understanding what drives employee engagement

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U.S. Report Working Today: Understanding What Drives Employee Engagement The 2003 Towers Perrin Talent Report

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Page 1: Understanding What Drives Employee Engagement

U.S. Report

Working Today:

Understanding What Drives Employee Engagement

The 2003 Towers Perrin Talent Report

Page 2: Understanding What Drives Employee Engagement

©Towers Perrin 2003

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DDeeffiinniinngg EEnnggaaggeemmeenntt:: WWhhaatt IItt LLooookkss LLiikkee............................................................................................................................................................................................................................................55Exhibit 1: Defining Engagement ................................................................................................................................5Exhibit 2: Current Employee Engagement...............................................................................................................6Exhibit 3: Engagement Across Job Levels .............................................................................................................7Exhibit 4: Engagement Across Industries...............................................................................................................7

DDrriivviinngg EEnnggaaggeemmeenntt:: WWhhaatt IItt TTaakkeess ................................................................................................................................................................................................................................................................99Exhibit 5: Top Drivers of Engagement: How Employees Rate Their Companies Today.................................9Exhibit 6: Employee Views About Leadership......................................................................................................10Exhibit 7: Manager Effectiveness and the Impact on Engagement................................................................12Exhibit 8: Building More Challenge Into the Work Environment — How Managers Are Doing...............13Exhibit 9: Employee Views About Company Performance................................................................................15Exhibit 10: Trends in Employee Mobility..................................................................................................................16

MMeeaassuurriinngg EEnnggaaggeemmeenntt:: WWhhyy IItt MMaatttteerrss ..........................................................................................................................................................................................................................................1188Exhibit 11: Linking Employee Engagement to Financial Performance..............................................................18Exhibit 12: Engagement and Customer Focus........................................................................................................19Exhibit 13: Engagement and Revenue Growth.......................................................................................................20Exhibit 14: Engagement and Cost of Goods Sold ..................................................................................................20Exhibit 15: Engagement and Turnover .....................................................................................................................21

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Table ofContents

Page 3: Understanding What Drives Employee Engagement

If Alan Greenspan’s term “irrational exuberance” was the catchphrase of the late 90s’

boom, “rational endurance” is today’s equivalent. According to Towers Perrin’s compre-

hensive study of the workforce, that phrase accurately sums up the mood of employees

today. Despite repeated business and economic blows over the last two years, ranging

from sharp declines in the stock market and continuing job layoffs to corporate fraud

and bankruptcies, workers remain surprisingly resilient — even resolute — in their

focus on getting the job done.

Our 2003 talent study — completed in April 2003 and representing the views of more than35,000 employees in U.S. companies — updatesand expands a prior study completed just twoyears earlier. (See page 33 for details aboutthe study and the respondent group.) Thus, itprovides both a snapshot of today’s workforceand a comparison of how employees’ viewshave — and haven’t — changed over one ofthe most turbulent periods in recent times.

In a nutshell, we found that the events of thelast two years have not taken the expected toll on employees’ work ethic and desire tohelp their company succeed. We believe the reason has a lot to do with enlightened self-interest. By helping their companies,employees are presumably trying to preservetheir own job and financial security. In addition,our respondents agree their employers havemoved the needle slightly on some aspects of the work environment that matter to them,particularly around creating a far more visibleconnection between their day-to-day work and the organization’s larger goals.

Tempting though it may be to view these findings with relief, employers face real risks inresponding with either complacency or inaction.Rational endurance may be good enough toget an organization through a few difficultyears. But it will not yield the level of workforceperformance required for longer-term success.

Why? Because, as our data clearly show, rationalendurance does not allow much room for trueengagement, which we define as employees’willingness and ability to contribute to companysuccess. Another way to think about engage-ment is the extent to which employees putdiscretionary effort into their work, in the formof extra time, brainpower and energy. And bythis measure, a much more cautionary pictureemerges from our study.

Rational Endurance Is Not EngagementA key focus of our research was measuringrespondents’ level of engagement in their work(see page 6). Just under a fifth of our totalrespondent group — a disturbingly small per-centage — are highly engaged, freely givingthat extra effort on an ongoing basis. An equalnumber are disengaged, meaning they probably

Executive Summary

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Page 4: Understanding What Drives Employee Engagement

have “checked out” from their work, as somany employers fear. The remainder — roughlytwo-thirds of our sample — are “moderately”engaged at best.

Why does this matter? Because engagementremains the ultimate prize for employers.Companies may use different names or defineit slightly differently, but the endgame is thesame for everyone: discretionary effort. At atime when virtually every organization is strug-gling with cutbacks and financial pressure —trying to improve performance with fewer peopleand dollars — having a critical mass of employeeswho freely give that effort is of tremendousvalue.

Think of it as the human power driving thefinancial and operational engine. The greaterthe power, the better the engine performs onmultiple levels, all other things being equal.Indeed, one of the most compelling elementsof our study is that this once largely intuitivebelief — that highly engaged people do outper-form others — now has a basis in fact. Thereare clear links between our respondents’ levelof engagement, their focus on customers, andaspects of their organization’s financial andoperational performance across a number ofareas (see page 18).

Challenge...Opportunity...and RiskSo what does this mean to the typical companyright now? In many ways, it’s a classic goodnews/bad news situation. On the upside, despitethe hard choices employers have made inreducing staff and cutting back on core reward

programs, they still have a willing workforcewith a reasonably strong work ethic. Whileemployees certainly take issue with a numberof aspects of their work experience — andexhibit some negative feelings about their jobs(see page 17) — these negative emotionshaven’t yet translated into widespread poorperformance.

But employees’ willingness to deliver is neitherinfinite nor self-renewing. And the flip side ofthe coin — diminishing cooperativeness andengagement — is all about risk for the employer:Risk that the moderately engaged will slidetoward increasing disengagement. Risk thatresiliency will harden into recalcitrance. Riskthat job performance will erode over time, withserious consequences for financial results. Riskthat, as the economy rebounds and the jobmarket opens up, the less than fully engagedemployees will seek other employment. Andfinally, the ultimate risk of facing serious gapsin skills and talent in an environment wherepeople are arguably the last source of competi-tive advantage.

Viewed through this lens, our findings presentemployers with both opportunity and challenge.The opportunity lies with the small number ofhighly engaged individuals, who can becomerole models for their peers, helping build thekind of environment and work experience thatdoes engage greater numbers of people.

The challenge, by contrast, lies with the largenumber of moderately engaged — whom we’vetermed the “massive middle.” Left to their owndevices, these employees could easily slide

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Page 5: Understanding What Drives Employee Engagement

toward the wrong end of the engagementscale, with serious consequences on produc-tivity and morale. Indeed, the sheer size of this group — probably the single largest groupin any organization — means it will have a disproportionate impact on the mood and moraleof the workforce overall. Strengthening thisgroup’s level of engagement may be the mostcritical task virtually every employer faces today.

Toward Greater Engagement:Moving the Needle The value of this study is that it helps identifythe nature and shape of this task, drawing onthe views of one of the largest employee groupssurveyed on this topic. It not only tells us whatengagement looks like, but also how to build it —highlighting those variables that have the mostpositive impact on behavior and performance.

Perhaps most important, the study reminds usof a hard truth that’s often forgotten in the desirefor a quick solution: Building engagement is aprocess that never ends. And it rests on thefoundation of a meaningful and emotionallyenriching work experience. It is not about making

people happy, or even paying them more money.As important as pay and benefits are in attractingand retaining people, they play a less importantrole in engaging people in their work.

What is on the engagement list are the thingsthat take time and commitment — such asstrong leadership, accountability, autonomy, asense of control over one’s environment, asense of shared destiny, and opportunities fordevelopment and advancement. In the end,this study reminds us there are no substitutesfor these fundamentals.

The remainder of this report explores the elements of engagement in more detail, andcompares them to the somewhat different mixof elements that attract and retain employees.

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Page 6: Understanding What Drives Employee Engagement

DefiningEngagement:What It Looks Like

Think of this emotional/rational duality as acombination of “the will” and “the way.” Fullengagement demands both. Employees needthe will: the sense of mission, passion and pridethat motivates them to give that all-importantdiscretionary effort. And they need the way:the resources, support and tools from theorganization to act on their sense of missionand passion.

Engagement: The Rational and the EmotionalExhibit 1 shows respondents’ “scores” on coremeasures of both emotional and rational engage-ment. Overall, there is surprisingly strongagreement with many of these statements,which accounts for our sizable group of moderately engaged employees. Note, however,that scores for key aspects of rational engage-ment (the bottom items on the exhibit) aregenerally higher than those for emotionalengagement.

In part, this speaks to the undeniable progresscompanies have made in recent years in creat-ing more of a line of sight between individualactions on the job and broader company objec-tives. Programs that communicate and reward

Through our study, we’ve confirmed a definition of engagement that involves both

emotional and rational factors relating to work and the overall work experience. The

emotional factors tie to people’s personal satisfaction and the sense of inspiration and

affirmation they get from their work and from being part of their organization. A key

item here, for instance, is having a strong sense of personal accomplishment from

one’s job. The rational factors, by contrast, generally relate to the relationship

between the individual and the broader corporation; for instance, the extent to which

employees understand their role, and their unit’s role, relative to company objectives.

Exhibit 1Defining Engagement

Agreeing Mixed Disagreeing

0% 20% 40% 60% 80% 100%

Really care about the future of my company

Proud to work for my company

Sense of personal accomplishmentfrom my job

Would say my company is a good place to work

Company inspires me to do my best work

Understand how my unit/department contributesto company success

Understand how my role relates to companygoals and objectives

Am personally motivated to help my company succeed

Am willing to put in a great deal of effort beyond what is normally expected

77 16 7

70 21 9

66 19 15

61 22 17

50 27 22

89 8 3

81

78

78

13

16

17

6

5

6

% of employees

Percents may not add to 100 due to rounding

5©Towers Perrin 2003

Page 7: Understanding What Drives Employee Engagement

6

the connection between the individual and thebroader organization are paying off, and helpingemployees more clearly understand the mutualresponsibility and accountability at the heart ofthe employer/employee relationship.

Plumbing deeper into the more emotionalaspects of working, though, the picture changesa bit. Just under two-thirds of our groupagreed their company is a good place to work,and even fewer — just half — agreed theircompany inspires them to do their best work.This is where we see the impact of employees’dissatisfaction with various aspects of theirwork experience; notably, overwhelming work-loads, distant and noncommunicative seniorleadership (who fail to present a clear picture offuture success) and the lack of developmentalopportunities.

The lower scores for elements of emotionalengagement also pose some risk for employers.In this period of rational endurance — whenboth companies and employees are collectivelyhunkered down to get the job done — engage-ment based largely or only on rational factorsmay be adequate. But as the economy reboundsand choices open up for people, many are likelyto consider moving to another employer. Atthat point, emotional engagement may be theonly thing helping retain those people mostcritical to the business.

Finally, our respondents may be reminding usthat the heart is a tougher battleground thanthe mind. Today, employers have better toolsand approaches for supporting employees intheir daily work, and that shows in the strongagreement around some of the rational engage-ment factors. But companies are still behindwhere they need to be in inspiring people and

providing the personal sense of passion and mis-sion that count so heavily in a rich and mean-ingful work experience.

A Question of IntensityThis last point goes a long way toward explainingwhy, despite the reasonably strong agreementscores on a number of the engagement factors,we have only a small group of highly engagedrespondents. Exhibit 2 provides the evidence,showing how the total group breaks downaccording to employees’ levels of agreementwith the core engagement factors. Here arethe important points to note:

■ The highly engaged — just 17% of the sample— are those who gave the highest scores toall the engagement factors.

■ The disengaged — 19% of the sample —are those who gave the lowest scores to allthe factors.

■ The remaining “massive middle” had relativelylower agreement scores and more disagree-ment scores across the board. They werequite positive in some areas, but had mixed(neutral to negative) views on a variety ofthe engagement elements, particularly theemotional ones.

Exhibit 2Current Employee Engagement

Moderately engaged

Disengaged

Highly engaged 17%

19%

64%

©Towers Perrin 2003

Page 8: Understanding What Drives Employee Engagement

7

Significantly, this pattern held up across a rangeof demographic segments in the study, from joblevel (Exhibit 3) to industry category (Exhibit 4).In each case, though, there was one importantexception to the pattern that’s worth noting,because it further underscores the importanceof a sense of inspiration, challenge and authorityin generating engagement.

■ Senior executives are more highly engaged

than any other group — and less likely to

be disengaged (Exhibit 3). Cynics mightsuggest this is because they make a lotmore money than others, and while that’scertainly a factor, it’s not the whole story.Senior executives also have, by definition, thevery qualities in their jobs that employeesrepeatedly tell us matter in engaging them:challenge, authority, autonomy, stimulation,access to information, resources and growthopportunities. Indeed, in our study on theemotional climate of the workforce (page 17),we found that senior management’s currentwork experience comes close to mirroringwhat other employees described as theirideal experience (to which all aspire, but fewhave today). And again, it was largely aboutthings like challenging work, personal contri-bution to results, advancement, and a senseof energy and excitement from the job — inother words, true passion for the work.

Beyond the top executive group, engagementlevels drop progressively. And the lowest levels,not surprisingly, show up among hourly work-ers, who arguably have the least control orinfluence over their jobs and work experience.

Exhibit 3Engagement Across Job Levels

Senior executive

Highly engaged Moderately engaged Disengaged

Director/manager

18%

Specialist/professional

16%

66%

Nonmanagementsalaried

20% 14%

66%

15%

Supervisor/foreman

67%

18%

65%

25%

10%

53%43%

4%

25%

63%

12%

Nonmanagementhourly

Exhibit 4Engagement Across Industries

Nonprofit High tech

16%

Insurance

18%

66%

Pharmaceuticals

17% 16%

67%

23%

Heavymanufacturing

63%

14%

68%

15%17%

46%

42%

12%

18%

67%

15%

Hospital

Finance/banking

17%21%

62%

Highly engaged

Moderately engaged

Disengaged

©Towers Perrin 2003

Page 9: Understanding What Drives Employee Engagement

8

■ Among industries, engagement is substan-

tially higher in the nonprofit sector than in

every other sector we looked at (Exhibit 4).

Again, this is logical, given that people tendto be drawn to this sector from a sense ofmission and passion, rather than from anyprospect of high pay or wealth accumulation.

Indeed, the fact that the sector is traditionallynot a high-paying one, relative to the otherswe studied, may be our best reminder that itisn’t possible to “buy” engagement in the con-ventional sense (through better than averagemonetary rewards).

Our linkage framework deconstructs the fourcore elements in the fundamental relationshipbetween people and business (read financial)performance.

The notion is deceptively simple. Employeebehavior influences customer behavior (thinkof the last time you walked out of a storewithout making a purchase because of an ill-informed, rude or poorly trained salesperson).Customer behavior directly affects revenuegrowth and profitability, among other things.So it’s critical to shape the behavior of theindividuals at the beginning of the chain:employees. That means creating an overallwork experience, and developing and managing a series of workplace programsand practices, that directly support desiredbehaviors and high levels of engagement.

At the individual company level, the linkageframework becomes much more meaningful.It allows a company to identify the specificvariables that affect customer behavior andrelated financial outcomes, and determineswhat employees need to do or focus on tohelp achieve those desired outcomes.

At one type of company, for instance, employ-ees’ technical skills and knowledge might bea key factor in customer loyalty — leading to an emphasis on training and development,among other things. At another kind of organization, rapid turnaround, flexible problem solving, or fanatical attention to storecleanliness and point-of-service assistancemight be far more important influences oncustomer behavior, leading to a very differentmix of programs to shape employee behaviorand attitudes.

When a company aligns its programs andpractices within this framework to drive theright behavior from employees through tocustomers, it positions itself to realize anappropriate return on its people investment.By contrast, when a company builds its people programs in a strategic and operationalvacuum — with no explicit or implicit links tobehavior and performance — it will not onlyfail to achieve a return on investment but may,over time, see a drop in customer retention,profitability and the like.

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People Programsand Services

Employee Behavior

Customer Behavior

Business Performance

Linking People and Performance: The Right Equation

The Towers Perrin Linkage FrameworkSM

©Towers Perrin 2003

Page 10: Understanding What Drives Employee Engagement

Defining engagement is a crucial step in the process, of course — laying the foundation

for forward progress. But the real value comes in determining what creates engagement.

Through statistical analysis, that’s exactly what we’ve been able to do in our study —

identifying a set of workplace attributes that, in combination, are critical to building

high engagement.

They are, in order of importance:

■ Senior management’s interest in employees’well-being

■ Challenging work

■ Decision-making authority

■ Evidence that the company is focused oncustomers

■ Career advancement opportunities

■ The company’s reputation as a good employer

■ A collaborative work environment wherepeople work well in teams

■ Resources to get the job done

■ Input on decision making

■ A clear vision from senior managementabout future success.

Exhibit 5 shows how our respondents feeltheir companies are doing across these all-important drivers of engagement. Severalpoints are worth noting:

■ A majority of these attributes relate to thecultural components of the workplace andthe total rewards mix. These are elementsthat generally can’t be quantified from amonetary perspective — or delivered througha clearly defined program. That’s why, despitetheir importance to employees, they remainelusive goals for so many companies.

DrivingEngagement:What ItTakes

Exhibit 5Top Drivers of Engagement: How Employees Rate Their Companies Today(in descending order of importance)

42 25 33

53 33 14

61 20 19

0% 20% 40% 60% 80% 100%

75 16

34

9

32 34

Senior management has sincere interestin employees’ well-being

Company provides challenging work

Employees have appropriate decision-making authority

Company cares a great deal about customer satisfaction

Employees have excellent career opportunities

Favorably Mixed Unfavorably

45 28 27

Senior management communicates clear vision for long-term success

Employees work well in teams

Company has a reputation as a good employer

Employees have resources needed to perform jobs in high-quality way

Employees have appropriate decision-making input

55 30 14

67 19 14

58 21 21

64 16 20

% of employees rating company

Percents may not add to 100 due to rounding

9©Towers Perrin 2003

Page 11: Understanding What Drives Employee Engagement

■ The traditional monetary rewards in the totalmix — pay and benefits — don’t appear hereat all. This doesn’t mean they’re not importantto employees. As we’ll explore in detail later,they play a very significant role in attractingpeople to a company and some role in retain-ing people. But they have a relatively minorrole, at best, in driving engagement itself.

■ Two of the elements in the “engagementtop 10” — the first and last, respectively —have to do with senior management. Simplyput, it’s impossible to underestimate the roleleadership plays in building an engagedworkforce.

■ The nature of people’s work matters a lot. Thedesire for challenge on the job is the second-most influential factor in driving engagement— a finding consistent with the data fromour study of the emotional climate of theworkplace (page 17). Being able to do some-thing interesting and meaningful helps feedthat important need for a sense of personalinspiration and accomplishment, leading topride in one’s work and one’s company.

■ Control over one’s environment is a cleartheme, seen in items like decision-makingauthority, input into relevant decisions andresources to get the job done. Employeesneed to believe that some authority andautonomy come along with the increasedresponsibility and risk they are being askedto bear in various ways in the workplace.

Ultimately, all of these elements come downto the kind of culture and work environment acompany creates and nourishes over time. Aswe noted earlier, it isn’t possible to build suchan environment overnight. It takes commitment,consistency, trust in employees’ judgment,

strong leadership, even stronger day-to-daymanagement, and practices and programs thatalign with and support the desired culture.

Below, we’ve chosen to focus on the first fiveof these engagement drivers because theycollectively have the most impact on engage-ment and, hence, represent a critical focalpoint for employers in strengthening currentlevels of engagement.

#1. Senior Management’s Interest inEmployees’ Well-BeingConsidering this is the most important driver ofengagement, employers should be disturbedby respondents’ weak vote of confidence here.Asked whether their senior management exhib-ited such interest, only 42% of our respondentsagreed it was true (Exhibit 5). A third disagreed,while the remainder were mixed, suggestingthey felt too distanced from senior managementto even make the judgment call.

Exhibit 6, which shows how respondents feelabout various aspects of their company’s lead-ership, suggests some of the reasons for this

Exhibit 6Employee Views About Leadership

0% 20% 40% 60% 80% 100%

45 28

37

27

27 35

Management is taking steps to ensure company’s long-term success

Management supports new ideas and ways of doing things

Management has integrity

Management communicates clear vision for long-term success

Management communicates openly and honestly

55 27 18

48 30 22

47 27 27

Favorably Mixed Unfavorably

% of employees rating leadership

Percents may not add to 100 due to rounding

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mixed view. While our respondents are reason-ably positive about their management’s businesssavvy (with more than half agreeing their management is taking steps to ensure thecompany’s success), they are less sanguine onmost other measures of leadership effective-ness. Note, in particular, the relatively lowerfavorability scores for management’s commu-nication abilities, both in terms of articulating avision for the future and in being honest andforthright in dealings with the workforce.

Effective employee communication is a peren-nial challenge for organizations, especially large,complex ones. In our work with clients, we’vefound that it’s a learned skill, and one that traditionally hasn’t been emphasized amongmanagers moving up through the ranks. Inaddition, many organizations confuse commu-nication with information, concentrating on disseminating basic facts rather than providingcontext, commentary and two-way dialogue. Inour experience, employees want to know whatmanagement thinks and believes and how itplans to act. And they also want vehicles togive their input. It’s part of the environment ofmutual trust, accountability and responsibilitythat’s important in engaging people and winningdiscretionary effort.

Equally damaging, we’ve found, is a culturecharacterized by perceived gaps between leadership’s words and its actions. A commonexample is trumpeting a strong performanceorientation, but then paying people with littleregard to meaningful performance distinctions,or failing to connect incentive pay to measurableorganizational or personal outcomes. Nothingdestroys trust and engagement more overtime than inconsistency — or worse, outrightcontradiction — between words and actions.

#2. Challenging WorkJust over half of our respondents (53%) agreedtheir company provides challenge in their work.But a third were mixed — indicating perhapsthat challenging work is not consistently avail-able — and the rest claimed to lack sufficientchallenge (Exhibit 5).

Clearly, employers’ ability to build challengeinto a job varies dramatically, depending on thenature of both the work and the workers. Indeed,given the size and breadth of jobs representedin our sample, the fact that more than half ofthe respondents said they have challenge intheir work seems to be a surprisingly positivefinding. After all, how many jobs by their verynature involve repetitive, mundane activity?

But even taking this into account, there arecertain things employers can do to help promotea more stimulating and challenging environmentfor almost everyone. In our experience, thesecan include encouraging people to take initiative,being open to change, tolerating uncertainty,coaching and developing people’s skills, andholding people accountable for their performance.Arguably, in fact, these elements are even moreimportant in environments where the workitself is relatively routine — providing somecounterbalance to the otherwise “disengaging”quality of the work.

In many organizations, the absence or presenceof elements like these depend on the person-ality, skill and beliefs of the frontline supervisoror manager. He or she generally sets the toneand feel for a unit, taking cues from leadershipand the prevailing culture. So we asked ourrespondents how their immediate managerswere doing on a range of relevant attributes and

©Towers Perrin 2003

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we analyzed their responses in the context ofour engagement data. Exhibits 7 and 8 tell thestory — a mixed one at best.

Exhibit 7 shows respondents’ overall ratingsfor managerial quality, as well as their ratings forthe 10 managerial behaviors that have themost influence on engagement. Some pointsto consider:

■ Forty-three percent of our respondents ratedtheir managers favorably in terms of overallquality of supervision. While this is hardly aringing endorsement of managerial effec-tiveness, that figure actually represents aslight improvement from our prior surveytwo years ago, when just 38% had favorableviews about supervisory quality. It suggestscompanies are starting to recognize theimportance of the managerial role and helpingequip managers with the skills and tools tobecome more effective in these key areas.Still, employers have a long way to go, giventhat a full third of the respondents ratedtheir managers as fair and a quarter gavethem poor ratings.

■ Managers appear to be putting their energieswhere it counts the most. Respondents gavethem somewhat higher scores for the threemost “engaging” behaviors than for the otherlisted behaviors. Still, roughly half of therespondent group rated managers as only fairto poor across virtually this entire behavioralspectrum, further affirming how far managershave to travel to deliver a more inspiring andchallenging work experience in their units.

Exhibit 8 (page 13) shows respondents’ ratingsfor a related set of behaviors that particularlyaffect the ability to provide a more challengingwork environment. While respondents weregenerally split down the middle in most of these

areas as well, with half or less reasonably positive, two areas do stand out as particularlyproblematic:

■ Managers’ ability to coach and developemployees’ skills. Just under two-thirds ofthe respondents were mixed to negative onthis managerial attribute. Yet, from a company’sperspective, what could be more important

Exhibit 7Manager Effectiveness and the Impact on Engagement

Supporting teamwork

Acting with honesty and integrity

Encouraging/empowering people to take initiative

Encouraging new ideas and new ways of doing things

Having valuable experience/expertise

% of employees rating manager

Excellent/good Fair Poor/very poor

33%43% 24%

Manager Behaviors Having the Most Significant Impact on Employee Engagement (in descending order of importance)

Overall Quality of Supervision

Providing clear goals and direction

Inspiring enthusiasm for work

Ensuring access to a variety of learning opportunities

Helping employees understand how theyimpact financial performance

0% 20% 40% 60% 80% 100%59 24 16

58 22 20

50 25 24

49 27 25

50 26 24

49 28 23

46 27 27

42 29 29

40 33 27

Building teams with diverse skills and backgrounds

42 32 26

Percents may not add to 100 due to rounding

©Towers Perrin 2003

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than ensuring employees build and maintainthe skills required to get the job done anddone well? If that focus isn’t coming fromthe frontline managers who have the mostdirect view of people’s abilities, from whereelse will it come?

■ Consulting employees before making decisionsthat affect them. This actually garnered thebiggest negative score across the range ofmanager behaviors, with 37% rating theirmanager as poor or very poor at taking theirviews into account.

Given today’s fast pace and need for rapiddecisions, having the time to talk to peopleabout an issue may be more of a luxury thana practical reality for many managers. Andsometimes, consultation just isn’t possiblefor business or other reasons. Still, giving

people a chance to provide input — providinga forum for opinions — is not only part ofbuilding more challenge and stimulation intothe work environment, but also a part ofinvolving people to enhance engagementand a sense of accountability. The workplaceis no different from other areas in our lives.We all want to control as much of our personalsituations as we can, and supporting thatneed to the extent feasible should be anincreasingly important focus for employers.

#3. Decision-Making AuthorityControl is, in fact, at the heart of the third mostimportant driver of engagement: freedom tomake decisions relating to one’s job. Interestingly,this is an area where employers are faring reasonably well overall. Just under two-thirds(61%) of the respondents agreed they have an appropriate amount of decision-makingauthority to do their job well (Exhibit 5). But afifth disagreed. The rest were mixed, suggestingthat their ability to make decisions could beoccasional at best, depending on the manageror task at hand.

The relatively higher score respondents gavetheir companies on this key aspect of engage-ment may well stem from an increased focuson the broad notion of empowerment, whichtook root in the late 80s to early 90s as com-mand-and-control organization models beganto look both antiquated and inefficient. Whilethe term itself has now become something ofa cliché, our data suggest the intent behind theword may finally be taking hold in companiesas something more than a slogan.

Exhibit 8Building More Challenge Into the WorkEnvironment — How Managers Are Doing

0% 20% 40% 60% 80% 100%

45 29

42

25

32 26

Being open to and supportive of change

Communicating clearly and openly

Holding people accountable for performance

Recognizing and rewarding good performance

Tolerating uncertainty and ambiguity

Favorably Mixed Unfavorably

51 26 24

37 30 33

Coaching and developing employees’ skills

Consulting employees before making decisionsthat affect them

46 26 27

43 28 30

37 26 37

% of employees rating manager

Percents may not add to 100 due to rounding

©Towers Perrin 2003

Page 15: Understanding What Drives Employee Engagement

14

It is impossible to underestimate the importanceof this element of the overall work experience,especially today, when companies are increas-ingly asking employees to shoulder greaterresponsibility (and risk) in areas as diverse astraining, career management, retirement plan-ning, and management and use of health care.

In our consulting work, we’ve consistentlyfound that people are much more willing toaccept increased risk if they perceive they alsohave control over decisions relating to that risk— as well as relevant information and tools tomake good decisions. Essentially, this comesdown to an employer’s responsibility to provideemployees with information. To the extent acompany consistently keeps employees fullyinformed, it provides the necessary foundationfor employees to behave responsibly andaccept accountability for making their owndecisions.

So along with decision-making authority mustcome clear communication and education aswell as decision-making tools and support. Inaddition, responsibility and autonomy have tobe seen as a core and consistent part of theenvironment. Giving employees responsibilityin some areas, but pulling them back in others(relating to their jobs or dealings with customers,for instance) can send mixed messages andultimately defeat attempts to create moreaccountability across the workforce.

Finally, of course, decision-making authority tiesclosely to the ability to build more challengeinto the work environment, since being in controlof decisions enhances the satisfaction andexcitement of work on so many levels.

In a fluid business environment, nothing slowsdown a person’s efficiency and effectivenessmore than having to get approval for everyaction, and nothing stifles initiative more thancontinually being second-guessed.

#4. Customer FocusRespondents gave their companies top markson this engagement driver, with fully three-quarters agreeing their company cares a greatdeal about customer satisfaction, and only 9%disagreeing (Exhibit 5).

Why is a strong customer orientation soimportant to employees and to capturing theirdiscretionary effort? We think it comes downto their pragmatism and core business savvy.Employees know their companies are in busi-ness to serve customers and that financial performance depends on doing that well. Sothey care whether their company is performingwell in this area. Working for a good competitorin the customer arena helps ensure their ownfuture and gives them the sense of confidencethat comes from association with a winner.

Still, they are also realists, as Exhibit 9 (page 15)shows. While 59% gave their companies highmarks for serving customers well, far fewer feltas positively about financial results, indicatingthey are very aware of the toll the recessionhas had on most companies in the last few years.For instance, just 42% agreed their companies’overall financial performance was above averagecompared to others in the industry. This repre-sents a full 10 percentage point drop from ourprior April 2001 study, when 52% felt theircompanies were above average in overallfinancial results.

©Towers Perrin 2003

Page 16: Understanding What Drives Employee Engagement

15

Perhaps even more significant, less than half(45%) rated their company favorably in providingleading-edge technology to support workprocesses and activities. This, too, is an areawhere we saw a relatively sharp decline inemployee confidence since our April 2001study, when 58% of those respondents gavetheir companies a favorable rating on the technology side.

This decline could well be attributable to cutsin spending on new technology and upgrades,which many companies made in the last 18months as part of broader cost managementefforts. It could also explain why, despite allthe attention on cost reduction, just a third felttheir companies were ahead of competitors incontrolling costs. To the extent employees feel

burdened with older, less efficient systems tohandle increasingly demanding workloads, theymay well think their companies are simplymanaging costs badly relative to the competition,making poor decisions about where and whatto cut, and shortchanging future growth andcompetitiveness.

#5. Career Advancement OpportunitiesRespondents gave their companies the lowestscores by far on this engagement driver. Just athird of the respondents agreed their careeropportunities were excellent, while an equalnumber disagreed and the remainder weremixed (Exhibit 5).

This indictment of career opportunity camethrough in two related survey items as well:

■ Communicating career opportunities. Just35% agreed their companies did that well,while 32% disagreed.

■ Advancing high performers in the organization.Only 31% were positive about this aspect oftheir organization, while 36% were not.

Given companies’ economic belt-tighteningover the last two years, job advancement —indeed, job movement at all — has probablybeen limited at best (other than job elimina-tions). So to some extent, our respondents’views may simply be a sign of the times — inkeeping with their recognition that it’s hardertoday to find another, and especially better, jobthan it was two years ago.

Exhibit 9Employee Views About Company Performance

0% 20% 40% 60% 80% 100%

Overall financial performance

Revenue growth

Profitability

Managing costs

Serving customers

Above average Average Below average

Adapting to changing customer and market demands

42

39

39

41 16

44

43 18

17

34 46 21

59 32 9

49 36 15

Providing leading-edge technology

Excellent/good Fair Poor/very poor

(based on view of company compared to industry competitors)

45 2530

% of employees rating company

% of employees rating company

Percents may not add to 100 due to rounding

©Towers Perrin 2003

Page 17: Understanding What Drives Employee Engagement

Still, we have a far more mobile workforcethan was true a generation ago. Almost two-thirds (63%) of the respondents agreed there’sno appropriate amount of time to stay with acompany — a number that hasn’t changed atall in the past two years.

What’s more, as Exhibit 10 shows, roughly 57%remain open to moving to another company,whether passively (expressing willingness to“consider” another job) or actively (looking foranother job or about to make a job shift). Evenmore interesting, considering what’s happenedin the labor market since April 2001, we foundvirtually no differences in response patternsaround mobility across the two studies.

What all this says is that employees stillremain as or more committed to their workthan to a particular employer, all other thingsbeing equal. In tough times, they will stay thecourse with a company — if for no other reasonthan they have to. But if they don’t see thepotential for opportunity — particularly in thetreatment of the best and brightest withintheir companies — they are likely to bolt whenthey can.

In marked contrast, as we’ll explore next, highlyengaged employees — who presumably seesuch opportunity to a far greater degree thanothers — are far less likely to bolt than aretheir less engaged brethren. So as competitionfor talent heats up again over the next fewyears, the question for employers is this:Which employees, or employee groups, aremost critical to the organization, and how canyou create a work experience that marriestheir commitment to their work and theiradvancement with an equal commitment toyour organization?

16

Exhibit 10

Trends in Employee Mobility2003

I have no plans to leave

I am not looking for another job, butwould consider the right opportunity

I am actively looking for another job

I have made plans to leave my current job

I plan to retire in the next few years

8%

2001

44%

37%

37%

44%

7%

7%10%4%

3%

Percents may not add to 100 due to rounding

©Towers Perrin 2003

Page 18: Understanding What Drives Employee Engagement

17

During the period we were gatheringdata for our 2003 Talent Report, welaunched a related study with 1,100employees from similarly sized companies that focused specificallyon quantifying people’s emotionalconnection to work. (See WorkingToday: Exploring Employees’Emotional Connections to Their Jobs,available on towersperrin.com.)

We used a unique tool calledResonanceTM to obtain completelyunstructured and open-ended viewson how people felt about their current and ideal work experiences.What we found from this effort notonly mirrors the results of our talentstudy, but also builds on it by paint-ing a vivid picture of the elementsthat can create the most positivework experience an individual couldimagine. And significantly, thoseelements track closely to the driversof engagement discussed in thisreport.

Here’s an overview of the results:

■ Roughly 40% of respondents hadnegative emotions about their cur-rent work experience. The reasonscome down to excessive work-loads, lack of faith in management(its competence in driving thecompany forward, not its integrity),anxiety about job security, lack ofchallenge in their work, and insuf-ficient recognition for the level ofcontribution and effort provided.What our talent study shows, of

course, is that most employeesare keeping these negative emo-tions in check and maintainingtheir professionalism. The ques-tion, as we’ve noted, is how longthis will last.

■ Respondents’ ideal work experi-ence was grounded in reality —actually, a vastly improved variationon their current situation — andfocused on four key areas:

■ Feeling confident about whatthey do. People need to feelpride, optimism and certaintyabout what they do, how they doit and, to a lesser but still impor-tant degree, who they do it for.Strong leadership, effective day-to-day management and a strongsense of connection with a win-ning organization that consistentlydelivers the best to its customersgo a long way toward helpingbuild this feeling in employees.

■ Feeling competent at theirwork. Being good at a job bolstersconfidence and ensures both theorganization and the employeeachieve individual and collectivegoals. Training and developmentprograms, mentor/coach relation-ships and regular feedback frommanagers not only engender com-petence, but help a company buildthe skills and behaviors that meetspecific business objectives.

■ Having control. Employees wantto control their own destiny asmuch as possible; control feedsboth competence and confidence.Employees feel in control whenthey have a measure of powerover how they do their work. Evenwhen workloads are heavy, beingable to control the flow and paceof their work can relieve pressureon employees, as can a feelingthey can turn to managers forresources and support when theyneed it.

■■ Feeling part of a work “com-munity.” People’s positive emotionsare strongly influenced by thepeople they work with day to day,by collaboration, teamwork andshared goals, and by a sense of apurpose in work (beyond just apaycheck). Generating a sense ofcommunity is perhaps the mostdifficult challenge, especially in aculture where loyalties are dividedor morale is low. However, estab-lishing a two-way communicationprogram that emphasizes the goalsof the organization and the rolesemployees should play is a goodfirst step.

Emotional Attachment in the Workplace — Keeping Negative Emotions in Check

©Towers Perrin 2003

Page 19: Understanding What Drives Employee Engagement

18

MeasuringEngagement:Why ItMatters

If engagement was once little more than a theoretical concept, that time is long gone.

Not only can we now define it clearly and measure its existence and intensity, but we

can also demonstrate its value to an organization in concrete terms. A key part of our

research process was collecting financial data on the public companies for which many

of our respondents work.

This additional information allowed us to compare(for a portion of the total survey sample) people’sresponses to our engagement, customer focusand mobility questions with their employer’sactual financial performance. We measured theserelationships using a set of publicly availablecompany financial metrics, and we controlled forindustry sector performance to adequatelyreflect differences across industries in marketdemand, growth rates and cost structures.

Our expectation was that we’d find distinct differ-ences in company performance based on people’slevel of engagement. And in fact, that’s preciselywhat we found.

Exhibit 11 draws on our Linkage Framework(page 8) to show the strength of the direct andindirect relationships among company programs,employee behavior, customer focus and financialresults. While it’s important to recognize that there

Exhibit 11

Linking Employee Engagement to Financial Performance

Employee Attitudes Customer Impact Financial Results

Operatingmargin

Senior managementinterest

Challenging work

Decision-makingauthority

Customer focus

Career advancement

Company reputation as employer

Teamwork/collaboration

Resources

Decision-making input

Senior managementvision

Turnover intention

Employee engagement

Customerfocus

Cost of goods sold

Revenuegrowth

Sales, general andadministrative

expense

Positive relationshipNegative relationshipConceptual relationship

©Towers Perrin 2003

Page 20: Understanding What Drives Employee Engagement

19

are many variables that affect business outcomes,our analysis nonetheless shows a clear relation-ship between increased engagement, improvedretention of talent and better financial perfor-mance. Here’s how to understand this picture.

On the extreme left are the 10 workplaceattributes that, as we’ve seen, help driveemployee engagement. The stronger theseattributes are in the workplace, the stronger thelevel of employee engagement. As engagementrises, we see two important outcomes: a declinein the likelihood of leaving the company and astronger orientation around meeting customerneeds. Put simply, the more highly engagedemployees are, the more likely they are to putcustomers at the heart of what they do andhow they think about their jobs, and the lesslikely they are to leave their company.

The right side of the picture addresses financialresults where, not surprisingly, there’s a relation-ship between customer focus and revenuegrowth (as well as one between engagementitself and revenue growth). There’s also an inverserelationship between engagement and the costof goods sold (COGS). In other words, we foundthat the cost of production tends to drop asemployees become more engaged in their work.

Rounding out this picture is the relationshipbetween turnover, turnover costs (which canaverage about 40% of an employee’s salary), andsales, general and administrative expense (SG&A).SG&A, in turn, along with COGS and revenuegrowth, are key mathematical components ofoperating margin — a significant bottom-linemeasure of a business’s financial health.

Basically, what we’re seeing here is the powerof discretionary effort on multiple levels. In aservice business, for instance, the relationship isreadily apparent: An engaged employee focuseson customer service, giving the customer areason to return to the store or business andbuy more goods and services. Such employeesbuild customer loyalty and retention over time.But even in a business where there is little directcontact between employees and customers,engaged employees can still indirectly affectrevenue growth; for instance, by supporting otheremployees who do have direct contact or bypioneering an innovation that boosts sales.

Exhibits 12 through 14 look a bit more closely atthe relationships that support this model:

Exhibit 12 shows the relationship between respon-dents’ engagement scores and their responsesto a set of questions measuring the degree oftheir organization’s customer focus. As the slopeof the graph clearly demonstrates, higher engage-

©Towers Perrin 2003

Exhibit 12

Engagement and Customer Focus

High Engagement index score

Low Cu

sto

me

r fo

cu

s s

co

re

Low

High

Note: This graph plots the linear regression equation thatexplains the correlation between two variables: Respondents’engagement scores and their mean score on three surveyquestions assessing the degree of customer focus in theirorganization (using a five-point scale).

Page 21: Understanding What Drives Employee Engagement

ment scores relate to higher scores on the cus-tomer focus questions. Specifically, moreengaged employees agree that their company:

■ Cares deeply about customer satisfaction

■ Has a strong ability to serve customers (compared to competitors)

■ Can adapt rapidly to shifts in the market.

Conversely, disengaged or only moderatelyengaged employees have far more misgivingsabout their company in terms of these mea-sures, and are likely to have little personalinvestment in a strong customer focus.

Exhibit 13 shows the relationship betweenrespondents’ engagement scores and theircompany’s one-year revenue growth relative toaverage revenue growth for their respectiveDow Jones industry sector. The compellingfinding here is that the more engaged anemployee, the more likely his or her employeris to exceed (versus fall behind) the industryaverage in one-year revenue growth. Putanother way, our highly engaged employeestend, on average, to work for companies thathad revenue growth at least one percentagepoint above the average for their industry.Conversely, our least engaged employees tendto work for companies whose revenue growthfell one or two percentage points below theindustry average for the year (putting thesecompanies at the lower end of the perfor-mance spectrum on a relative basis).

Exhibit 14 demonstrates the inverse relation-ship we saw earlier between employeeengagement and a company’s cost of goodssold, compared to the Dow Jones industrysector average for that measure. Here, the

point is that highly engaged employees tend towork for companies where COGS fell belowthe industry average, while the least engagedemployees tend to work for companies whereCOGS surpassed the industry average.

In each of these cases, the directional evidenceis clear and compelling: Companies with higheremployee engagement outperform those with

20

Exhibit 13

Engagement and Revenue Growth

High -2.0

-1.0

0.0

1.0

Engagement index score

Low In

cre

men

tal

perc

en

tag

e p

oin

t d

iffe

ren

ce b

etw

een

1-y

ear

co

mp

an

y

reven

ue g

row

th a

nd

mark

et

secto

r avera

ge

Exhibit 14

Engagement and Cost of Goods Sold

High -3.0-2.0-1.00.01.02.03.04.05.0

Engagement index score

Low Incre

men

tal p

erc

en

tag

e p

oin

t d

iffe

ren

ce b

etw

een

co

mp

an

y C

OG

S

as a

% o

f re

ven

ue a

nd

mark

et

secto

r avera

ge

Note: This graph plots the linear regression equation thatexplains the correlation between two variables: Respondents’engagement scores and their companies’ cost of goods sold,as measured by the percentage point difference between com-pany COGS and the overall Dow Jones market sector COGSaverage for the relevant industry.

Note: This graph plots the linear regression equation thatexplains the correlation between two variables: Respondents’engagement scores and their companies’ revenue growth, asmeasured by the percentage point difference between companyrevenue growth and the overall Dow Jones market sectorgrowth average for the relevant industry.

©Towers Perrin 2003

Page 22: Understanding What Drives Employee Engagement

21

lower employee engagement, relative to industrybenchmarks. Whether that’s because theyattract more engaged people as a consequenceof their superior performance, or whether theirsuperior performance comes from the discre-tionary effort of their engaged people is, in theend, almost moot. What’s clear is that the twoare intertwined, and together work to create a“virtuous circle” of enhanced performance.

Engagement and RetentionExhibit 15 takes a closer look at the relationshipbetween engagement and intent to leave thecompany — underscoring the fact that a highlyengaged workforce is a more stable workforce.As shown, fully two-thirds of highly engagedemployees have no plans to leave their currentjobs, versus just a third of the moderatelyengaged — and a mere 12% of the disen-

gaged. Thus, moving employees from a state of moderate to high engagement makes themalmost twice as likely to want to stay with thecompany and invest discretionary effort, allother things being equal. And while highengagement doesn’t guarantee retention (fully a quarter of this group are still open to an interesting opportunity), it does increase thechances of retaining the very people who areprobably going to be most attractive in a competitive talent market.

Disengagement, for its part, poses two distinctlydifferent retention risks for employers:

■ Losing key people. Note that about a quarterof our disengaged group are actively in themarket now — three times the number ofmoderately engaged and more than 10 timesthe number of highly engaged who are seekingother positions. This is a very worrisome factif many of these individuals are in critical jobs.

■ Keeping disaffected and nonproductive people. On the other side of the coin, butjust as disturbing, half of the disengaged areopen to other opportunities, but are notactively looking. This suggests that a companycould have a very large group of people notonly marking time themselves, but adverselyaffecting performance by spreading their ownnegative views and behaviors to others.Retaining the disengaged — for however long— has as serious potential consequences forperformance as losing the highly engaged.

Exhibit 15

Engagement and TurnoverHighly

engaged

I have no plans to leave

I am not looking for another job, but would consider the right opportunity

I am actively looking for another job

I have made plans to leave my current job

I plan to retire in the next few years

Moderatelyengaged

23%

Disengaged

51%

12%

47%

8%

36%

66%25%

6% 8%

2%

7%6%

3%1%

Percents may not add to 100 due to rounding

©Towers Perrin 2003

Page 23: Understanding What Drives Employee Engagement

22

Employers need the full portfolio of traditionaland nontraditional rewards, designed in the context of their business and people strategies.But what our study demonstrates so clearly is that they need to emphasize differentrewards at different stages in the employmentrelationship.

Different Goals...Different DriversAs we did for the drivers of engagement, weanalyzed our data to isolate the specific elementsof the work experience most important torecruiting and retaining employees. Exhibit 16(page 23) shows the results — and contrasts the top 10 drivers of attraction and retentionwith the list we’ve already explored forengagement.

What’s immediately apparent are the differ-ences across these three areas. While thereare some overlaps, particularly in retention andengagement, different reward elements takeon greater or lesser importance, depending on the objective. Knowing what counts toemployees — and when — can make all thedifference in structuring a total rewards programthat brings in the right people, keeps them and secures their discretionary effort over time.

No single reward element — or even singlecombination of reward elements — can effec-tively do all three. Let’s take a closer look.

■ Attracting people. This is where pay andbenefits predominate. Five of the 10 mostinfluential recruitment factors fall into thesetwo categories — including the top four inthe mix. Interestingly, this mix has changeda bit since our April 2001 study, underscoringthe impact of the external environment inshaping people’s needs.

Competitive health care benefits and basepay held their top spots in both studies, whichis not likely to surprise anyone. But in April2001, before the Internet bubble burst,opportunities for career advancement rankedthird on the list, followed by work/life balanceand raises linked to individual performance.Today, after 18 months of recession, down-sizing, and sharp cuts in merit increases andbonuses, advancement opportunities aresomewhat less important — coming into themix only after the financial basics are in place.Work/life balance, however, remains a verystrong factor in both studies — likely areflection of the demanding workloadsemployees continue to carry (today, more bynecessity than choice).

Despite our focus on the nontraditional (i.e., nonmonetary) elements of the work

experience, there’s no question that pay and benefits remain critical to our respondents

and to employees broadly. Think of these as the first line of defense; the needed-to-play

elements in managing the workforce. A company can’t get into the game — successfully

attracting or retaining people — without relevant and reasonably competitive pay and

benefit programs. Only to the extent those programs meet both the company’s and

employees’ needs can an organization focus on the more intangible, needed-to-win

elements so influential to engagement and discretionary effort.

AttractionandRetention:Buildingthe RightFoundation

©Towers Perrin 2003

Page 24: Understanding What Drives Employee Engagement

Exhibit 16

Pay Benefits

2 Competitive base pay 1 Competitive health care benefits8 Pay raises linked to individual performance 3 Work/life balance

4 Competitive retirement benefits

Learning and Development Work Environment

5 Career advancement opportunities 7 Caliber of coworkers6 Challenging work 9 Recognition for work

Pay Benefits

6 Competitive base pay 10 Overall satisfaction with benefits needed in day-to-day life

Learning and Development Work Environment

1 Career advancement opportunities 3 Overall work environment 2 Retention of high-caliber people 5 Resources to get the job done 4 Development of employees’ skills 7 Clear goals from manager 8 Challenging work 9 Manager inspires enthusiasm

Pay Benefits

Learning and Development Work Environment

2 Challenging work 1 Senior management interest in 4 Customer orientation employee well-being 5 Career advancement opportunities 3 Decision-making authority10 Senior management vision 6 Company reputation

7 Collaboration with coworkers 8 Resources to get the job done 9 Input into decision making

What It Takes to Attract, Retain and Engage

Top 10 Elements That Retain Employees

Top 10 Elements That Engage Employees

Top 10 Elements That Attract Employees

10 Company reputation

23©Towers Perrin 2003

Page 25: Understanding What Drives Employee Engagement

Among the important nonmonetary elementsin the mix, career advancement and workchallenge remain critical, which is consistentwith their importance in the overall workexperience. Equally critical are the kind ofpeople one works with and the kind of company one works for, factors that are presumably related, since company reputationhelps draw the best talent, while that talent,in turn, helps build the company’s reputation.Both factors point to the importance of work-ing for an organization perceived to be a winner on a number of fronts.

■ Retaining people. Pay and benefits remainsomewhat important in retention, but clearlyto a lesser extent. In a sense, what we’reseeing here is the difference between theneeded-to-play and needed-to-win reward elements. Assuming an employee perceivesthat his or her pay and benefits are competi-tive and adequate in the context of the joband competitive realities,other things — notablyadvancement, talentedcoworkers and the overallwork environment — matterfar more in deciding to staywith a company. But if pay orbenefits are seen as inade-quate or out of line witheffort or competitive reality,that will then become a majorfactor in pushing people tolook for other situations.

Here, too, we’ve seen someshifts in the mix of key ele-ments driving retention overthe last two years. In April2001, for instance, ourrespondents cited skill-build-ing as the top driver, perhaps

reflecting the need to master new Internet-related skills for the hot job market in the“new economy.” Today, by contrast, the focuson skills has dropped down in importance,replaced by the need to ensure some kind ofadvancement on the job.

What’s also more important today is managerialeffectiveness, particularly in setting clear goalsand inspiring people, both of which hark backto people’s need for both “the will” and “theway” in giving discretionary effort. Indeed, it’simpossible to underestimate the importance ofthe manager’s role overall, especially, as we’veseen, in creating a positive work environmentand building more challenge into people’s jobs.

The Reward StorySo how well are employers doing in creatingreward packages that meet employees’ varyingneeds? Exhibit 17 begins to tell the story. Itshows how respondents rated the four key

Exhibit 17

How Rewards Stack Up Overall

Pay

Above average Average Below average

Retirement

25%

Learning opportunities

37%

38%

Workenvironment

37%

19%

44%

21%

Health care

40%

40%41%

34%26%

40%

29%31%

% of employees rating reward elements

(compared to other companies where employee could work)

Percents may not add to 100 due to rounding

©Towers Perrin 200324

Page 26: Understanding What Drives Employee Engagement

25

components of their total rewards program —pay, benefits, learning and development, andwork environment — relative to what they mightexpect at another company at which theycould work.

The good news is that the number of respon-dents rating any of these reward elements asbelow average was generally between a fifthto slightly less than a third. The bad news isthat the number rating their rewards as aboveaverage wasn’t much higher. For the most part,employees see their rewards as solidly average.

In the current economy, this clearly hasn’t provedto be a big concern. Employees are staying putbecause they have to. And they likely know,from online research, conversations with friendsand other sources, that pay increases have leveled off in the last two years and that manycompanies are cutting back on bonuses andbenefits and shifting more cost to employees.They probably see little difference betweentheir situation and those of friends or colleagueselsewhere.

But that brings us right back to the issue of risk.As the labor market eases, distinctions in theseareas will become increasingly important.Then, being average won’t be good enough foremployers — particularly in recruiting or retain-ing the in-demand talent who always have themost job options and, hence, bargaining power.So what will it take to surpass average?

Exhibit 18 drills down into specifics a bit more,highlighting respondents’ views about what isand isn’t working for them in the core pay andbenefit arena. Among the noteworthy points:

■ Respondents were most negative about payissues. Close to or more than half of ourrespondents didn’t rate their company well in

terms of paying for performance and settingrealistic bonus goals.

While complaints about pay are somethingof a perennial theme for employees, negativeviews have actually increased, albeit slightly,since our last study, particularly regarding the connection between pay and performance.In other words, our respondents are more,not less, cynical about that connection, andare less positive about the extent to which

Exhibit 18

Employee Views of Pay and Benefits

0% 20% 40% 60% 80% 100%

24 26

51

50

28 21

Annual pay increases tied to individual performance

Bonuses tied to individual performance

Bonuses tied to company performance

Bonus goals that are challenging but achievable

Health benefits that are a good value for the cost

Favorably Mixed Unfavorably

25 27 48

21 23 57

26 25 49

Compensation

Benefits

0% 20% 40% 60% 80% 100%57

45

26 17

28

282944

27

55 1727

Health benefits with access to quality providers

Sufficient choice in health plans

Health benefits that are easy to use

Retirement benefits that will help meet retirement savings goals

53 27 20Affordable health care benefits

% of employees rating company plan

Percents may not add to 100 due to rounding

©Towers Perrin 2003

Page 27: Understanding What Drives Employee Engagement

26

either their base pay or bonuses adequatelyreflect their individual performance. This is apotentially very troublesome say/do gap. Ifmanagement is focusing on the importanceof high performance, but failing to makemeaningful distinctions when providing raisesand bonuses, the message not only getslost, but can actually disengage employees.

That such a gap does exist at many companiescomes through in another troubling statisticfrom our study: 49% don’t believe their company rewards top performers more thanaverage performers. This disturbingly highpercentage — which actually increasedslightly since our April 2001 study — appearsto be a fairly broad indictment of the truestate of pay for performance today. And it’s aperception that’s likely to be quite problematicfor employers who today, more than ever,need to use their limited compensationbudgets to best effect for the company andits most critical employees.

■ Respondents were most positive about theirhealth care benefits, relatively speaking. Fully40% of our respondents said their health carebenefits were above average, while another40% judged them average. This was a some-what surprising finding, given employers’multiyear campaign to change the way theydeliver health benefits, first moving to managed care and now, increasingly, lookingat consumer-driven approaches.

To some extent, of course, this view is prob-ably another example of our respondents’pragmatism. They know cost shifting is pervasive and they may well feel that thingsare not much different (or even slightly better)at their firm than elsewhere.

But this view also appears to reflect someimprovements employees see in health careplan design and management. Specifically,our data show that certain attributes of a planhave a lot to do with perceptions of overallcompetitiveness. In particular, five factorsinfluence the extent to which employees viewtheir plan as better or worse than average:

■■ Affordability of the benefits. Do people feelthey can bear the costs of their deductiblesand copayments? And are these costsgenerally in line with what they know friendsare paying at other, similar companies?

■■ Perceived value for money. Overall, giventheir total level of contribution, do peoplefeel they’re at least getting good value?

■■ Access to quality providers. Is there sufficientaccess to doctors and hospitals that are perceived to be good?

■■ Sufficient choice in their plans. Are theremultiple plans and features from which tochoose (for instance, both a point-of-serviceplan and an HMO)?

■■ Ease of management. Are there complexclaim forms, referral requirements, Webenrollment elements? The easier a plan is tomanage, the more likely an employee willfeel reasonably good about it.

Note that with one exception (choice), half or more of the respondents agreed theirplans delivered on these attributes (Exhibit 18,page 25). This finding underscores the impor-tance of focusing on these attributes in bothdesigning and communicating health care

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programs today. While each single attributecan influence employee perceptions, thecombination appears to have a very strongimpact on positive views about a plan, evenin the current climate.

Our data also revealed that education has animportant influence on perceptions abouthealth care. As Exhibit 19 shows, respon-dents who said they understood why theircompanies asked them to share health carecosts were far more likely to feel positiveabout the various plan attributes shown aboveand, in turn, far more positive overall abouttheir programs.

This shows, once again, that there is no sub-stitute for communication, no matter whatthe issue. The more a company informs andeducates — about health care, retirement,performance, the business, financial results— the more likely employees are to be posi-tive and on board.

Even with an improving economy, cost pres-sures are not likely to abate any time soon,and most companies will continue to control orreduce fixed payroll expense. In so doing, ourdata suggest they need to employ both art andscience to channel limited dollars in ways thatbest equip them to attract, retain and engagethe people most critical to their long-term success.

Exhibit 19

How Employee Education Influences Views About Heath Care Benefits

0% 20% 40% 60% 80% 100%62

39

My company provides health care benefits with access to quality providers

0% 20% 40% 60% 80% 100%68

45

0% 20% 40% 60% 80% 100%63

41

My company provides sufficient choice inhealth care plans

0% 20% 40% 60% 80% 100%54

35

High understanding of company need to share health care costs

Low understanding of company need to share health care costs

% of employees with favorable view

My company provides affordable health care benefits

My company provides health care benefits that are a good value for the money

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Rational endurance is not an unreasonableresponse from a workforce buffeted by this kindof continuing uncertainty and change. But, aswe’ve noted, it isn’t a sustainable propositionover time. It won’t elicit discretionary effortfrom employees or inspire them and engagethem emotionally. It won’t, in the end, providemeasurable performance lift.

Employers need to begin moving people beyondthe prevailing mood and mode of rationalendurance. And they need to begin now — beforeemployees’ pragmatism hardens into cynicismand their work ethic and professional focusstart to wane. Drawing on our data, here’s whatwe believe will make a difference to employersin setting a successful HR course for the future:

■ Build sufficient flexibility into the employ-

ment cycle and experience to emphasize

different rewards and cultural elements at

different stages in the process. If our researchoffers one key lesson, it’s that employerscannot view attraction, retention and engage-ment through a single lens, or provide a one-size-fits-all program that will serve thesethree distinct needs with equal success. Anorganization that puts pay and benefits at thecore of its “deal” with employees will probablybe quite successful at recruiting. But if itdoesn’t expand that deal in its communications

with current employees — shifting theemphasis from pay and benefits to careeropportunity and job challenge, for instance— it may see an unwanted rise in turnover.

■ Put mechanisms in place to ensure that

all employees can see and understand

senior management’s concern for them

collectively and its vision for the future of

the organization. Essentially, this comesdown to two-way communication. Keepingemployees informed is a prerequisite, but it’snot enough. What employees want — whatsignals management’s concern and focus —is the ability to comment, share ideas andgive input.

Communication on this level requires a will-ingness to listen as well as inform, and topresent both good and bad news with suffi-cient context for the news. It requires adher-ence to a consistent set of messages aboutthe organization and its vision for growth,and frequency in getting those messagesout across multiple channels.

■ Set clear expectations for managerial

behavior and hold managers accountable

for that behavior and related skills.

Experts have long debated whether good managers are made or born. Whichever the

Managing an organization and its people pose unique challenges today. Consider

what’s occurred just in the two years between our two talent studies: A sharp rise in

terrorism worldwide. A major attack on our own soil. U.S. involvement in two wars.

Increased outbreaks of fighting elsewhere. Growing tensions among nations about the

best way to address terrorism. Continued economic uncertainty. A stock market that

took back a decade’s worth of profit and remains volatile in the midst of recovery.

Entire companies — even industries — teetering on the verge of bankruptcy.

Putting It All Together:An HRAgenda forthe Future

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case, good managers still need some veryspecific things from their companies — and their leadership. They need to know preciselywhat’s expected of them as people managers.They need support and training in deliveringagainst those expectations. And they needto be held accountable for their performancein the same way they need to hold employeesin their units accountable for their specificobjectives.

Ultimately, managing people should becomeas important an objective to an organizationas managing operations, inventory or budgets.This is a message that has to flow down fromthe top and take root in the fabric of theorganization.

■ Seek creative ways to make jobs more

challenging and improve opportunities for

advancement. If employers were to focuson just two areas in workforce management,these would arguably provide the most returnon their investment. They are the only twoelements that show up as key drivers acrossall three aspects of the employment relation-ship, from attraction through engagement.

At a time when so many people are strug-gling with excess work — doing the same ormore work with less help — there is a specialurgency to making work seem more challeng-ing and stimulating. Simply put, it can mitigatethe negative impact of a demanding work-load. One of the most interesting findings inour study of the emotional climate of theworkplace (page 17) was that people who arestimulated and inspired by what they do (typ-ically, more senior executives) tend to focusless attention on their workload, regardless

of its size. The stimulation of the work ulti-mately compensates for the amount of thework, helping dissipate negative feelingsabout workload itself.

What does it take to create more stimulationand challenge in a job? As we’ve seen, thatcan, and often has to, go beyond the bound-aries of an individual job. It rests on shapinga culture that gives people a reasonableamount of autonomy, allows them to takesome risks and is open to new ideas.

As for career advancement, there’s no ques-tion it’s more difficult today, when so manycompanies have flatter organizational struc-tures. In part, companies need to redefineadvancement, focusing less on traditionalspans of control and reporting relationshipsthan on elements like skill mastery, teamleadership, special assignments and so on.But it’s also a function of strong performancemanagement programs that help people setclear goals, assess progress against thosegoals, understand gaps in skills and how toclose them, and what their longer-termopportunities might be.

■ Give employees education and tools to

increase their business savvy. Rememberour respondents’ focus on decision-makingauthority and customer service. Both wereamong the top drivers of engagement.Viewed in tandem, these elements speak toemployees’ need and desire to have moreof a personal connection to, and impact on,the business and its customers and con-tribute materially to results.

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This is obviously easier in some roles thanothers, particularly in service-based busi-nesses where employees can have a greatdeal of direct customer contact. A number ofcompanies have built reputations for beingboth great employers and great serviceorganizations by empowering employees tomake their own, on-the-spot decisions abouthow best to address customer needs.

But there are other ways to help people feelthey’re part of and contributing to the busi-ness. Both our data and our consulting workwith clients repeatedly show the importanceof a clear line of sight for employees betweenwhat they do and how it affects the organi-zation and its financial results. This is, in fact,an area where companies have improvedover the past two years, according to ourrespondents.

The challenge now will be to expand thisfocus, using new tools and approaches tostrengthen the link across more job functionsand give people a greater sense of connectionto customers and the bottom line, even wheretheir direct customer contact may be limited.In the end, this can also help foster a greatersense of job stimulation and challenge acrossan organization.

■ Ensure that employees have the right

information and education to become

informed consumers of the full range of

workforce “goods and services” available

to them. As we’ve noted, employees needinformation to feel comfortable and in controlwhen shouldering increased responsibilityand risk in various aspects of their worklives. More companies are now turning tothe Web to address this need. It is an effectivevehicle both for pushing information to peopleand pulling requests and data from them.

It personalizes information and decision makingfor individuals, letting employees play what-ifscenarios with differing benefit plan typesand financial outcomes to make better deci-sions about purchasing health care coverageor planning for retirement. The Web can alsobe an important tool to do self-assessmentsabout skills and career focus, and pursue thetraining necessary for career advancement.

■ Invest total reward dollars for maximum

return on investment. Over the pastdecade, more and more companies havebegun viewing their reward programs as anaggregated investment pool that they canmix and remix in different ways, dependingon workforce needs and issues and financialpressures. They can identify employee pref-erences among reward options and createprograms that let employees trade currentfor deferred pay, salary for bonuses, bonusesfor benefits, benefits for cash, and so on.

Down the road lies perhaps the ultimategoal: A totally customized, flexible approachthat puts all the risk and responsibility inemployees’ hands by giving them a total sumof money — commensurate with their skills,experience, function and level — to allocatein whatever way best suits their needs acrossan array of employer-provided or -sponsoredprograms.

Until then, it’s important for employers tounderstand that limited dollars do not needto limit their return on reward investments.Advances in technology have ushered in an eraof Web-based modeling and decision tools

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that quantify the impact of shifting dollarsfrom one reward area to another, not only interms of program design and management,but also in terms of employee engagement,retention and a host of other measures.

A growing number of companies are usingsuch approaches, including our own TotalRewards OptimizationSM tool, to test differentreward portfolios and determine preciselyhow far they can go in cutting back orredesigning plans without negatively affect-ing employee engagement and productivity.It’s a critical first step in allocating financialand other resources for maximum value, par-ticularly when there are severe constraintson those resources.

■ Measure, measure, measure. The HR function has been among the slowest toquantify its impact on an organization, in partbecause so much of its work relating toemployee performance and engagement hasbeen impossible to measure. While HR haslong looked at things like turnover, headcount, recruitment costs and training costs,the notion of determining a true return oninvestment in people has remained elusive.

That is changing fast, partly because of costpressures and management’s need to betterunderstand the relative value of investmentsin various employee programs. Sophisticated

new tools, like our Linkage Framework(pages 8 and 18), now allow employers toquantify the relationship between employeeand customer behaviors and financial out-comes, and drive behavior in ways that leaddirectly to the right outcomes. Through linkage analysis, employers can also identifylevels of employee engagement and quantifythe impact of different levels on a range offinancial measures.

Demographic and staffing modelers helpidentify, early on, the changing profile of aworkforce, including the potential loss of largenumbers of skilled workers to retirement,and the associated effect of lost skills andexperience.

These and other measurement tools allowcompanies to plan and manage staffing andturnover far more efficiently and over a farlonger period — helping deliver an HR strategyin line with a long-term business strategy.

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Organizations have always struggled with the temptation to address people manage-

ment issues with money. In flush times — for instance, the early days of the Internet

boom — many could and did just that through creative equity and incentive pro-

grams, among other things. But even then, what drove so many of the dot-com

employees to work through the night and literally move beds into offices was more

their passion for creation than the downstream rewards.

Conclusion

Today, the situation is very different and feworganizations have the financial wherewithal tosolve workforce issues with money even ifthey wanted to. So it’s a welcome reminder,assuming we needed one, that money is onlypart of the answer — and a relatively smallpart when it comes to discretionary effort.

What employees seek — indeed, what we allseek in our work experience — is a blend oftangible and intangible elements that togethercreate an environment of stimulation, contribu-tion, recognition (monetary and otherwise),development, learning and support (from day-to-day management and senior leadership).

Our study reaffirms the importance of theseelements. And it tells us how and why theywork. Now, we need to recommit to usingthem and staying the course over time.

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The Towers Perrin Talent Report presents the results of a biennial study that tracks the

views and attitudes of employees to understand the elements of the work experience

that drive attraction, retention and engagement.

About OurSurvey

This study, completed in April 2003, wasadministered via the Web by Harris Interactive.It involved 40,000 employees working full-timefor medium and large organizations (employingat least 500 workers) across North America.

The U.S. sample — the basis for this report —was just under 36,000. The Canadian samplewas about 4,400. Our prior study (NewRealities in Today’s Workforce), completed in2001, involved 6,000 employees across thetwo countries.

Respondent demographics: GenderNorth America

53% Male

47% Female

Respondent demographics: Country breakdown

89% U.S.

11% Canada

Respondent demographics: Age

29%

12%

Respondent demographics: Job levelU.S.

4% Senior management16% Director/manager 8% Supervisor/foreman22% Professional/technical16% Nonmanagement

salaried34% Nonmanagement

hourly

4% Senior management16% Director/manager 9% Supervisor/foreman24% Professional/technical24% Nonmanagement

salaried23% Nonmanagement

hourly

Canada

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Respondent demographics: Company revenues U.S.

51% Under $50m

9% $50m to under $100m

11% $100m to under $500m

7% $500m to under $1b

22% $1b or more

Canada

58% Under $50m

8% $50m to under $100m

12% $100m to under $500m

6% $500m to under $1b

16% $1b or more

Respondent demographics: U.S. regions

20%

Respondent demographics: Industry

Hospital

Business/professional services

Heavy manufacturing

Other health care

Retail

Consumer products

Transportation (e.g., railroad, airlines)

Finance/banking

Government

Education

Hospitality (e.g., restaurants, hotels)

Media (e.g., television, newspapers)

Utilities

Energy (e.g., oil, gas)

Pharmaceuticals

Nonprofit

1

2

3

4

4

5

6

6

6

10

10

5

0% 3% 6% 9% 12% 15%

9

3

15

8

5

85

7

7

6

6

4

5

4

2

2

3

1

11

U.S. Canada

High tech/telecom

813

Insurance

42

Excludes those choosing “other”

©Towers Perrin 2003