john engen

Few industries are more cutthroat than retailing. Competitors are subject to rapidly changing trends, and the whims of a fickle public can make a store that's hot one year pass' the next. Witness the recent demise of CompUSA, only a few years ago a $4 billion computer retailer, as an example of just how quickly things can turn south.

Winning the hearts and pocketbooks of customers is the obvious key to retailing success-and it's not easy, says Myron "Mike" Ullman III, chairman and CEO of J.C. Penney, the $20 billion Dallas-based seller of soft goods and clothing. The quality, style and price of the merchandise matter most. No surprise there. But the quality of the interactions people have inside the store runs a close second. "When you look at what makes for that good experience, it usually comes down to having associates in the store who enjoy being there," Ullman says. "To me, it's fundamental to our success."

With that in mind, Ullman embraced the latest hot thing in Corporate America in 2005: a full-out effort to improve employee "engagement." Once a year, Penney's 155,000 workers are asked to fill out a 50-question survey touching on everything from their understanding of the corporate vision to the level of support they get from managers, and even whether they have a "best friend" at work.

The rest of the year is spent talking about-and taking remedial or proactive actions on-those findings, in the hopes of creating a work atmosphere that makes workers just a bit happier to be there. Among the earliest steps taken: quick fixes, such as more refrigerators and microwaves in break rooms, a new casual-dress policy in the home office and deeper structural changes, including an overhaul of health benefits and an enhanced leadership program.

The results, Ullman says, have been heartening. The percentage of "engaged" workers rose to 75 percent, from 66 percent two years ago, and 18 percentage points higher, he says, than the typical company. They embrace and understand Penney's vision better than in the past, and seem to put out more effort to make customers happy.

That's important to the bottom line, because Penney's internal research shows that stores with top-quartile engagement scores generate about 10 percent more in sales per square foot than average, and 36 percent greater operating income than similar-sized stores in the lowest quartile. Per-share earnings have more than doubled since Ullman took over, and he credits engagement as one of the biggest reasons. "This isn't just warm, fuzzy stuff," he says. "It's solid business logic."

Thousands of companies have jumped on the engagement bandwagon over the past decade, including Hewlett-Packard, Best Buy, The Ritz-Carlton Hotel Co. and Wells Fargo & Co. And why not? The core idea makes sense; that is, employees who enjoy their work and care about the company will be easier to retain, sell more products, work harder and even contribute more innovations to drive success.

In a competitive marketplace, there's no shortage of CEOs who tout the quality of their workforce as a differentiating edge. A solid engagement initiative, rooted in regular measurement, corresponding training and actions, and strong communication with workers, puts some teeth behind those words, and can reinforce the image of a caring management among the folks who make it tick. Think of it as similar to a traditional customer satisfaction effort, only with employees as the target audience. At The Gallup Organization, employee engagement consulting now exceeds polling as the biggest revenue generator. "It's been our fastest-growing business over the past decade," says Tom Rath, a global practice leader. Rath estimates that more than three-quarters of large corporations are now pursuing some sort of engagement program.

The topic resonates deeply with many CEOs. "If you believe in the sixth-man-on-the-team theory, you can agree that employees who are super-excited and engaged won't need extra training to be nice to customers and sell more products.... Customers will be happier, and shareholders will get a better return," says Richard Davis, CEO of Minneapolis-based banking giant U.S. Bancorp, who recently launched a company-wide engagement initiative for his 54,000 employees. "I've got to believe it's the secret weapon of companies that are really great."

That gut-level faith is probably justified. Then again, no one really knows for sure if the money, time and effort being devoted to engagement really generate the kinds of returns CEOs envision. "The big question that hasn't been addressed yet is, "What is the connection between employee engagement and performance? Do our businesses run better? Does productivity increase?'" says John Gibbons, a research associate with The Conference Board. "We just don't know." A typical engagement initiative involves asking a defined set of questions of all employees. The responses are then used as the foundation for discussion and action to improve the workplace environment and as a baseline for future measurement. The survey is repeated six months or a year later, and regularly thereafter, with scorecards issued to show progress- or lack thereof.

Done right, these are complex and ongoing efforts that require the help of consultants and/or dedicated staff oversight to execute. Training programs are established, policies are overhauled, and investments in materials and tools are often mandated. Many engagement initiatives are even given in-house brands-at Penney it's "Winning Together"-to boost their profiles. Town hall-style meetings often accompany the branding, to flesh out ideas on how to make the workplace better.

For a large company, the costs can run into the tens of millions and sap attention from other pressing needs. Perhaps for that reason, some dismiss engagement as a costly, fluffy distraction-vendor-driven hype or an innate quality that lies within employees themselves, not the organization. "There's a school of thought that believes it's impractical and a waste of time and money," Davis says.

The issue isn't resonating much with shareholders, either. Risk Metrics Group evaluates companies for investors using dozens of different criteria, but engagement "is out of our scope," says spokeswoman Sarah Cohn. "It's a hard story to explain succinctly to investors who view things in more traditional ways," concedes Penney's Ullman. "But we know that turnover goes down and our people are more committed."

Consultants have responded to those concerns with research, some of which portrays a global engagement crisis that's holding down corporate profits. A 2007 study by Towers Perrin, found that 38 percent of workers are either partly or fully "disengaged." Those are the folks who merely punch the clock and can't be counted on to expend the discretionary effort needed to help management achieve key strategic objectives. In contrast, just 21 percent of employees are fully "engaged" enough to give their all for the team, while the remaining 31 percent are considered "enrolled"-otherwise good employees who lack an emotional connection to the company.

Other figures illustrate how boosting engagement levels can benefit the bottom line. Gallup's data, based on 10 million surveys over the past decade, shows that companies with top-quartile engagement scores average 2.6 times the per-share earnings growth of competitors near the bottom, says James Harter, the pollster's chief scientist for workplace management and well-being. "I'm a conservative researcher, but there's a correlation here that's very robust," Harter says.

Yet another study of 40 global companies by Towers Perrin found that clients with the highest percentage of engaged employees had operating margins 6 percentage points higher than low-engagement clients and net profit of nearly 4 percent higher. "We're trying to put hard data behind a strong intuitive belief," says CEO Mark Mactas. "What we've found is that the organization's role really matters."

Not everyone is convinced. Gibbons, who devotes most of his time to the subject, says these broad consultant studies fail to demonstrate "a direct lead-lag relationship between engagement and financial returns. ... You need to see a spike in engagement, and then a subsequent spike in organization performance to know that one caused the other, and we don't have that yet."

Thus far, Gibbons says, only a handful of companies have demonstrated a limited "causal effect" between engagement and performance. Hewlett Packard, for instance, established firm links between higher engagement scores and improved customer loyalty. At Eaton Corp., a $12 billion industrial manufacturer in Cleveland, an ambitious engagement effort in one large plant boosted morale and line productivity in a provable way. For now, however, these are one-offs. While engagement's virtues as a profit elixir might yet be proven, says Gibbons, "there's simply not enough evidence out there yet to justify the massive investment that some companies are putting into engagement."

None of this is deterring corporate leaders from taking a leap of faith that the company will perform better if, with better treatment, employees are subtly convinced to care more about the company. "There's some debate about the science of it," concedes Robert Kelly, CEO of The Bank of New York Mellon, which recently made engagement a priority. Nevertheless, in the asset management business, anything that holds the promise of lower turnover and better customer service can boost earnings and is worth a shot, he says. "It's a common-sense thing."

In an era of intense global competition, few will disagree. Generally speaking, engaged employees are confident about their personal futures with the company, like their managers and co-workers, and feel like they make a difference. They also are generally proud of the leadership, vision and ethics of the corporation. Beyond that, however, there's a decided lack of agreement about what, exactly, constitutes good engagement, what drives it and even how to measure it.

Gallup's bellwether survey, the Q12, asks just a dozen core questions of employees, no matter the company. Those queries, honed over four decades of research, cover the basics (i.e., "Do you have the materials and equipment to do your work right?"), as well as perceptions of career development opportunities, the company's purpose and work relationships.

The outward simplicity of Gallup's approach appeals to many CEOs. James Kilts, who ran Gillette from 2001 to 2005, used the Q12 survey to address morale problems and found the process easy to manage and effective in helping turn the company around. "We needed to create objectives that were measurable and to track them on a quarterly basis to ensure we were making progress," he recalls. "It takes two minutes to fill out those 12 questions, and they're very predictive of performance."

Other consultants-and companies that fashion their own surveys-seek out much more information. U.S. Bancorp asks 37 distinct questions, for instance, while Penney asks 50, including those on pay and benefits and open-ended queries that garnered 200,000 write-in responses for improvements. "That's where the real meat is, where people's passions lie," says Michael Theilmann, Penney's chief human resources officer. The disparities make comparisons difficult. At a 2007 Conference Board summit on engagement, the HR heads of 13 multinationals were asked to share between four and 12 critical questions on their engagement surveys. "We had 45 distinctly different questions," Gibbons recalls. "There isn't much agreement on what should be measured."

Nor is there much consensus on exactly what to do with the answers. Gallup advocates a "matrix" approach that emphasizes the role of local managers in promoting engagement. Scorecards are produced for each unit with at least four people. The people who run those units are expected to hash through the issues exposed by the scorecard, and come up with specific strategies to address the two most-nagging problems.

The theory, in a nutshell, is that the average worker thinks of direct coworkers as "the company." The process pyramids upward to the very top of the organization, each manager-including the CEO-focused on improving the engagement of his or her direct reports. "Our research indicates that the No. 1 driver of engagement is your direct manager," Rath says. "It's not enough to look at the entire company. You have to dive into the details at the local level."

In contrast, Towers Perrin's research says that the success of an engagement initiative is based on the tone set at the top. While it's willing to customize the approach to focus on local work units, "what senior management does, from showing interest in employees' well-being and communicating openly and honestly, to being visible and listing values and being socially responsible, is the most important engagement-driver," Mactas says.

And The Conference Board's research shows that "variety and challenge" in a worker's core job matter most. "Everyone is talking about engagement," Gibbons says. "But we still don't have agreement on what it is, how it should be measured, and how to improve it."

The reality is, all of these factors are important. As Mactas says, "There's no one-size-fits-all remedy." Rather, each company's approach is influenced by factors such as history, culture and strategy.

There's little disputing that higher levels of engagement can have positive, perhaps even profound, impact on the workplace environment. With time, stronger data will likely verify for certain what intuition already tells us: that it also makes for a stronger bottom line.