How to Calculate Your Employee Engagement ROI

The #1 topic on the minds of CEOs and senior HR leaders is ‘culture & engagement,’ according to Deloitte’s Global Human Capital Trends Report. Employee engagement can be defined as proactively and passionately adding value while aligning with the company mission. Or according to Deloitte, “culture describes ‘the way things work around here’, while engagement describes ‘how people feel about the way things work around here’.”

Engagement can be hard to quantify, but an engaged employee wears it on their face and demonstrates it in their work and in their communication.  

You may know that employee engagement is important, but do you know how it can impact your bottom line by reducing turnover and absenteeism, and increasing productivity?

That’s why we’ve created an easy to use Employee Engagement ROI Worksheet, designed to help you quantify what a fully engaged team can do for your business. You might be surprised to see just how much your disengaged employees are costing your company each year.

Why is Employee Engagement Important?

When company leadership is committed to improving employee engagement, results are seen in a variety of ways. Engaged employees tend to be more focused, work more efficiently, and communicate openly about their experiences, triumphs, and challenges. This makes sense, since someone who genuinely cares about their work is not going to let anything stand in the way of their success.

A study by 15Five found that the vast majority of employees who receive little or no feedback from their managers were actively disengaged. Engagement went up dramatically when employees received feedback about their weaknesses, and even more so when they received feedback about their strengths.

Increased engagement has been linked to the following business outcomes:

– According to Gallup, businesses with highly engaged teams experience a 20 percent lift in productivity.

– According to the Workforce Institute on Absenteeism, businesses saw a drop in absenteeism (unearned PTO) by 41 percent when teams were engaged in their work.

– On average, highly engaged teams will experience a 40 percent improvement in turnover. This improvement can vary from 24 percent in high-turnover organizations to 59 percent in low-turnover organizations. You can find more details about this in the Gallup Q12 Meta-Analysis Report. (For the turnover rate calculation below, we used the median).

When you access an ROI Calculator, you will be prompted to enter your company data. In our fictitious example, we entered the following:

Higher Engagement is Related to These Outcomes

Using the information entered above, you can expect to see the following improvements in the areas of turnover, absenteeism, and productivity when you commit to boosting employee engagement at your company:

Revenue per employee is a simple calculation that divides annual company revenue by the average number of employees. It measures how efficiently a particular company is utilizing its employees. In this case higher engagement increased revenue by 20 percent.

Cost of absenteeism per employee. On average, 1.2 percent of total working days (3 days per year) are unearned paid time off. To calculate your costs due to absenteeism, take 1.2 percent of revenue per employee and add that to 1.2 percent of average employee salary. This represents the individual impact to the business when an employee is absent with unearned PTO. For more on these figures, see Absenteeism: The Bottom Line Killer. 

Total cost of absenteeism represents the business impact of absenteeism company-wide.

Turnover rate is calculated by dividing the number of employees that left during the year by the average number of employees during the year. (Wanna check our math? Go here.)

Turnover rates vary by industry. To compare your turnover rate with others in your industry, go to this link.

Number or employees that leave in a year is the turnover rate multiplied by the average number of employees. As you can see, with an engaged workforce turnover is cut almost in half!

Average cost to replace an employee. According to The Society for Human Resources Management (SHRM), every time a business replaces a salaried employee, it costs 6-9 months of the replaced employee’s salary. The formula in this template uses 9 months. For executive positions, replacement can be as high as 200 percent of the employee’s annual salary. This calculation doesn’t account for the other factors such as costs of on-boarding, lost productivity, lost engagement, training costs, and cultural impact on the organization.

Total cost of employee turnover multiplies the average cost to replace an employee by the number of employees that quit or were fired last year.

What’s Your Employee Engagement ROI?

Your Total ROI value is the amount of revenue added due to a 20 percent increase in employee productivity, plus the money saved from a 41 percent reduction in absenteeism and 40 percent decrease in turnover:

With increased engagement, our pretend company might very well see an additional $50k in revenue per employee. This translates to over $6 million in additional revenue per year! With less absenteeism and turnover, the company may also see a significant savings of nearly $400k.

Our results are consistent with other research findings. Willis Towers Watson reports that companies with engaged employees enjoy a 19 percent increase in operating income; without engagement, operating income decreases by 30 percent.

No one can put a price on the value of employees; their contributions, skills, or who they are as people. Our intent is not to propagate the myth that employees are nothing more than resources. Instead, we hope that this data will support the notion that you can increase employee engagement and satisfaction by communicating with your teams regularly and by always putting people first..

This post originally appeared on 15Five.