The Financial Cost of Employee Disengagement

 

Introducing Employee Engagement

The term ‘employee engagement’ refers to the emotional commitment an employee has to the business they work for. It’s a measure of the extent to which a team member feels committed, loyal and passionate about the work they do, of how willing they are to collaborate with their colleagues, and how likely they are to contribute discretionary effort in order to achieve common business objectives and drive success.

No longer considered merely an intangible, immeasurable HR concept, ‘employee engagement’ is now widely accepted as a key driver of motivation, commitment and productivity in the workplace, and the link between an engaged workforce and business success is recognised across industries.

However, the extent of the direct financial costs that face businesses with a disengaged workforce are often underestimated. Many corporations find it difficult to put a number on the sum of money the business is losing through disengagement, and therefore struggle to justify investments in engagement schemes. This whitepaper, along with our new ‘Financial Cost of Disengagement’ calculator, is designed to help businesses:

  • Calculate the money they are losing due to employee disengagement
  • Discover ways to boost engagement in both the short and long-term
  • Understand the financial return that investing in an employee engagement scheme will generate for the company

 

“The only way to do great work is to love what you do.” - Steve Jobs

The UK is Facing a 'Disengagement Crisis'

These disengaged employees are characterised by easily identifiable traits and behaviours.

They Lack Motivation and Productivity

Disengaged employees are not emotionally committed to, or proud of the organisation they work for. They tend to lack motivation, rarely go above and beyond to contribute to common business objectives and are unproductive. This affects both the quality and quantity of work output.

They Don't Act as Brand Advocates

Employees have the most intimate knowledge and experience of your business. In an era of anonymous and independent online reviews, they are your most powerful source of brand promotion. Disengaged employees are unlikely to act as brand ambassadors, to expand the company’s social presence and to leave a positive digital footprint.

They Lack the Desire to Collaborate

Disengaged employees are less willing to collaborate with teammates and to help others, creating an environment of bad blood and dissatisfaction, and damaging overall team morale.

They Are Eager to Leave 

High levels of employee turnover raise recruitment and training costs, demanding managerial and HR time.

The Financial Impact of Disengaged Employees

A disengaged workforce incurs immense financial costs to a business. 

It is estimated that employee disengagement is costing the UK economy £340 billion every year in lost training and recruitment costs, sick days, productivity, creativity and innovation.

Needless to say, this has drastic effects on a company's bottom line. So what, specifically, is it costing your business and how can an employee engagement programme help reduce this number?

The Perkbox Calculator

‘£340 billion’ is a huge figure that doesn’t easily translate into financial losses on an individual organisational level. The Perkbox ‘Financial Cost of Disengagement’ calculator has been designed to give you an insight into how much disengagement could be costing your business.

Based on our analysis and research…

The equations in the calculator are based on three metrics that we have identified as the hard, accurately quantifiable measures of disengagement:

  1. Absenteeism costs
  2. Recruitment costs
  3. Training costs

The cost generated by our calculator is a ‘minimum’ cost. In practice, costs incurred from the more intangible metrics excluded from the calculator are likely to be significantly higher. These include loss of motivation and productivity, loss of brand ambassadorship, loss of team morale, and loss of customer engagement.

Absenteeism Costs

Employee wellbeing is closely intertwined with job satisfaction.

Disengaged employees take 2 times the number of sick days of engaged employees.

Case Study:

M&S Results from M&S’s 2015 annual employee engagement survey revealed that absence levels in stores that sit in the top quartile of engagement scores were 25% lower than those in the bottom quartile.

Recruitment Costs and Training Costs

It’s no secret that replacing team members involves significant costs for employers. These can include:

  • Lost output costs of other employees who manage the on-boarding process
  • Logistical costs of advertising, interviewing, hiring and absorbing new team members
  • Lost productivity costs as a new recruit is trained up

It costs at least 20% of an average salary to recruit a new employee and 7% to train them up. If employees churn within the first year, a company can be faced with annual financial losses of over £11,200 per employee. Take into consideration that disengaged employees are four times more likely to churn, and these costs skyrocket.

 

It can take a new employee 1–2 years to reach the productivity level of an existing employee

 

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The ROI on Employee Engagement Schemes

Despite the immense costs of employee disengagement, many managers are still hesitant to introduce a budget for ‘employee engagement’ into their business model.

82% of business managers think employees need to feel more engaged at work, but 59% of employees believe that their CEO focuses solely on finances rather than the team’s wellbeing.

The incongruence of these figures highlights the fact that employers recognise the importance of an engaged workforce, but that few are putting enough focus on the team to make a difference. This is contributing to huge financial losses.

There are endless opportunities to be gained from investing in your business’ most valuable asset – your team. When implemented correctly, investment in employee engagement will not only pay for itself, but can generate a huge ROI for your business. 

Case Study: Mapil

Maplin, UK retailer of electronic goods, found established links between employee engagement and store sales performance in its company-wide engagement survey in 2015. The half of stores that actively managed engagement, implementing schemes and analysing success, outperformed their sales budgets by £0.5 mil more than non-participating stores, and grew year-on-year sales by £1 mil more.

The statistics above demonstrate the positive impact an engaged workforce can have on a company, such as increasing profit, reducing loss and contributing to overall business success.

Employee Engagement Myths Debunked

MYTH #1

“Financial incentives alone will be enough to motivate my team.”

Many businesses are under the impression that financial rewards are the most effective motivator.

However, as Alfie Kohn, human behavioural expert, explains, “no controlled scientific study has ever found a long-term enhancement of the quality of work as a result of any financial reward system.”

Similarly, although many managers blame employee turnover on higher salary offerings elsewhere, remuneration actually sits ninth in the list of reasons why employees leave. Just 20% of employees label ‘salary’ as the biggest contributor to loyalty.

What does this mean?

Although the link between compensation, motivation and performance is complex, what we can be sure of is that throwing money at unhappy and disengaged employees will not motivate them, nor will it stop them from leaving.

That is not to say employees shouldn’t be rewarded for good work, or that bonuses and salary increases should not be used as incentives. However, a more holistic approach to employee engagement is necessary.

“As soon as money is predictable, it becomes an entitlement, not a motivator.” - Atchison

 

MYTH #2

“If my employees are happy, they are engaged.”

More and more organisations are buying table tennis sets and offering free food, holidays on birthdays and beers on Fridays. Although small changes like this go a long way to boosting employee happiness at work, that doesn’t necessarily mean they boost employee engagement. Employee happiness and employee engagement is a commonly made false equivalency. They could be happy at work, but disengaged in the business objectives, or even unproductive.

 

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What Drives Engagement? Top 5 Tips to Engage Employees

1. Recognise and Tap into the Demands of your Team

Millennials and the emerging post-millennial generation, set to comprise 50% of the global workforce by 2020, have very different professional priorities to baby boomers (born just after WWII) and Generation X (born after BBs). The modern workforce increasingly prioritises accountability and self-responsibility. On the flipside, just 44% cite wages as the most important factor when looking for a job.

Employers must react to changing demands if they want to engage and retain their team. Rather than dictating an engagement strategy top-down, try to make each employee feel they play an integral part in driving the engagement strategy.

Ensure that your mission to engage employees is not perceived as simply another HR initiative designed to boost profits.

IDEA: Have a monthly one-on-one meeting with employees and give them a chance to voice how they want to progress internally. Try to adapt team structure and responsibilities accordingly – if you are able to provide them with the opportunities in-house, they are less likely to look elsewhere.

“Opportunities for growth will be vital, and the lack of them will pop up frequently in exit interviews.” – Wang

 

2. Integrate Employee Engagement into Your Company Culture

An employee engagement programme shouldn’t be a symbolic gesture – it should be the most compelling data point for decisions inside the organisation, and reflect who you are individually and collectively. By building and integrating systematic engagement into the organisation’s core business strategy, engagement becomes vital to sustainable success. People feel included, influential and confident that their opinions matter. Employee engagement needs to be more than simply a chain of forced activities to tick a box and achieve a number.

Perry Timms, HR consultant, speaker and author says:

“The most ‘engaged’ companies don’t even mention the words employee engagement – it is so deeply a part of who they are. People who are engaged don’t just do more, they care more and will build a stronger business. You can’t buy that, fake it or force it. It happens when you take the right approach to employee engagement: create enterprise spirit and a sense of belonging. Ask the right questions, act on the responses, be transparent, responsive and committed, want to know more and involve people in creating a better workplace. Use engagement as an excuse to build a healthy, people-centric business.”

Integrating employee engagement into the framework of the business can hugely boost peer-to-peer (P2P) relationships, and can positively impact teamwork, morale and camaraderie. These are essential in creating a positive working environment in which teammates work collaboratively and productively. In a 2015 study by Oracle, which polled 1,500 workers across Europe, 42% felt their peers were the biggest influence on their engagement levels.

IDEA: Dedicate an hour a week to teambuilding activities. Discuss developments in your industry and share new methods of working. Even get a dart board and start a league, or introduce office yoga and meditation sessions.

3. Reward Achievements and Give Feedback

A study released by Deloitte suggests that in organisations where recognition occurs, employee engagement, productivity and customer service are 14% better than in those where recognition does not occur.

This disconnect is highly revealing of the ineffectiveness of many R&R programmes. Currently, 87% of the current £37 billion market for recognition is spent on tenure based programmes – employees are rewarded for time spent at the organisation. This type of reward has virtually no impact on organisational performance.

Employees who receive constant feedback and information about personal performance are not only more motivated, but are more focused on where to invest their resources and efforts. Feedback should be given frequently, and should relate to the employee’s contributions, not just the behaviour exhibited. It should also be twoway, giving employees the opportunity to voice their opinion, and flag any difficulties.

IDEA: Share recognition stories via a weekly internal email or, if you’re feeling brave, why not bring gamification into your HR strategy? The integration of game elements across the employee lifecycle introduces a competitive element to employee engagement, boosting participation in otherwise unexciting and unappealing processes.

4. Be Transparent and Lead By Example

Senior leadership practices and behaviour are key. Although engagement practices should not be dictated top-down, leaders steer the company and can build an atmosphere of positivity and engagement that inspires.

IDEA: Seat yourself on a desk amongst your employees. Working alongside them encourages open and honest communication without any hesitation, and doesn’t isolate you on another hierarchical level.

5. Don't Treat Onboarding as a 'Necessary Evil' 

In many companies, little or no investment is channelled into supporting a new hire. An effective orientation can be a very powerful tool for engaging and motivating employees. It introduces new hires to the company culture, the background of the business and performance and communication expectations.

A systematic onboarding approach shortens the time taken for a new hire to be productive and start contributing to business success, increases retention rates and improves on-the-job performance. In other words, time and financial investment in advanced onboarding carries a high ROI and really should not be overlooked.

IDEA: Assign new employees a mentor who can take the new joiner for lunch on the company. After setting up the employee, give them a small project that they can get started on, quickly and easily. A feeling of immediate contribution to the success of the business is a huge motivating factor, and helps to ensure that new recruits are on board from day one.

Zappos

Conclusion

“Direct managers account for 70% of the variance in employee engagement according to Gallup. The ideas above are all related to the way that managers treat their employees. Successful employee engagement doesn’t just happen - it’s a conscious strategy that takes significant investment in time and resources. If a company is to be successful in the long run, engagement needs to be prioritised on the management agenda.” - Shaun Bradley, Director of People & Organisational Development at Perkbox.

Our research has revealed an irrefutable link between a highly-engaged workforce and business success. In today’s increasingly competitive market, an engaged workforce can be an organisation’s biggest advantage. Return on investment in employee engagement schemes can generate huge financial uplift, and create enormous economic opportunities for employers.

 

https://www.perkbox.com/uk/resources/library/the-engagement-platform-employees-can

By Oliver Matejka

Content Writer, Perkbox

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