The Economics of Employee Engagement – Part 2

Whether or not your employees are truly engaged in the business, the result WILL manifest itself on the financial statement… clearly and quantifiably… good or bad. 

First, a series of questions. What is the impact on your business if your employees are engaged or not? Can you quantify it? Is organizational productivity a valid measure of engagement? If so, can you measure productivity on the financial statement? Serious questions that many times are avoided because the answers appear to be difficult. Let me reduce these questions to their essence.

The measure of engagement is not whether employees are happy, but whether they are productive. If in fact they are more productive, you will sell and produce more goods and services with the same people, or you will produce the same level of goods or services with fewer people. If your organization is more productive, by definition, the result will  require more output and/or fewer people… period. And that measurement of organizational productivity can be measured and tracked on the financial statement. No excuses, no debate, it’s simply the math. If you are not selling/producing more, or have fewer employees, then your financial statement never saw the engagement or the productivity… or the profit. Productive and engaged employees will sell more, produce more, spend less, cost less, and enable the enterprise to be more profitable. Unproductive, disengaged employees cost the business opportunity and money… every day. Regardless – you must be able to measure it to manage it.

In far too many cases, employee engagement survey data is either unrelated or inverse to financial results. If you overlaid your engagement data or ratings for the last 24 months with your financials you may be surprised at the results.

I challenge you to a simple but potentially profound exercise. Whether you have 1 or 100 million in sales, don’t dismiss this as being to simple – too many attach value to the complex at the expense of the obvious! Here it is: graph your monthly net sales dollars for the last twelve months. Then graph your total wage and fringe cost (all hourly and salaried combined), as a percentage of sales. Lastly graph your operating profit as a percentage of sales. In all likelihood you will see significant variation in your payroll to sales ratio and it’s resulting impact on profitability. Specifically, months when your payroll ratio is high, profits are low, and vice versa. As a simple demonstration, imagine (or calculate) if you will, how your financials would improve if your best month(lowest payroll ratio) was achieved 12 months a year. My educated guess is your profits would nearly double. Email me if you would like to discuss this exercise further.

This above demonstration of the impact of a rising or falling payroll ratio is simply an illustration of (1) either more output with the same payroll, or (2) the same output with less payroll. I will be the first to admit that this is an over-simplification, but my intention is to make a simple but extremely significant point. (Please note: we offer a comprehensive assessment utilizing 5 years of financial data and viewed through multiple financial lenses to provide a client with a complete analysis.)

Whether your employees are truly engaged or not, the result WILL manifest itself on the financial statement… clearly and quantifiably. 

Engaging your employees and leading your company to a more profitable outcome requires that you define, measure, pursue and reward specific financial results. Leadership also requires that  you create an atmosphere of organizational emotion, whereby employees share in business success and failure, real time. Every organizational activity, at every level of the business, by every department, and every employee, has an impact on key operating ratios – favorably or unfavorably.  Leadership’s job to identify the objectives, write the game plan, provide the real time score board and reward success.  If you do, you will be amazed at the results. And remember… having some unhappy employees along the way may be your best indicator that people are REALLY engaged.

Bottom line… employee engagement must be measured on the financial statement. As you enter the 2014 budget season, I would encourage you to challenge your paradigm regarding employee engagement and it’s relationship to financial results. You may be leaving a lot on the table. Contact me if we can help.


About Karl F. Muller

Specializing in driving Organizational Performance to new levels. Utilizing a tactical and focused four (4) part strategy to engage all employees in the pursuit and achievement of performance and real financial results. Applicable to manufacturing, service, distribution and corporate services groups. We have worked throughout North America with businesses and facilities ranging from 50 to 5,000 employees, union/non-union. Define... Measure... Pursue... Reward. Celebrating our 30th year. 200 public speaking engagements, 5,500 senior managers trained, 700 organizations assessed. We are serious, tactical, focused. No fancy corporate speak, no blue suits. Just Results. The Muller Group, Inc.
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