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October 25, 2007

Engaged Employees Equal Increased Earnings
    by Anne Moore Odell

A recent study by Towers Perrin shows employee engagement and financial performance are intertwined and outlines how companies can help employees become engaged. -- Employees who give their all to their jobs make more profitable companies. While this might seem like common sense, the correlation between employee engagement and a company's financial success has been difficult to prove. A new study by the global professional services firm Towers Perrin shows a convincing connection between the two.

SRI Mutual Funds GuideUnfortunately, Towers Perrin's study also reports the majority of employees globally are not fully engaged.

The difference between what companies need employees to do and what employees want to do has been named by Towers Perrin the "engagement gap." Only one fifth (21%) of workers in the study are engaged in their work while 38% of polled workers are partly to fully disengaged.

This new study, entitled "The Global Workforce Study," goes one step further than just measuring employee engagement. It found that businesses with the highest employee engagement are financial winners. These companies also have a higher employee retention rate.

To date, this is the largest study of its kind with input from a survey of almost 90,000 workers from 18 countries. The study was also able to draw on a huge employee normative database that contains over two million employee records and the financial performance records of their companies.

"In one three year study of 40 global organizations, for example, we found that 'high employee engagement' companies enjoyed significantly better financial results on measures such as operating margin, net profit margin, revenue growth and earnings per share growth than 'low employee engagement' companies," said Max Caldwell, Managing Principal of Towers Perrin.

"Our study underscores that investors increasingly need to consider human capital-related factors--including workforce engagement--as one of the ways to assess the ability of an organization to execute business strategy and deliver profitable, sustainable growth," Caldwell continued.

Companies with the highest percentage of engaged workers, the study reports, make more money. In a 12-month study across 50 companies, companies with the highest percentage of engaged workers had a 19% increase in operating incomes and a 28% increase in earnings per share. On the other hand, over the same year period, companies with the lowest employee engagement rates showed a 33% decline in operating incomes and an 11% decline in earnings per share.

A three year study that followed 41 companies showed a 3.7% rise in operating margins in companies with engaged workers versus a 2% drop in operating margins in companies with less engaged workers.

Engaged employees also think that what they do has an impact on the quality of the products and services offered by their companies. Eighty percent of these workers see a relationship between their jobs and company results. Just forty percent of disengaged workers acknowledge this connection.

The study tested which dimensions had the greatest impact on workforce engagement: personal factors, such as optimism and openness to challenge; work team factors, such as someone's relationship with his or her supervisor; and organizational factors, such as rewards, development and leadership.

Caldwell told "We found that the organization has the greatest impact on employee engagement, and specifically the most powerful drivers include senior leadership, learning, and development and reputation. While the front-line supervisor is also important, our study dispels the popular myth that employee engagement and performance is 'all about my manager.'"

Towers Perrin thinks that this finding presents a tremendous opportunity for business and HR leaders, since it underscores that workforce engagement and company performance can in fact be enhanced if the organization focuses on the right people processes and systems. The role of senior leadership is especially important given the direct and indirect impact leaders have on employees.

Towers Perrin's Global Workforce Study identifies employee engagement levels in each of the 18 countries in the survey. They do this to understand engagement within a given country, in the context of its national culture, since that culture exerts a strong influence on how people view their work and their workplace and how they respond to questions about those aspects of their lives.

"We do not compare scores across countries because such comparisons miss very important distinctions in people's response patterns, and can lead to simplistic views of the results," said Caldwell. "For instance, workers in countries with a strong hierarchical focus tend to respond more positively to survey questions overall, compared to people in countries that have less institutional hierarchy. For this reason, a high score in one country may be equivalent to a lower score in another country when such patterns in response are factored in," he added.

Caldwell suggested that engagement data is most meaningful and actionable at the individual country level. Employers, investors and other stakeholders should look behind the data in a particular country to understand the impact of employees' views and attitudes, and how a company's workforce compares with companies in that particular country.

Organizations should focus on employee engagement as a way to improve workforce and organizational performance.

Caldwell draws a distinction between "employee engagement" and "employee satisfaction" or "happiness."

However, he concluded, "it may be meaningful to a socially conscious investor that employees who feel good about their company, who are provided with opportunities to develop their skills and who are led with inspiration and integrity -- who are genuinely engaged in their organization--create more value for their companies, for shareholders and for themselves. This underscores the rewards for organizations who invest in their people."

The study furthermore suggests senior management work to role model "inspiration, vision, and commitment" as a method to increase engagement. Other ways to increase engagement are to help employees understand what "is in it for them," or in other words, the benefits for the employees, including learning opportunities and career growth. Towers Perrin also reports that employees want to work for leaders, for companies that "strive for excellence."

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