Return on Investment in Engaging Employees

In 2005, Gallup reviewed employee engagement data from 332 organizations (4.5 million employees) in the 2005 Q¹² database to test the relationship of a company's overall employee engagement to its financial performance. (Gallup's Q¹² measures employees' emotional and cognitive commitment to the firm, described in detail in Human Sigma beginning on page 155 in Chapter 8.)

We have long had ample evidence of the importance of employee engagement to financial fundamentals at the business unit level, but we wanted to be able to show the financial returns to investing in employee engagement in a more straightforward way -- to provide a measure of Professor Baruch Lev's organizational capital. We selected companies for this study based on the following criteria:

• publicly traded, to facilitate the gathering of financial data
• entire company surveyed by Gallup (versus one division, for example), so that accurate comparisons could be made to company-level earnings
• competitors that are publicly traded, so that each company's financial data could be compared to similar companies within their own respective industries

We found 89 companies in our 2005 database that met all of these criteria and pulled their financial data and industry comparables. We divided these organizations into a study group of companies in the top quartile of Gallup's Q¹² database and a contrast group of companies in the bottom half of Gallup's database. Study and Contrast groups included a similar proportion of U.S. and international companies:

• The Study group included employee engagement data from 388,716 employees in 40,429 business units, with an average response rate of 84%. This represented 18 companies in nine different industries.
• The Contrast group included data from 176,469 employees in 22,292 business units, with an average response rate of 83%. This represented 18 companies in six different industries.
• GICS codes determined industry comparables using precise company-industry criteria. Comparable financial data were available for an average of 7.3 competitors per organization, for a total of 263 competitors employing 9.8 million people.
• Exchange rates from March 1 of each year were used to convert all currencies to U.S. dollars.
• Study group companies averaged 4.1 engaged employees for every actively disengaged employee. As a group, they improved from a ratio of 2.1:1 to the current 4.1:1 ratio from 2002-2004.
• Contrast group companies averaged 0.96 engaged employees for every actively disengaged employee.
• For each Study and Contrast group company, earnings per share (EPS) were compared to the appropriate set of competitors, and the 2004-2005 percentage difference from industry equivalent was compared to a baseline three-year average from 2001-2003.

Studying EPS relative to competition, top-quartile engagement organizations exhibited an upward trend, exceeding competition by 18% in 2004-2005 (a net difference of 15.6 percentage points from baseline). Below-average-engagement organizations were slightly below their industry equivalent at baseline and 3.1% above their industry equivalent in 2004-2005 (a net difference of 6 percentage points above baseline).

The EPS growth rate of top-quartile organizations (relative to the industry peers) was 2.6 times that of below-average organizations. This difference in EPS growth rate illustrates one of the principal benefits of building a critical mass of engaged employees, and one that we have observed repeatedly at the unit level.