How to Measure the ROI of Employee Engagement: 4 Reasons Why It Matters

The Great Resignation isn't over. According to one of the largest surveys of the global workforce, one in five workers plan to quit their jobs in 2022. Now, more than ever before, employee retention and engagement are critical to business success.

As a manager, team leader, or human resource leader, it can be challenging to keep up with current employee experience trends and issues. But the increasing importance of employee engagement should be at the forefront of every HR professional's mind. 

According to Gallup data, the estimated cost of low engagement to the global economy is $7.8 trillion per year. Trillion! These staggering numbers are forcing companies to rethink the future of the workplace. 

As you dive into the relevance and importance of employee engagement, it's important to note that the relationship between employee engagement and company success is undeniable - and you can measure it! 

To discover the importance of employee engagement and what metrics are needed to calculate the return on investment of employee engagement, keep reading!

What is employee engagement?

Employee engagement is an employee's emotional commitment to their organization and its goals.

Engaged teams are an organization's most valuable assets. Engaged employees feel a sense of purpose and belonging in what they do. They put more effort into a challenge and help companies grow and succeed. 

Conversely, disengaged employees feel less motivated and can negatively affect the work environment and business. 

4 Reasons Why Employee Engagement Matters in 2022 and Beyond

Employee engagement is a critical factor for business success. According to Gallup, organizations with highly engaged employees enjoy an 81% decrease in absenteeism, an 18% decrease in turnover for high turnover organizations, a 43% decrease in turnover for low turnover organizations, an 18% increase in productivity, and a 23% increase in profitability.

You can gain a lot by implementing a robust employee engagement program— such as:

1. Decreased employee turnover
2. Decreased absenteeism
3. Higher productivity
4. Higher employee satisfaction

As you can see, higher employee engagement directly affects the bottom line.

These benefits should be enough for any business or HR leader to start a robust, holistic engagement strategy or to hire a company like Cooleaf to take care of employee engagement and recognition. Cooleaf makes it easy for leaders to measure engagement and job satisfaction levels through pulse surveys and ENPs surveys.

Cooleaf is here to help you grow that engagement holistically and authentically.

Let's take a deeper dive into measuring the ROI of employee engagement and align your organization on the path toward success.

KPIs To Calculate ROI of Employee Engagement

So you've heard it all before: "employee engagement matters." But why? How do you measure the ROI of employee engagement or identify what affects it?

To measure employee engagement, we're going to need the following metrics:

• Employee productivity
• Employee turnover
• Employee absenteeism
• Revenue per employee

Employee Productivity

Employee engagement may be an overlooked solution to increasing employee productivity. Highly engaged teams often work more diligently and expend more effort on their jobs therefore increasing the quality of their work. This leads to an increase in productivity as engaged employees tend to be more mindful of their impact on their company's success. They're also more passionate about their work and tend to be more collaborative, innovative, and motivated.

Productive teams get more done, which drives up profits. The basic formula to measure employee productivity is as follows:

Output/Input

With output being the number of goods or services produced, input being labor hours required for production. 

Let's break this down a bit further. The way productivity is measured varies by industry. For instance, input can be hours worked, kilowatts of power, volumes in pounds or kilograms.

Measuring output also varies by industry.

It's important to spend some time determining what your input and output metrics are based on your industry to gain an accurate sense of what employee productivity looks like.

Once you've calculated employee productivity, you would take this formula and calculate the percentage of increase in employee productivity pre- and post-employee engagement program initiatives.

Employee Turnover

Employee retention costs money. And a lot of it. When you have an unhappy or disengaged employee, they are likely to leave the company sooner rather than later. And that means you will have spent money training them and investing in their careers, only to see them exit your organization before they can become genuinely successful employees. In addition, hiring a new employee costs both time and money—and if you have many unhappy or disengaged employees, those costs will add up quickly!

Conversely, engaged employees tend to stay with their companies longer. Organizations that are committed to creating a culture of collaboration and engagement are seeing lower turnover rates. Creating a space where employees feel engaged not only helps you attract top talent but also helps you retain top talent long into the future.

Now, let's calculate employee turnover data so you can help explain the ROI of employee engagement. The formula to measure the overall employee turnover rate is:

(Employees who left / Average # of employees) x 100 = Overall employee turnover rate

You'll use this number to calculate the percentage decrease in employee turnover pre- and post-increased engagement initiatives.

Another cost that goes with employee turnover is the average cost of replacing an employee who's left the company. 

According to The Society for Human Resources Management(SHRM), it costs companies 6-9 months of an employee's salary to replace them. We'll use nine months in this case to calculate the average cost of replacing an employee. 

Average employee salary / 12x9 = Average cost of replacing an employee

Revenue per Employee

Revenue per employee(RPE) is an essential metric that measures the average financial productivity for each employee. It can be used to see how your RPE compares to your competitors, track the performance of your employees, and evaluate historical changes within your organization so you can make improvements to your operations.

To calculate the revenue per employee, we'll use this formula:

Total revenue / Average # of employees = Revenue per employee

Revenue per employee is typically measured using annual revenue but you could also use this metric to calculate revenue per employee for shorter periods of time(e.g., quarterly, bi-annually) to see the impact of engagement initiatives and programs and other organizational changes.

Employee Absenteeism

Another essential metric needed to calculate the ROI of employee engagement is employee absenteeism. The absenteeism rate is the percentage of employees absent from work during a set period. Engaged employees tend to feel better about the company they work for. Therefore they're less likely to miss work due to general dissatisfaction or other related issues.

We'll need two data points to use employee absenteeism in our ROI calculator. Annual absenteeism rate and absenteeism per employee. 

First, let's calculate the annual absenteeism rate using this formula:

E x A / E x D = Annual absenteeism rate

E is Average # of employees per year

A isTotal # of unplanned absences 

D is Total # of workdays available per employee

Now let's use the annual absenteeism rate to calculate absenteeism per employee:

R x A + S x A = Absenteeism per employee

A is Absentee rate (from above)

R is revenue per employee

S is Average employee salary

We will use the cost of absenteeism per employee to show the savings gained by lowering the absenteeism rate through improved employee engagement.

How to Calculate Overall Employee Engagement ROI

Employee engagement is a vital indicator of the health of your company. It's one of the most reliable ways to predict employee turnover and directly correlates with absenteeism, customer loyalty, productivity, and profitability.

Let's look at how to utilize the metrics above to calculate employee engagement ROI.

ROI is measured as follows: 

(Net benefits - Cost of initiatives) / Cost of initiatives X 100

To calculate net benefits, add up the amount of revenue gained:

X% increase in employee productivity + amount saved from X% reduction in absenteeism and X% decrease in turnover = Net benefits

The results are undeniable when companies realize the importance of committing to employee engagement initiatives, whether on their own or through an award-winning platform like Cooleaf. Now, you have the tools and formulas to calculate the ROI of employee engagement for your organization.

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Employee Engagement through Cooleaf

Cooleaf is the leading employee engagement platform to help people-first companies like yours drive a winning team culture. We pride ourselves on our data-minded, creative, friendly engagement experts on the Cooleaf Customer Success Team. We'll work with you to provide:

• An onboarding expert & programming to effectively launch your team's new engagement platform

• Quarterly check-ins with performance metrics you can bring back to your executive team

• Quarterly engagement programming, along with a go-to library of activities to suit your goals

• Routine webinars, newsletters, and resources to help you listen, engage, and measure your engagement

Are you ready to create real organizational change through meaningful employee engagement? Let's talk!