For well over 25 years, research and popular business literature has shared the value of people in an organization. Yet, even with this information, most organizations still struggle to engage their employees and realize that value. Instead, the cost of not fully engaging their employees is increasing, according to new research just released by Resource Development Systems, LLC in our whitepaper Maximizing Your Human Capital Investment: Research Based Strategies for Increasing Organizational Performance.
In June 2015, the Bureau of Labor Statistics released new data regarding the average total compensation costs in the US had risen to $31.65 per hour, which translates into an approximate annual cost of $63,000 per year per employee, or $6.3 million per 100 employees. Total compensation includes actual pay plus insurances, such as health, life, dental, vision, and workers’ compensation, as well as taxes, such as FICA and unemployment tax. This new rate is almost a one-third increase over rates when we first calculated the impact of low employee engagement levels in organizations back in 2010, which were based on 2009 rates. Most of this increase is from higher insurance costs and some increased taxes, with a minor increase in wages.
In The Cost of Being Good Enough, a whitepaper we published in 2010, we shared a new formula, the Payroll Efficiency Factor™ (PEF), which we devised to measure the impact of employee engagement, or the lack thereof, on one aspect of organizational performance. The PEF is a function of the percentages of engaged, unengaged, and actively disengaged employees in the organization. The resulting factor is the percentage of the organization’s payroll that is actually put to work in the organization. The average, mediocre organization has a PEF of only 63%, while the best organizations have a PEF of 78%. While exceptional organizations are only 15 points higher, those 15 points actually comprise almost 25% more performance per payroll dollar than the average organization.
With this increase in total compensation rates from 2010, what it now translates into is a loss of an additional $8,400 per employee per year over our 2010 estimates for an organization with an average PEF of 63%. This provides a total loss of $23,000 per employee per year, or $2.3 million for an organization of 100 employees. This is money that the organization is already spending, but it isn’t getting any value or return from that money. The organization is paying for work to be done, but is getting far less done for what it is paying.
Contrast this with the exceptional organizations. These organizations are seeing an additional $9,500 worth of work being done by each employee per year, or $950,000 per 100 employees annually, almost cutting their cost of lost engagement in half. But because the employees in the organization are more focused on what matters (Payroll Effectiveness), their work actually makes a larger impact on achieving the organization’s goals.
Not only is more work getting done per dollar, but that work actually makes a greater impact on the organization’s progress. On the other hand, employees in mediocre organizations often spend time working on things that are not really important to the organization, further reducing the value of their work. As a result, any amount of value from an increase in the Payroll Efficiency Factor™ can be multiplied by a factor of 3, 5, or even 10. This is money that is going to the bottom-line of the organization’s performance.
Clearly, it is of great value for executives and managers to do a much better job of managing and engaging employees. Wages and other costs associated with employees will continue to rise, and the savvy executive will do things to ensure that they actually maximize the return on those costs. After all, the results could be the difference between struggling to survive and actually having a thriving and successful business.
To learn more, you can download the whitepaper Maximizing Your Human Capital Investment: Research Based Strategies for Increasing Organizational Performance, as well as The Cost of Being Good Enough from the Whitepaper section at www.ResourceDevelopmentSystems.com. There is never any registration required to access our research reports.
Make a Great Day!