Estimating the monetary impact of a rise or fall in employee experience and morale is necessarily an estimation process. We use the best, most reliable available information from both external and our own proprietary research.
For example, the conclusion of a large review of the literature commissioned by the UK Government and published by the Department for Business Innovation and Skills was:
There is a considerable amount of evidence to indicate that there is a positive association between subjective wellbeing and an employee's job performance.
More recently, in a meta-analysis (a study which systematically uses the results from multiple studies to estimate an overall effect size) the Centre for Economic Performance (part of the London School of Economics) came a similar conclusion:
Ultimately, higher wellbeing at work is positively correlated with more business-unit level profitability
Professor Alex Edmans from London Business School also shows that firms listed in the Great Places to Worklist had between 2-3% higher annual stock market performance than their competitors (in the same sectors).
Building on the academic research, we draw on our own experience of working directly with our clients. Over the last eight years, we have worked with over 1,000 organisations, some of whom we have been tracking their employees’ wellbeing for over five years. This longitudinal data at firm level is particularly useful at estimating more accurately the “within firm” effect sizes from the rise (or fall) in employee experience. This is because most academic work is comparing between firms in cross sectional studies, rather than changes within the same organization over time. Our data helps fill this crucial gap.
How we calculate the ROI of morale
Our return on investment estimation is based on a cost benefit analysis approach.
The key costs that are directly impacted by changes in employee experience and team morale are:
- Staff turnover costs including direct recruitment costs and temporary costs due to open roles
- Sickness absence and unapproved absenteeism.
The key benefit is productivity, which is effectively a broad construct including effects from:
- Increased output
- Higher quality work
- Product or process innovation
- Increased sales.
Model built on 0.5pt increases (or decreases)
All our estimates are based on the impact of 0.5pt change in average employee wellbeing on our 1-5 scale. In our opinion, many studies overclaim the possible impacts as they compare the happiest teams (or employees) with the least happy. It is unrealistic that everyone will be positive all of the time but a 0.5pt across the board improvement is realistically achievable, and something that many of our clients have achieved and sustained.
1. Enhanced benefits: productivity gain
Our core estimate is that a 0.5pt increase in our Happiness KPI will translate into a 7.5% increase in productivity. This estimate comes from the main academic literature cross-referenced to our own client data (especially in regard to calibrating to our 1-5 scale).
We adjust this estimate up and down according to four criteria:
- Creativity – how tightly your roles and processes are defined
- Teamwork – how much collaboration is required within and between your teams
- Customer interactions – how customer facing your employees are
- Remote working – how much people work from home*
In the resilience calculator we use the 7.5% productivity gain in the first iteration estimate. In the enhanced calculator you can adjust up and down the other impacts according to your specific business.
*This estimation was already designed before the coronavirus crisis – we believe its role may be even larger now.
2. Reduced costs: staff retention and absenteeism
All the evidence shows, unsurprisingly, that employees who are happier are less likely to leave. We base our estimates on our client’s data where we can not only see the size of the effects but also the speed.
Based on this, we estimate that a 0.5pt increase (or decrease) in employee wellbeing in one quarter translates into a 17.5% reduction (increase) in staff turnover the next quarter. In other words, it has a large immediate impact.
For staff absenteeism and sickness absence, we estimate the effect is a 10% reduction for increases in employee wellbeing.
3. The internal investment in using Friday Pulse
To complete the overall return on investment calculations the “investment” needs to be costed out too. For good implementation of Friday Pulse within your organization:
- All employees need to complete their Friday Pulse and attend a team meeting to discuss the results (estimated at maximum 30 minutes a week)
- HR (or ops) need to manage the process (estimated as 2 days per month for every 100 employees).
Some underlying assumptions
To model these effects at an organization level, we make the following key assumptions:
- Costs of employment are equal to salary plus overheads (estimated at 35%)
- All gains and losses are applied as % changes to cost of employment
- Costs of recruitment are estimated as 30% of annual salary
We use national averages (medians) as default settings for:
- Company size = 200 people
- Annual salaries = $50,000 (USA); £30,000 (UK)
- Staff turnover rates = 13% (USA) ; 19% (UK)
- Absenteeism rates = 3.4 days/yr (USA); 4.1 days/yr (UK)
- Working days per year = 244 (USA); 232 (UK)
Friendly disclaimer: we believe our resilience calculator is a relatively conservative estimate of the costs associated with changes in employee wellbeing and team morale. However, it is worth noting that our assumptions are pre the current COVID-19 crisis.
Department for Business Innovation and Skills (2014) Does worker wellbeing affect workplace performance? Alex Bryson, John Forth and Lucy Stokes.
CEP Discussion Paper, No 1605 March 2019. Employee Wellbeing, Productivity and Firm Performance, Christian Krekel George Ward Jan-Emmanuel De Neve
Alex Edmans (2020) Grow the Pie; How great companies deliver both purpose and profit; Cambridge University Press