Wasting Money: The Cost of Getting Engagement Wrong

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Like organizational culture, employee engagement is a frequent topic of mine.

Indeed, creating a culture of recognition is a foundational element to creating an environment in which employees choose to engage. Hallmarks of just such an engaging culture are (in order of importance to employees) trust, recognition and rewards as reported by recent research out of Australia:

The core ingredients for engagement success according to the [Employee Engagement Capability] Report are flexible working arrangements, recognition programs, non-cash rewards/incentives, training and development programs, paid parental leave and time off for study.”

The cost of ignoring the importance of employee engagement is incredibly costly. I’ve cited numbers out of Towers Watson showing a 15 percent increase in engagement correlates to a 2 percent increase in operating margin. But let’s get more fundamental then that – how much money are you wasting every year by ignoring engagement?

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What’s the cost of getting engagement wrong?

Keith Ayers, CEO of Integro Leadership Institute, ran some numbers based on reported Gallup levels of engagement in the U.S. workforce.

In many companies a lack of employee engagement is costing the organization anywhere from 35 percent to 50 percent of payroll. Employees are paid 100 percent of their pay and benefits, but 35 percent to 50 percent of that money, if not more, is wasted because employees are not giving the organization 100 percent of what they are capable of producing. Companies that have learned the value of employee engagement are reaping the reward – turning 100 percent of their payroll into an investment. …

For the sake of this example, let’s be conservative and assume that all Not-Engaged (55 percent) and Actively Disengaged (16 percent) employees are giving you 50 percent of what they are capable of, and we’ll assume that the Engaged (29 percent) employees are giving you 100 percent. We’ll also assume an average pay and benefits per employee of $50,000, and that you are paying all employees 100 percent of their pay and benefits with the expectation that they will give you 100 percent of what they are capable of.

Here is the bottom line: In an average company in terms of employee engagement, 70 percent of employees are giving back only 50 percent of what they are being paid. That means 35 percent of payroll is pure cost … there is absolutely no return on investment.

Using these numbers, that lack of engagement in a 100 person company is costing $1,750,000 (35 percent of payroll), and for a 1,000 person company the cost is $17,500,000. And remember we are assuming that the Actively Disengaged employees are giving you 50 percent of their capabilities, and the Engaged employees 100 percent. Because I have used conservative estimates, the real cost could be substantially more.”

You can find more from Derek Irvine on his Recognize This! blog.

Derek Irvine is one of the world’s foremost experts on employee recognition and engagement, helping business leaders set a higher vision and ambition for their company culture. As the Vice President of Client Strategy and Consulting at Globoforce, Derek helps clients — including some of world’s most admired companies such as Proctor and Gamble, Intuit, KPMG, and Thomson Reuters — leverage recognition strategies and best practices to better manage company culture, elevate employee engagement, increase retention, and improve the bottom line. He's also a renowned speaker and co-author of Winning with a Culture of Recognition. Contact him at irvine@globoforce.com.

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2 Comments on “Wasting Money: The Cost of Getting Engagement Wrong

  1. I agree solidly that ignoring engagement is very costly.  The performance gains are well documented.

    However, we need to agree on what impacts engagement.  I know the Gallup studies and I do not recall “paid parental leave and time off for study” are on their list of practices.

    I am not opposed to allowing time off to study but I would need evidence that triggers better performance.

    Engagement arguments too often remind me of the focus on employee happiness from the 1950s.  I have never found Herzberg’s argument convincing but I doubt if time off to study or paid parental leave contribute to employee satisfaction.

  2. Nice summary of traditional costs. Even greater are the systemic indirect costs such as the impact our lives outside of work, general well-being, brand destruction, etc. Social responsibility starts inside the workplace. Leaders should be convicted to start I their own teams with their own behavior with their direct and indirect reports. If you do everything else and miss this, you’re putting lip stick on a pig and you’re the pig.

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