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7 formulas to calculate employee engagement ROI

Employee engagement

7 formulas to calculate employee engagement ROI

Jonathan Davies


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5 mins read

Tue, Sep 3, '19  

Déjà-vu, is that you? We’ve argued both sides of the fence when it comes to Internal Comms measurements.

Some say it can be done. Some say they shouldn’t bother, because the budget investment is too minimal to argue ROI. Others again say that their effects are too intangible, so the focus shouldn’t be on numbers. But what if we could quantify the unquantifiable? What if, like wrapping bandages around the invisible man, we can make the invisible completely visible? 

We’ve put together the research results from sources such as Gallup, McKinsey, Harvard Business Review and more, and came up with a few formulas to help you calculate the ROI on your employee engagement efforts. It’s a mini Master thesis.

Want us to talk you through it and show how Happeo can boost that ROI?

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The lack of visible impact and credibility among leadership all relates to leaders not understanding why Internal Communications is important. You can help them with that, and you can speak the language of numbers. Call it value creation, call it ROI – they need something quantifiable. And really, even “invisible” posts such as morale can be quantified. Research shows that employee engagement has a strong effect on:

  • Absenteeism
  • Employee turnover
  • Onboarding costs
  • Productivity - search time and job productivity
  • Revenue generation 

The great news: we’ve created research-backed formulas to calculate it all. For the example calculations below, we’ve used a company that has: 

  • 300 employees
  • $50.000 average annual salary
  • 8,6 absence days per person (US average)
  • Turnover of 20%
  • Annual revenue target of $36.000.000 (arbitrary, you can replace this with EBITDA, ARR or whichever figure is important to your company)

Ready? Let’s start with absenteeism:

1. Absenteeism

Engaged employees miss fewer days of work. On average, US companies see 8,6 absence days per year per employee. Companies with high employee engagement see that number reduced by 30%.

Sources: Bureau of Labor Statistics, DDIworld.com

Amount of employees x average yearly salary / 230 working days x absence days x 30% x 10%

Example: 300 x $50.000 / 230 x 8,6 x 30% = $168.260

2. Employee turnover

Engaging employees has a big effect on turnover, and turnover is important because it's a large invisible cost for any organization. Research shows the average cost per employee leaving is between $15,000 - $25,000, so we took $20,000 as an average for this calculation. Companies with high-employee turnover experience a 24% decline in turnover with strong employee engagement, companies with high turnover experience a 54% decline. We signify turnover rate as "high" when it's above the global average of 17.8%, and "low" when it's below.
Sources: Gallup, Huffington Post, Compedatasurveys/Salary.com

(Quarterly turnover in employee amount x 24% OR 54%) x  $20.000

Example: (60 x 54%) x $20.000 = $648.000

3. Onboarding costs

Clients can save 5% of training costs during onboarding, because onboarding will be faster as a mass-amount of base information can be made available and searchable when Internal Comms teams have an intranet page dedicated to onboarding. The average cost of onboarding an employee in the US is $3.000.
Sources:  Bersin, Forrester

(Amount of employees hired x turnover%) x (3.000 x 5%) = savings

Example: (300 x 17.8%) x (3.000 x 5%) = $8.010

4. Productivity - search time reduction

McKinsey's research has shown that searchable knowledge archives (Pages, Drive integration, conversation in Channels) reduce the time employees spend searching by up to 35%. To remain conservative, we've taken 15%. McKinsey has also shown that employees spend 7.3 hours per week searching. 15% of 7,3 hours is 1,09 hours saved per week. Multiply this with the average employee hourly salary and 46 working weeks per year (based on 230 working days per year).
Source: McKinsey

(Amount of search time reduced (in hours) x average hourly salary) x amount of employees x (230 days worked per year x 8 hours worked per day / 40 hour work week=46)

Example: (1.09 x $27,17) x 300 x 46 = $408.691

5. Job productivity

Companies with above average employee engagement see higher productivity rates of their employees (between 5 and 21% increase). We've taken the more conservative 5% for this calculation.
Source: Gallup 

(amount of employees x average yearly salary) x % productivity increase

Example: (300 x 50000) x 5% = $750.000

6. Revenue generation

Harvard Business Review's research shows that companies with high total motivation enjoy a 30% revenue increase. Internal Communications activities account for ⅙ factors affecting total motivation, meaning a 5% revenue increase. This factor is a "sense of purpose and alignment to the business" – a pillar of Internal Comms activities.
Source: Harvard Business Review

Annual company revenue target x 5% internal comms effect

Example: $36.000.000 x 5% = $1.800.000

7. Internal Comms’ value when creating Alignment

This calculation my look familiar to some: it’s The Comms Factor, formulized. Mike Klein first coined this in his research report titled “How to measure what really matters”, and we’ve written it down in a way that anyone can calculate it. This method relies on Internal Comms negotiating credit for their activities. Take this for example: Let’s say it’s the Sales’ department’s goals to increase net revenue by 60 million in one year. Internal Comms spends a lot of effort on onboarding communications for the new sales guys, so their ramp time is reduced and they can hit their target sooner. That makes the case strong for Internal Comms to argue they should receive some credit for their efforts. Negotiate this with the person responsible for hitting the target. In the example below we’ve taken 6% negotiated credit.

Source: Mike Klein & Happeo’s “The Past and Present of Internal Communication” research

(Commercial target x commercial target credit%) x target achieved%

Example: ($36.000.000 x %6) x 85% = $1.836.000

Want to calculate the ROI on your Internal Comms efforts, and then see how Happeo can boost that further? Get in touch with our experts. We’ll do the math for you, free of charge.

Contact a Happeo expert