In their syndicated Dear Abby-like business column, Jack and Suzy Welch recently identified three areas that offer the best picture of a company’s well-being: Employee engagement, customer satisfaction, and cash flow. Note that in the estimation of the former supremos of GE and the Harvard Business Review respectively, the finance element ranks third. In the dynamic duo’s view these three indicators “won’t tell you everything you need to know, but they get right to the guts of a company’s overall performance.”
“It goes without saying that no company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it,” they add. No kidding. But sometimes the obvious isn’t as obvious as one might suppose. And it’s telling that a former CEO, someone once known by the unfortunate moniker “Neutron Jack” for eviscerating swaths of employees from the ranks of his company, reminds us that employee engagement is perhaps the most telling indicator of competitive advantage.
Recent research has surfaced that quantifies the difference employee engagement can make to the bottom line. ISR, a Chicago-based HR research and consulting firm, conducted a study of over 664,000 employees from 71 companies around the world. Most dramatic among its findings was the almost 52 percent difference in one-year performance improvement in operating income between companies with highly engaged employees as compared to those companies with low engagement scores. High engagement companies improved 19.2 percent while low engagement companies declined 32.7 percent in operating income over the study period. The data covers financial performance through 2005 (www.isrinsight.com)
According to Soni Basi, senior project director at ISR, the study compared the degree to which employees were “committed to the mission and values of their company” with the company’s financial performance over a given period. What exactly is meant by an engaged employee? “Engaged people are proud to work for the company,” says Basi. “They are committed to stay and put in the extra effort to facilitate the company’s goals.”
Other findings include a 13.2 percent improvement in net income growth over a one-year period for companies with high employee engagement, while seeing a 3.8 percent decline in net income over the same period for companies with low engagement. Companies with high engagement also show a 27.8 percent improvement in EPS growth, while companies with low engagement reported an 11.2 percent decline in EPS over the same period.
A previous ISR study of 41 companies over a period of 36 months from 2002 to 2004 revealed that the high engagement companies realized a 5.75 percent difference in operating margin and a 3.44 percent difference in net profit margin versus the low engagement companies.
The question remains how direct is the correlation? Are employees more engaged because the companies for which they work are doing better or do they perform better because the employees are committed? RBC Financial Group (formerly Royal Bank of Canada), for example, has been able to link employee commitment with higher levels of customer satisfaction and in some cases more deposits in its branches. By contrast Basi points to the newspaper industry where turmoil and industry consolidation have exacted a toll among employees. “We find in such cases that people might be very proud of the brand in the marketplace, but they might not be engaged any longer because they don’t think that the company is heading in the right direction.”
How strong is the commitment to manage human capital? In a separate survey of 100 companies around the world ISR found that 91 percent have measures that relate to human capital, 58 percent include such measures as part of their key performance indicators or business performance scorecard, but only 46 percent actively assess the value of human capital and its impact on business performance.
“Too many U.S. managers see employees as a cost as opposed to an asset, “says USC professor James O’Toole who authored along with Edward Lawler, “The New American Workplace,” a seminal work that assesses workplace practices. O’Toole reckons that the difference between high and low engagement companies lies less with direct compensation than with such workplace concerns as freedom from arbitrary control, collaborative decision-making and a stake in the outcome.
Why do some have companies high involvement/highly engaged workforces while others do not? O’Toole points to leaders who take a very different view of the value of their employees. In the early 1980s, Harley-Davidson, having been organized on the adversarial model of GM and Ford was facing oblivion when Rich Teerlink stepped in as CEO. He promised his workforce he wouldn’t outsource jobs as long as he got the productivity increases needed to be competitive. Companies such as Goldman Sachs, Deloitte Touche and UPS, he says, have customized development models designed to nurture and encourage talent. When he founded Starbucks Howard Schultz, a self described former working stiff, was more interested in creating the right work environment for employees that he was in the price of coffee.
Workforce environments reflect the priorities and values of the organization’s leaders. This represents an underutilized benchmark for judging CEO performance.
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