10/05/2017

Employee Experience, Engagement, and the Bottom Line

One-two-three by Billy Wilder. James Cagney plays a ruthless executive (Fred McNamara) for the Coca- Cola Company in Berlin

Since companies want to succeed in increasingly competitive markets, employees need to feel engaged to the organization in order to meet and exceed customer expectations and achieve corporate objectives.

In this post:

1) Everybody knows that employee engagement is related to the bottom line. But, watch out! I'm going to present some counter-examples and reasons to doubt some of these "self-evident truths."
2) Motivational climate surveys are necessary, but they are not enough to understand the factors that generate motivation or demotivation.
3) For them to be useful, you have to align the motivational climate survey results to the evolution in the bottom line. If not, all this work is just pointless.

What do I mean by "engagement?"

When I talk about engaged employees, I mean people who enthusiastically enjoy the challenges of their job.
People Analytics can help you understand the diverse factors that influence employee engagement, and it can contribute to having happier and more productive employees while reducing undesired turnover.

What questions are there about engagement?

What are the main drivers of employee engagement?
How does engagement affect the bottom line?

"Engagement is profitable."

That sentence sounds good, doesn't it? Truly motivated employees are an important factor in the success of an organization. Unmotivated workers won't contribute as much.
Many studies on engagement and the bottom line unanimously agree on engagement's correlation with profit: -
1. In a study done by Towers Perrin-ISR, they compiled data from more than 360,000 employees from 41 companies in the top ten world economies, and they examined the relationship between the different employee engagement levels and the companies' financial results. When they compared companies with high levels of engagement to ones with low levels over a three-year period, the differences were considerable:

2. In a survey done on 664,000 employees from all over the world, the research firm Industry Standard Research found some enormous differences between companies with highly committed employees and those with low engagement scores:

In operating income, the companies with an engaged staff had earned 19.2%, and those with low engagement indexes had lost 32.7%.
 In net income growth, the engaged ones had risen 13.2%, and the unengaged ones had fallen 3.8%.
In earnings per share, the engaged ones had gained 27.8%, and the unengaged ones had fallen 11.2%.
3. According to Gallup, employee commitment is directly linked to other factors that are probably very important to you, like significantly lower turnover and absenteeism rates, a 17% higher productivity rate, a 20% higher sales rate, and 21% more in profits.

4. Starbucks, Limited Brands, and Best Buy identified the amount contributed by a particular store with a 0.1% rise in employee commitment. At Best Buy, for example, this value equaled more than $100,000 in annual operating income for the store.

By and large, motivation is decreasing!

Although employee motivation continues to be more important than ever for most major companies, truly committed employees are still the exception and not the rule in most organizations.
Aon Hewitt's report 2017 Trends in Global Employee Engagement shows that overall, employee commitment has fallen in the last year.

Defined as the level of psychological investment employees have in their workplace, only 24% of all employees are in the highly engaged category, and another 39% are moderately engaged. This puts global engagement at 63%, compared with 65% from the previous year.
Furthermore, the engagement gap between management and non-management is huge. In an Oracle report, it was revealed that only 37% of non-management employees were proud to work in their organization, while approximately 70% of the managers and executives considered themselves engaged.
Although about 70% of executives and 60% of senior managers felt that their company was concerned about their well-being, less than a quarter of the non-management employees felt that way.

Defense against the dark arts

Sorry to insist. Maybe it's because of my low self-esteem or narrow-mindedness, but I can't help but say that if you think a company's ultimate goal is to create happy employees, you're confusing the means with the ends.
Of course, companies have to make employees happy, accumulate validated knowledge, offer excellent service to customers, and innovate constantly, but a company's ultimate goal is still (sorry to those who find this shocking) to make money. The rest are means. That is, for the company to make money, you have to intensify knowledge acquisition through data, make employees happy, innovate, and be customer-focused (just after the data, of course).
You can't be so naive as to believe that an invisible and well-meaning hand like Adam Smith's will generate a positive bottom line if you focus on giving a lot of love and excellent (and sometimes very expensive) service, or if you are in a constant state of innovation.
Some (even many) customer-first actions will contribute to generating profit in the medium term, but others have unfortunately negative results in the short-term, mid-term, and as far ahead as you can forecast or measure results.
I have already mentioned this. In an interesting presentation by Sjoerd van den Heuvel at the "Workforce Analytics 2017" conference in London, I saw a video of Anthony Guest, professor at King's College, who has devoted many years to researching happiness at work.
Professor Guest tells us in the video (https://vimeo.com/24416792: go to minute 18) that at the beginning of his career as a researcher in the 60s, he was sent to observe recruitment in the London Docks. At that time stevedores were hired a day at a time. The stevedores would line up, and the foreman would choose one by one who would work that day.
However, these harsh conditions changed a year later, mainly because of competition from other ports such as Rotterdam, where stevedores enjoyed a more satisfying work environment. To compete with the Dutch, they decided to make the London stevedores permanent. This change generated a spectacular rise in the rate of job satisfaction... and an equally dramatic drop in performance. They were happy, but not very productive. This went on until someone realized that these people had to be managed and that the best working conditions and overall satisfaction they produced were not enough to ensure better performance that would enable them to compete properly with the continental ports.

Correlation and causality revisited

I think you need to be especially cautious when reading statistics that talk about correlations between motivation and profit. You saw it in Chapter 5:
"Correlation does not imply causality"
Like the studies by Towers or Industry Standard Research, profit in companies with highly engaged employees is clearly higher than in those who are less engaged. Is therefore demonstrated that engagement causes profit?
Wait a minute! Could it be possible that's it's actually the other way around? That is, that a company's profits generate greater engagement indexes (inverse causality) or that maybe a third factor that depends on profits (like higher salaries or better working conditions, for example) is the real cause of a higher level of engagement?
If this was true, the cause and effect sequence could be:
Higher profits -> Better working conditions -> Higher motivation

Measuring doesn't count as an improvement. Employee experience and motivation are not the same.

But conducting surveys isn't enough to improve profits either. Many international organizations have focused on measuring the effect, i.e. employee engagement, instead of finding out the causes.
In a 2013-2014 report on the efficiency of human capital by PwC, 86% of the survey respondents said that their organizations measured employee commitment. But only 40% said that executives and managers are required to develop an action plan to improve the results.
This fits very well with what I said in Data Coaching:

The goal of People Analytics initiatives, including measuring employee motivation, shouldn't be the measurements themselves. It should be a part of an analytics program that searches for the causes and drivers of profit and predicts how those factors will influence the bottom line. In a survey on employee motivation, typically the focus would be to understand if the employees are committed and why, in order to design ways to improve engagement and consequently, the bottom line.

Causal indicators and results indicators

We can't consider motivation, happiness, or employee commitment to be as useful for business metrics as profitability or liquidity.
We need something else. Data from the engament survey could be combined with the data from onboarding and exit surveys. Data from recruiting, training and management, customer surveys, and macroeconomic or industry data could be meshed to develop a group of analytical data. Later, the analysis could be used to predict performance, absenteeism, turnover, or hiring quality.
We said it in chapter 2. There are two types of indicators:
1. Laggard indicators, which measure results Motivation would be here.
2. Leading indicators, which measure the factors that generate results. Employee experience would be here.
In turn, motivation is a leading indicator of financial metrics: profitability, liquidity, growth, and risk. These are the indicators that correspond to value creation.
The outline would be something like this:

Survey results should be used to develop a global action plan.
Because knowing you've improved five engagement points could still be a figure that you can't act on. The key is understanding the components of engagement that predict profit and obviously, taking action.

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