Employee engagement is good for the bottom line

The US Bureau of Labor Department forecasts in 2010 there could be ten million more jobs available than there are available employees to fill them in the US. So it is not surprising that Greg Ziols, Chair of Vistage, the world’s largest CEO membership organization, cites “recruiting and retaining employees in a tight labor market.” to be the most significant trend impacting business today. According to Ziols, Vistage’s 2007 “CEO Confidence Index” (www.vistage.com) found “Once again, finding and hiring qualified staff was cited as the most critical challenge for more than one third of all firms. Just one in ten CEO’s think it will become easier to find qualified employees.”

Human resource professionals, on the front line in the fight for talent, know this battle will not be won until their companies view employees as profit centers rather than cost centers. The good news is this shift in thinking is happening. Senior executives cannot ignore the impending labor shortage. And they cannot ignore the growing research that illustrates satisfied and engaged employees are good for the bottom line.

The Forum for People Performance Management and Measurement’s landmark study “Employee Engagement, Customer Satisfaction and Profitability” (www.performanceforum.org) found direct links between satisfaction levels among employees who had no direct customer contact and customer satisfaction and between customer satisfaction and improved financial performance. The study, conducted by Purdue University professor James Oakley, examined the relationship between an organization’s people strategy and market and financial outcomes. Oakley found “an organization’s employees influence the behavior and attitudes of customers, and it is customers who drive an organization’s profitability through the purchase and use of its products.”

Alex Edmans, MIT Sloan School of Management, agrees with these key findings. He analyzed the financial performance of a portfolio of stocks selected by Fortune magazine as the “Best Companies to Work for in America” from 1998 -2005. By the end of 2005, these stocks “earned average annual returns of 14 percent by the end of 2005, over double market return”. The portfolio also outperformed industry-matched benchmarks. In his abstract, Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices (May, 2007, http://ssrn.com/abstract=985735), Edmans concludes, “employee satisfaction improves corporate performance.”

Engaged employees key to creating a competitive advantage

Organizations that have created a competitive advantage through innovation, technology, quality products, and pricing strategies, now view “customer service that exceeds expectations” as their key to success. Quality service demands engaged employees. With jobs plentiful in many industries from high tech to service, organizations need to not only focus on ways to attract the right people; they must also focus on ways to keep the right employees and make sure they are satisfied and productive.

In the hospitality industry where many employees see their jobs as stepping-stones to more permanent positions, employee turnover rate ranges between 78.3 percent to 95.4 percent. These numbers are staggering; more staggering is the cost of this employee churn. The Incentive Research Foundation estimates roughly 100 to 200 percent of an employee’s base salary is spent to recruit and train a replacement. In an arena where customer service is paramount and the labor pool is shrinking, keeping employees satisfied and engaged is critical.

In 2003, The Incentive Research Foundation (formerly the SITE Foundation) conducted a study on Motivation in the Hospitality Industry (www.theirf.org). Mid-scale hotels contributed almost 15 percent of the responses; fast-food restaurants contributed 85 percent. A follow-up study was conducted at the same locations in 2004. The studies found that certain behaviors have various impacts on turnover in different ways and these differences suggest strategies employers might use to reduce turnover.

Key findings from this study include:

• Turnover is less when employees have a high level of value for their work. Employers can help employees value their work through consistent praise, recognition, and special incentives.
• Turnover is less at work sites where employees feel supported by the organization.
• Employees who feel better about their jobs persist more, exert more effort, and are less likely to leave.
• Higher levels of motivation and motivated performance translate into a 53 percent reduction in worker turnover.

Clearly, organizations need to be pro-active to develop and retain the right people. The Forum for People Performance Management and Measurement’s study The Road to an Engaged Workforce (www.performanceforum.org) explored the methods that managers have available to them to engage their employees. The study found “engagement is largely driven by the employee’s feeling that the organization values his or her contribution, and that the organization will do its best to remove barriers from getting the job done.”

One tool managers can use to engage employees is a well-designed employee incentive program.

Fortune 1000 corporations have traditionally used sales incentive programs and consumer promotions to drive sales. Recognizing the link between satisfied workers and customer satisfaction, today a growing number of organizations utilize incentive programs to improve workplace productivity, reduce absenteeism, improve customer service, and reward employees’ contributions. 72 percent of the companies polled in the Incentive Federation’s 2005 Study Among Current Users of Merchandise and Travel Items for Motivation/Incentive Applications (www.incentivecentral.org) indicted they have non-sales incentive programs in place, up from 67 percent in 2003.

Bottom-line reasons to look at incentive programs

Incentive programs are one of the few business strategies whose cost can be based on actual performance and paid out after the desired results have been realized. And the desired results make a positive impact on the organization’s bottom-line. Incentives, Motivation and Workplace Performance: Research & Best Practices, a study conducted by researchers for the International Society of Performance Improvement and funded with a grant by the SITE Foundation, (www.theirf.org) found:

Incentive programs improve performance. Effectively designed and properly implemented incentive programs increase performance by an average of 22 percent. Team incentives can increase performance by as much as 44 percent.

Incentive programs engage participants. The research found that incentive programs can increase interest in work. When programs are first offered for completing a task, a 15 percent increase in performance occurs. Asked to persist toward a goal, people increase their performance by 27 percent when motivated by incentive programs. When incentive programs are used to encourage “thinking smarter,” performance increases by 26 percent.

Incentive programs attract quality employees. Organizations that offer properly structured incentive programs can attract and retain higher quality workers than other organizations.

These findings were substantiated by T-Mobile USA’s “Do More, Get More” employee incentive program. The program, developed to improve customer service and reduce employee turnover in their fifteen call centers located around the country, touched more than 11,000 employees representing a true cross section of the American work force in terms of age, ethnicity, geography, and job responsibility. Sooner than two years following the launch of the “Do More Get More” program, a J.D. Power and Associates study named T-Mobile USA “the domestic wireless industry’s top-provider of customer satisfaction”. T-Mobile also ranked first in J.D. Power’s 2005 follow-up study. Within two years following the implementation of the program, employee attrition rates decreased by 50 percent, far surpassing the original goal of a 30 percent decrease in attrition rates in three years.

An incentive program will not compensate for lack of training, a poor product, or inadequate marketing. However, as a part of an integrated business/people strategy, well-executed incentive programs motivate and engage people at all levels of the organization. The bottom-line is the organizations that successfully motivate their workforce to achieve specific goals will realize the greatest financial gains over time.

Karen Renk, CAE, is the Executive Director of the Incentive Marketing Association. A Certified Association Executive, Renk has managed associations in the incentive marketplace since 1986, and she is one of the founders of the Incentive Marketing Association (IMA). IMA, the industry voice of the incentive and recognition marketplace, is a leading member of the Incentive Performance Center, and a founding member of the Forum for People Performance Management and Measurement at Northwestern University.

The Incentive Marketing Association:
Karen Renk, CAE, executive director, 630-369-7780, e-mail: Karen@IncentiveMarketing.org