciate your acknowledgement of the specific mileposts that will help resolve them.

By the time you make any announcement of this sort, you should have identified your goals and decided upon how they will be measured, tracked, and reported. If you want to reduce turnover to single digits, tell your staff not only that this is an objective, but also how your performance and progress will be tracked. If your goal is to have 50 percent of new hires come from employee referrals, tell your staff what the benchmarks are both within your company and against competitors, if those are your metrics.

Sharing your plan in detail gives your message credibility. Employees can see the extent of thought and preparation that has been devoted to the specifics. This makes a much stronger impression than airy proclamations like, “Employees are our greatest asset.” When you then follow up on these messages, you supplement your credibility much more than if you had reported successes that were not explicitly tied to your goals.

On a Budget: Budgeting for Engagement

While it's true that many engagement efforts involve little or no cost, engagement does require an investment of capital, just like financing a project or new product does. For example, if one of your goals is to reduce voluntary staff turnover, you might budget for the following:

• Specific recognition and spot bonus budgets
• Mentoring and cross-training opportunities
• External and internal training initiatives
• Increases to your bonus pool to reward performance

Key engagement items such as communication initiatives or talent management systems cost money and must be formally budgeted. And, as with any other budget, there must be accountability. Engagement cannot be the low man on the budgetary totem pole. Just as you would for “hard” programs, formalize your line items and track how your money is being spent. Make adjustments over time as appropriate.