© 2006 towers perrin presenter's name the theory and practice of employee engagement...

Presenter's Name

© 2006 Towers Perrin

The Theory and Practice of Employee Engagement

California State Automobile AssociationCalifornia State Automobile Association

October 4, 2006

©2006Towers Perrin Towers Perrin has prepared this document for the benefit of CSAA. This document contains proprietary material and should not be reproduced, either in total or in part, circulated, or quoted from without the express permission of Towers Perrin.

© 2006 Towers Perrin 2

Topics for Discussion

Background – Engagement at CSAA

Who we are

Why the interest in engagement

Results from our surveys

ROI – Context for engagement ROI analysis

What Towers Perrin’s research shows

What other organizations have found

How (and why) CSAA analyzed the ROI of engagement

Background

Data Collected and Analysis Performed

Findings

Key relationships

ROI/financial Implications

Actions taken and lessons learned

Background – Engagement at CSAA


California State Automobile Association (CSAA)

AAA was established in 1900 and offers an array of automotive, insurance, travel and financial services.

AAA is a not-for-profit, tax-paying federation of 77 motor clubs with more than 1,100 offices, serving 46 million members throughout the United States and Canada.

CSAA (AAA of Northern California, Nevada and Utah) serves more than four million members and is the second-largest member organization of the national AAA organization.

We have almost 7,000 employees working out of more than 125 locations across five states.

CSAA is headquartered in San Francisco.


CSAA’s 2006 Employee Engagement Survey

The 2006 Employee Engagement Survey was designed to meet the following key objectives:

1. Learn how employees view the organization overall and understand how they feel about their experiences in specific work groups

2. Understand employee perspectives regarding CSAA’s business effectiveness and the organization as a place to work

3. Assess how well the organization is delivering on its vision, values and behaviors from an employee perspective

4. Identify any important differences of opinion across CSAA

The survey was administered from December 5 through December 16, 2005 (with paper surveys accepted through December 20)

Of the 6,762 employees invited, 4,325 completed the survey – this response (64%) is a strong response rate for an employee engagement survey*

*The prior year’s employee engagement survey produced the same response rate of 64%, or 4,090 respondents out of 6,400 employees invited to take the survey


CSAA’s 2006 Employee Engagement Survey

Six questions form an engagement index that is:

Consistent with Towers Perrin’s research on employee engagement

Statistically reliable (the items form a cohesive index)

The engagement index includes the following questions:

1. I would recommend CSAA to a friend as a good place to work.

2. I am proud to tell others I work for CSAA.

3. My job provides me with a sense of personal accomplishment.

4. I am willing to put in a great deal of effort beyond what is normally expected to help CSAA succeed.

5. I understand how my role in CSAA is related to CSAA's overall goals, objectives and direction.

6. I understand how my unit/department contributes to the success of CSAA.


In the 2005 survey, CSAA’s scores were above Towers Perrin’s normative benchmarks on the employee engagement index

This year, CSAA’s engagement index score was similar to last year’s -- and still notably higher than Towers Perrin norms

81% 9% 10%Engagement Index

Favorable Neutral UnfavorableDiff. from

Norm

+7%

+7%9%82% 10%Engagement Index

Favorable Neutral Unfavorable


CSAA’s diversity index score is also above the comparable index figure for last year

Six questions form a diversity index that CSAA has identified as the best survey measure regarding diversity and is statistically reliable.

The diversity index includes the following questions:

1. How would you rate your immediate supervisor/manager on:

Consulting employees before making decisions that affect them

2. How would you rate your immediate supervisor/manager on:

Acting in ways that support a diverse and inclusive environment

3. I can be myself around here.

4. It’s safe to say what you think around here.

5. At CSAA, employee input and different opinions are actively encouraged.

6. Employees at CSAA are able to contribute to their fullest potential regardless of their age, race, ethnic background, gender, religion, disability, sexual orientation, or family status.

19%62% 19%Diversity Index

Favorable Neutral Unfavorable Diff.from 2005

+3%

Diff. from Norm

N/A


CSAA’s empowerment index score is also above the comparable index score from 2005

The empowerment index includes the following questions:

1. How would you rate your immediate supervisor/manager on: Encouraging/empowering people to take initiative in their work

2. CSAA empowers employees to make appropriate decisions that are in the best interests of the company and customers.

3. CSAA provides me with opportunities to learn new skills and develop myself.

4. I have the appropriate amount of decision-making authority to do my job well.

5. At CSAA, employees are supported in taking appropriate work-related risks.

17%64% 19%Empowerment Index

Favorable Neutral Unfavorable Diff.from 2005

+5%

Diff. from Norm

N/A


. . . And we have many opportunities for improvement

Engagement surveys point out these key areas for improvement:

I have excellent career opportunities at CSAA -- 55% favorable

CSAA’s senior management acts in ways that are consistent with what they say -- 47% favorable

Managers consult employees before making decisions that affect them -- 54% favorable

CSAA cares as much for employees as for members -- 41% favorable


Results by Survey Category Employee views are generally positive, with views regarding senior management

receiving the lowest scores (as they did in last year’s survey)

Scores in all categories either rose slightly or stayed the same as last year

54%

64%

66%

67%

69%

76%

66%

20%

18%

16%

15%

13%

17%

24%

16%

17%

17%

16%

11%

16%

23%Senior Management

Immediate Supervisor/Manager

Culture

Working at CSAA

Customers

Overall Views

OVERALL

Favorable Neutral Unfavorable

Note: Totals may not add to 100% due to rounding

Diff.from 2005

0%

1%

0%

2%

0%

2%

1%


CSAA conducted a culture scan to give us even more information

Background: CSAA’s territory is extremely diverse. In general, our employees reflect that diversity – except at the senior level.

Goal of culture scan: To understand what basic beliefs drive organizational practices and behaviors and how those beliefs impact the ability of CSAA to leverage diversity

Components of scan: Interviews, focus groups, analysis of employee engagement survey, historical review


CSAA conducted a culture scan to give us even more information (cont’d)

Findings:

Strategic -- AAA brand is key to our success

Governance – Service-driven family

Operational -- Individual effort

Critical targets for leveraging diversity:

Fear of retaliation

Reluctance to speak up

Requirements for fitting in

Business case for diversity

Results were consistent with engagement survey findings, with no significant differences based on ethnicity or gender.

ROI – Context for Engagement ROI Analysis


Towers Perrin’s Global Workforce Study reinforces why engagement matters: Highly engaged employees believe they contribute directly to results

I can positively impact quality

84%

61%

26%

I can positively impact cost

I can positively impact customer service

64%

41%

17%

76%

56%

25%

Disengaged

Moderately engaged

Highly engaged

Disengaged

Moderately engaged

Highly engaged

Disengaged

Moderately engaged

Highly engaged

31%

62%

84%

19%

42%

68%

27%

50%

72%

= Global response


The National Bank of Canada found strong relationships among employee engagement, client satisfaction and shareholder returns

90

100

110

120

130

140

150

2001 2002 2003 2004 2005

$50

$70

$90

$110

$130

$150

$170

$190

$210

$230

$250

$270

$290Employee engagement (left-hand side)

Client satisfaction (retail) (left-hand scale)

Total return to shareholders (right-hand scale)

111

127

$276

90

100

110

120

130

140

150

2001 2002 2003 2004 2005

$50

$70

$90

$110

$130

$150

$170

$190

$210

$230

$250

$270

$290Employee engagement (left-hand side)

Client satisfaction (retail) (left-hand scale)

Total return to shareholders (right-hand scale)

111

127

$276


Sears developed its employee-customer-profit chain to help in the turnaround of the mid-1990s

5 unit increase in employee attitude

1.3 unit increase in customer impression

.5% increase in revenue growth

Attitude About Job

Attitude About the Company

Employee Behavior

Service

Effectiveness

Customer Impression

Customer Recommendations

Employee Retention

Customer Retention

Return on Assets

Operating Margin

Revenue Growth

Merchandise

Value

I like the kind of work I do My work gives me a sense of

accomplishment I am proud to say I work at Sears How does the amount of work you are

expected to do influence your overall attitude about your job?

How does the way you are treated by those who supervise you influence your overall attitude about your job?

I feel good about the future of the company Sears is making the change necessary to

compete effectively I understand our business strategy Do you see a connection between the work

you do and company’s strategic objectives?


Towers Perrin’s work with a major hospitality company elaborated on the relationships among employee behaviors, customer loyalty and financial results

EBITDA / GOP

Margin

EBITDA / GOP

Margin

RevPar Index

RevPar Index

Customer Loyalty

Customer Loyalty

Commitment/ Loyalty Index

Q1 Hotel as a place to workQ58 Overall satisfaction w/hotelQ59 Willingness to recommend to a friend

Commitment/ Loyalty Index

Q1 Hotel as a place to workQ58 Overall satisfaction w/hotelQ59 Willingness to recommend to a friend

Guest Service Index

Q4 High quality serviceQ5 Courteous team membersQ6 Sensitive to guest needsQ7 Solving guest problemsQ8 Meeting expectations consistently/timelyQ9 Providing a safe place

Guest Service Index

Q4 High quality serviceQ5 Courteous team membersQ6 Sensitive to guest needsQ7 Solving guest problemsQ8 Meeting expectations consistently/timelyQ9 Providing a safe place

Team Member Attitudes and

Behaviors

Customer OutcomesCustomer Outcomes

FinancialOutcomesFinancialOutcomes

Reduced Turnover Cost

Reduced Turnover Cost

Key Drivers

Q10: Overall job satisfaction

Q15: Encouraged to identify problems

Q19: Hotel retains top performers

Q20: Team members are kept informed

Q33: Proud to work for hotel

Q54: Vision - ‘Investing in the development of team members’

Q55: Vision - ‘Delivering innovative products/services’

Q56: Vision - ‘Improving hotel perf. through the BC’

Q57: Vision - ‘Family of brand awareness’

Q60: Hotel’s image

Q63: Balanced Scorecard drives decisions

Q69: Hotel management balances short-/long-term considerations

Q70: Members of the Executive Committee cooperate well together

Q72: Hotel has high standards for business ethics

Key Drivers

Q10: Overall job satisfaction

Q15: Encouraged to identify problems

Q19: Hotel retains top performers

Q20: Team members are kept informed

Q33: Proud to work for hotel

Q54: Vision - ‘Investing in the development of team members’

Q55: Vision - ‘Delivering innovative products/services’

Q56: Vision - ‘Improving hotel perf. through the BC’

Q57: Vision - ‘Family of brand awareness’

Q60: Hotel’s image

Q63: Balanced Scorecard drives decisions

Q69: Hotel management balances short-/long-term considerations

Q70: Members of the Executive Committee cooperate well together

Q72: Hotel has high standards for business ethics

Brand A: 5 percentage point change in team member attitudes/behaviors > +1.6 percentage points in EBITDA

Brand B: 5 percentage point change in team member attitudes/ behaviors > + 2.1 percentage points in GOP margin


Becker, Huselid and Ulrich found a relationship between HR systems and firms’ market value per employee

$290,000

$310,000

$330,000

$350,000

$370,000

$390,000

20 40 60 80 100

Quintile Changes in Sophistication of HR Architecture

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Mar

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Val

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0$290,000

$310,000

$330,000

$350,000

$370,000

$390,000

20 40 60 80 100

Quintile Changes in Sophistication of HR Architecture

Do

llar

Ch

ang

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Mar

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0

How (and Why) CSAA Analyzed the ROI of Engagement


The Lay of the Land

CSAA leadership realizes that employee engagement is important but that the ROI is difficult to quantify

If the ROI can’t be quantified, it’s difficult to justify requests for resources to improve engagement

But without a resource investment, engagement isn’t likely to increase

And the (difficult to quantify but nevertheless real) benefits of engagement won’t be realized

Hence the challenge:

Figure out where and how engagement really matters in a business sense

Determine which investments in building engagement are likely to produce the highest ROI

Define the investment strategy

Track the ROI produced by increased engagement, partly as proof and partly to direct future investment


Our analysis focused on determining the strength and the financial implications of relationships between:

Employee engagement and perceived customer service focus

Engagement and financial outcomes

Engagement and employee turnover

Turnover and financial outcomes

Engagement, perceived customer focus and other operational results


With this as backdrop, we undertook a six-step process

1. Project planning and kickoff – Launched the project by confirming goals and desired results of the effort

2. Compiled current CSAA data – Obtained financial, customer satisfaction measurement and HR data to analyze for linkage relationships

3. Developed value driver models – Identified statistical relationships between engagement and operational outcomes

4. Mapped employee behavior/attitude elements to customer behavior elements – We delved further into engagement data to understand the nuances of engagement at CSAA

5. Defined overall investment strategy – We completed the project by recommending a directional investment strategy for improving engagement and the financial outcomes it influences; focus for CSAA:

- Leadership development- Creating a diverse and inclusive environment- Hiring, promotion and talent management processes and policies

6. Executed – Check for progress (pulse surveys)


We conducted a range of analyses using both Towers Perrin and CSAA data

Using the Towers Perrin Global Workforce Study (GWS) database, we analyzed the relationship between employee engagement and combined ratio for a population of 16 insurance companies

Using these data we developed a structural equation model

We applied this model to CSAA insurance product data

We also performed a series of analyses on the CSAA Employee Engagement Survey data (supplemented by analysis of the engagement findings from our GWS database) to deepen our understanding of engagement drivers

We collected and analyzed a variety of other CSAA data:

Financial data for each product area

Comprehensive file of human resource data

Performance and customer satisfaction metrics from all of CSAA's businesses


To understand the financial value of engagement in CSAA’s insurance business, we examined data on the financial value of engagement in the insurance industry

For this analysis, we integrated two sources of data:

2005 financial data from AM Best (combined ratio, loss ratio, expense ratio, net premiums written (NPW) growth rate) for US insurance companies*

2005 engagement and customer satisfaction** data from Towers Perrin’s Global Workforce Study for the same insurance companies

We looked at relationship among engagement, customer satisfaction and the financial measures across companies

Based on the nature of the measures, we would expect:

Negative relationships between engagement/customer satisfaction and combined ratio, loss ratio, and expense ratio (since lower numbers mean better performance for the these ratios)

Positive relationships between engagement/customer satisfaction and NPW growth

*23 top U.S. writers with at least $1 billion in DPW and approximately 60% or more of writings in personal auto and homeowners. Most of the companies do not pay a dividend, so combined ratio without dividend was used in the analysis.**Customer satisfaction data is based on employee perceptions.

Findings


The Bottom Line:

For CSAA overall, a 5% increase in engagement is associated with a possible financial gain of $47.4 million, comprising:

$44.2 million in the insurance product area (net underwriting gain)

$3.2 million in membership and travel (operating income)

Improving engagement also has implications for turnover cost:

A 1% improvement in key turnover drivers is associated with potential cost savings from $185,000 (if the cost of each termination is 50% of annual pay) to $554,000 (if each termination costs 1.5 times annual pay)

These cost reductions are embedded within the broader financial calculations for improved engagement

Engagement is not a stand-alone activity. Relationships are not guaranteed but the direction is clear. It is also a powerful way to galvanize leadership commitment to employee issues.


The relative strength of engagement drivers suggests targets for HR investment

Ten questions account for 67% of the variance in engagement

Key items have a much stronger linkage to engagement than others; question 9 (excellent career opportunities) has an impact almost four times that of item 53 (people care about each other)

Items in bold are also key factors associated with turnover

Top Ten Engagement DriversRelative Effect on

Engagement*

9. I have excellent career opportunities at CSAA. 19%

15. I understand what I can do to build the AAA brand for our customers. 17%

18. CSAA is a company that is an advocate for safe and responsible transportation. 14%

40. CSAA has a set of values that I can identify with. 10%

10. I think CSAA is doing what it takes to be a leader in its industry. 9%

12. CSAA cares a great deal about customer satisfaction. 7%

19. CSAA's senior management is taking steps to ensure the long-term success of CSAA. 7%

11. CSAA is a proactive partner with the communities it serves. 6%

28. Sup/mgr: Supporting my efforts to live CSAA's values and behaviors 5%

53. People at CSAA care about each other. 5%

*Percentages show relative strength of linkage to engagement; higher percentages mean a stronger linkage


Engagement Index and Customer Index — Percent Favorable by Location

87%

77%

81%

71%

70%

71%

70%

67%

67%

70%

73%

74%

64%

69%

66%

66%

68%

67%

79%

67%

69%

Engagement Index Customer Service Index

93%

87%

87%

85%

85%

85%

84%

84%

84%

83%

83%

81%

81%

80%

79%

77%

77%

77%

77%

76%

82%CSAA

Auto Guardian NV

Irvine Office

Car Care Plus NV

Region 2 Sales & Service


Colorado Springs Claims Center



Las Vegas Claims Center


Livermore Contact Center


Main Office

Auto Guardian CA



Elk Grove Contact Center

Draper Contact Center

Car Care Plus CA



As the preceding chart suggests, CSAA locations high on the engagement index are also high on the customer service index

The correlation between the engagement index and the customer service index is high (.69)

60%

65%

70%

75%

80%

85%

90%

95%

60% 65% 70% 75% 80% 85% 90% 95%

Engagement Index

Cu

sto

me

r In

de

x


Insurance companies that score high on engagement also score high on customer satisfaction

3

3.5

4

4.5

5

3 3.5 4 4.5 5

Cu

sto

me

r In

de

x

Engagement Index

Source: Towers Perrin’s 2005 Global Workforce Study


We found a strong relationship between engagement, customer satisfaction, and expense ratio; in turn, expense ratio drives combined ratio

Numbers shown for tested relationships (solid arrows) are correlation coefficients; these range from 0 to 1, with 1 indicating two variables are perfectly related to each other. * indicates a statistically significant relationship. Dashed arrows show relationships that exist by definition.

Engagement

Customer Satisfaction

.67* Expense Ratio Combined Ratio

Loss Ratio

-.54*

-.72*

Actions Taken and Lessons Learned


Actions Taken -- Division action planning

Train supervisors to lead career pathing discussions

Launch “coffee and conversation” programs with execs

Increase frequency of department social events

Invite cross-enterprise guest speakers to Town Halls

Enhance on-boarding activities

Make mid-year discussions more robust

Enhance rewards and recognition programs


Actions Taken -- Division action planning (cont’d)

Increase frequency of Brown Bags

Create executive “day on the frontline” program

Increase frequency of executive face-to-face sessions

Build cross-training programs

Create department working agreements

Create an online suggestion forum

Hold focus groups to assess progress


Actions Taken -- Enterprise

Posted action plans on intranet

Held full-day “Empowering the Employee” sessions for all employees

Increased focus on talent management – added to executive metrics

Implemented “Goodwill Gesture” empowering front-line employees

Enhanced diversity training for executives

Launched annual day-long leadership conference for managers

Revised staffing policies

Increased visibility of executives

Implemented intranet feedback function for all stories

Launched “Way We Work” initiative to support work flexibility


Looking Ahead

Continue focus on talent management

Build career management tools

Change engagement survey format and cycle time – move to 18-month cycle with mid-cycle “pulse” surveys

Support engagement through AAA University


Lessons Learned

Building engagement takes time, energy and money

Senior leadership must be vocal and visible

Get the demographics right

Overall score can be high -- and there can still be significant work to do in some areas

Divisional acting planning must include senior leadership

Transparency is key – share the good, the bad and the ugly!


Contact Information

Tom DavenportPrincipalTowers [email protected]

Marie AndelSenior Vice [email protected] 415-565-7876

© 2006 towers perrin presenter's name the theory and practice of employee engagement...

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