Lies, Damn Lies, and Statistics: Engagement & Company Performance

Earlier this year, John Hollon wrote an article here on TLNT titled Getting to the Bottom Line Impact of Employee Engagement. In it, he recognizes that engaged and motivated employees are more productive, but to him the big issue is getting a handle on their impact on the bottom line.

Today I want to explore that issue and point out what is fact versus fiction.

Here are some statements from various firms showing a link between employee engagement and company performance. I’m sure most of you have seen examples like these:

High-engagement firms grow their earnings-per-share (EPS) at a faster rate (28 percent) while low-engagement firms have an average EPS growth rate of 11.2 percent (Towers Watson, Closing the Engagement Gap: Global Workforce Study).
Highly engaged firms have a shareholder return that is 19 percent higher than average in 2009. In low-engagement companies, shareholder return is actually 44 percent below average (Aon Hewitt).
A company that actively promotes wellness is 3.5 times more likely to encourage creativity and innovation among employees. Its employees are 8 times more likely to be engaged in what they do (World Economic Forum).
Companies with high sustainable engagement have operating margins almost three times those of companies with a largely disengaged workforce (Towers Watson)

Mistaking correlation with causality

Astonishing right? If you are like me, you assume that someone, somewhere must have tested out these claims at some time, and that they are already validated by evidence. In addition, you would assume that — all things being equal — these results would be the same year to year and not some aberrant, one-time “fluke.”

Every HR department wants to believe that high employee engagement causes company performance. But that is not true. Many in HR mistake correlation with causality and therefore don’t understand what drives what.

Here is an example of “correlation” passed off as “causation” — according to a 2001 Towers Watson survey of more than 400 U.S. and Canada-based companies:

There is a clear relationship between the effectiveness of a company’s human capital and shareholder value creation. This relationship we found is so clear that a significant improvement in 30 key HR practices is associated with a 30 percent increase in market value.

Is engagement a byproduct, or a cause?

When questioned, Wyatt actuaries had to admit that while the study: “… demonstrates a very strong correlation between effective people practices and shareholder value, on its own it does not prove a causal link.”

Here is another example showing how “correlation” and “cause” get mixed up. The Sunday Times (UK) announced the “Best Companies to Work For” in 2005. The results supposedly showed a causal connection between being a ‘best company’ and superior performance, when compared to the FTSE 100. In the small print, however, was an admission that “in the last year the FTSE 100 moved ahead with a 14.3 percent return against an 8.3 percent return for Best Companies”.

Intuitively we know that employee engagement is a key factor in bottom-line success. But as Dr. John Sullivan states: “Engagement may be a byproduct, not a cause.” We make a mistake when we assume that employee engagement increases profitability and share value in and of itself.

Many factors contribute to company performance — leadership, financing, economic factors, etc. But many factors contribute to employee engagement as well — recent pay increases, recognition party thrown by management for employees, new policy providing company reimbursement for professional certifications, fight with spouse, house in foreclosure, etc. All of these factors should be considered when attempting to explain or predict the link between employee engagement and company performance

OK you say, but what’s the whole point?

Not absolute facts

Here’s the bottom line: Using assumptions and estimates are OK. Just recognize them as correlations and not absolute facts. And don’t get carried away with grandiose predictions and then wonder why these results don’t occur at your company. Or, be too concerned about if employees continue to be engaged, why they occur one year but don’t in subsequent years.

People management might never become an exact science, but there is a real need for a much higher level of HR professionalism on this subject and others.

Rather than emotionally defending a program, if we want credibility with top management, a superior approach is to critically assess and improve every component of a program. The worst response we can make to top management when asked how we know that high engagement will affect company performance is to respond with “ABC consulting company told me” or “all our competitors believe this.”

Our most critical goal is to make HR as value added as possible through practices which are documented to create value. If we fail to identify the right causes, using evidence-based analysis, we fail to find the right solutions. The ultimate challenge for us all is to know — to the best of our ability — that we are achieving the best returns possible from our human capital.

Just remember the old adage: If it appears too good to be true, it probably is.