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What Really Drives Financial Success?
Business Journal

What Really Drives Financial Success?

A Q&A with Jim Harter, Ph.D., and Frank L. Schmidt, Ph.D.

Do engaged employees create financial success, or does financial success spark engagement? That's the kind of daunting question that academics love to ponder but rarely get to answer. It's also the kind of question that can have a big impact on how managers do their jobs, because the answer could mean the difference between a work team's -- or an organization's -- success or failure.

When people are engaged, they don't just immediately make profit.


Jim Harter, Ph.D. and Frank L. Schmidt, Ph.D. were determined to answer this question. Dr. Harter, Gallup's chief scientist of workplace management and well-being, and Dr. Schmidt, the Gary C. Fethke Chair in Leadership and professor of management and organizations at the University of Iowa, led a team of researchers who conducted a meta-analysis using a longitudinal database that included 2,178 business units in 10 large organizations. The results of the study were recently published in the journal Perspectives on Psychological Science.

Ultimately, they found that engaged employees cause high retention rates, better financial performance, and customer loyalty. This is crucial news for business leaders and managers. Understanding the relationship between employee engagement and organizational performance can help leaders and managers take the right steps toward creating engagement -- and eventually, a high-performing organization.

GMJ: When you say that you studied employee perceptions, what exactly do you mean?

Jim Harter, Ph.D: We use that general term in our paper because there are many different types of employee perception measures. We wanted to blend in the other things that have been studied, such as job satisfaction, so our research wasn't just exclusive to engagement. We wanted to know if employees' answers to questions tell something about future performance or if performance causes how they answer those questions.

GMJ: So how does this meta-analysis differ from other research Gallup has conducted? Specifically, how does it differ from Gallup's Q12 meta-analysis?

Dr. Harter: The Q12 meta-analysis looked at whether there are associations between employee engagement and business results -- for example, whether business units that have higher levels of engagement also have higher performance. The answer is that they do.

But that leaves a key question to be answered: What causes what? Does higher financial performance cause higher engagement, or does higher engagement cause higher financial performance?

It takes a certain type of data to go to the next level and find evidence that one thing causes the other. To find that answer, you need data across many different organizations and across time. In the past, we've had evidence of causality from individual organizations, but in this study, we looked at causality across 10 organizations in very different industries.

GMJ: How did you approach this study? And what did you find?

Dr. Harter: When you get down to the nitty-gritty -- which we did here when we looked at each and every Q12 item independently -- we find that the path from the individual engagement elements to financial performance is stronger than the path from financial performance to engagement.

It's difficult to directly make the argument that engagement causes higher financial performance because when people are engaged, they don't just immediately make profit. They show up for work, they please customers, they build a safer environment, they produce higher quality products -- and those things accumulate to affect financial performance.

What we're able to do in this study is look not just at engagement and financial performance but also look at two mediating variables: employee turnover and customer perceptions. We're able to look at the path from employee engagement to those two outcomes that then lead to financial performance.

Frank L. Schmidt, Ph.D.: We knew from previous studies that perception and performance were associated; we knew that there was a relationship between Q12 scores and the financial performance of the organization. But since both were measured at the same time, it was possible that organizations that were doing well were paying more attention to employee engagement and doing the things managers need to do to have a high level of employee engagement. In other words, because they had the resources, perhaps these organizations were able to spur engagement in a way that less prosperous companies could not.

The 12 Elements of Great Managing

The purpose of this study, which was based on longitudinal data collected at three different periods of time, was -- to put it simply -- to determine whether employee perceptions at Time One had a bigger impact on financial performance at Time Two than the reverse. What we found was that the predominant direction of causality was from employee perceptions at Time One to financial performance at Time Two, and that the evidence for causality in the reverse direction was pretty weak in comparison.

On average, people come to work wanting to make a difference.


GMJ: So how do employee perceptions influence performance?

Dr. Schmidt: When employees have favorable perceptions of their work situation and their organization and the support they receive from their managers and supervisors, they are more motivated to provide good customer service, to work more diligently, and to be identified with the mission of the organization. High levels of employee engagement contribute to employee retention -- employees are much less likely to quit because they are engaged to good customer service and to good performance all the way around.

Dr. Harter: Exactly. Organizational performance comes from a lot of little behaviors that accumulate over time. If the ultimate outcome of a for-profit organization is sales and profit, the first question for a researcher is "How do employee perceptions cause sales and profit?"

Take, for example, one of the Q12 items: knowing what's expected of you at work. If you know what's expected of you, you're more likely to do things every day with a sense of clarity. You know what your purpose is, and you know what the outcomes are that you're trying to achieve. If you don't understand those things, you have a sense of hesitancy or confusion, and that difference affects what you do every day, whether it's serving customers and making them engaged or showing up to work.

On average, people come to work wanting to make a difference. Not everybody does, but on average, people do want to make a contribution. So clarity of expectations affects whether people do work every day that benefits the organization, serves customers, or produces quality work. Over time, an employee's perception affects whether the business is successful or not. It will affect whether the customer buys something. It will affect turnover. It will affect lots of things.

Here's another example: When people perceive that they're cared about at work, they're more likely to show up, and they're more likely to do things that benefit the organization in the longer term. And if people feel that someone at work encourages their development, they're more likely to pay attention to customers. The data suggest that if employees feel that someone's looking out for their best interest, they then reciprocate and look out for the best interest of the organization.

GMJ: What can companies do to encourage positive perceptions -- or alter them to create the ones they want?

Dr. Schmidt: All of the Q12 items are designed to be actionable by management. If there is an average or below-average level of performance in a business unit on any one of these items, the manager can examine the content of the item and take action to improve on that dimension. Improvement would depend on what the item was. If a substantial number of employees are saying they don't have the materials and equipment they need to do their jobs -- this is one of the Q12 items -- then that tells the manager what he or she needs to work on to improve that component of employee engagement.

That's why it's important to have good evidence as to the direction of causality, which we get from this study. If employee perceptions are the main cause of financial performance rather than the reverse, we know that managers can take action to improve employee perceptions and therefore have an impact on the bottom line. But if the causal direction were in the opposite direction, it'd be a different story. We would be saying to managers that what you have to do first is improve your financial performance, and then maybe your employees' perceptions of their work will improve. That's a very different prescription, and that's why it's important to know the predominant direction of causality.

GMJ: How big is the linkage between perception, performance, and profit?

Dr. Harter: In other studies we've done, we've found associations of one to four percentage points difference in profit when you compare the top quarter of most engaged business units to the bottom quarter of least engaged units. We've also found 25% to 50% differences in turnover between top-quartile and bottom-quartile business units. In our large-scale meta-analysis that covered 32,000 business units in 152 organizations, we found that top-quartile and bottom-quartile units differ by 16% in profitability. That's how much all the things that people do each day affect profit.

Managers can do things that benefit people in their lives while at the same time improving the business.


And that's also an important point for managers. As managers, you can do things that benefit people in their lives in general at the same time you're improving the business. For example, we know that engaged workers are about twice as likely to be thriving in their overall lives in comparison to actively disengaged workers, and we also know they're much more productive.

Furthermore, the path is clear from engagement at work to customer perceptions. Our Q12 meta-analysis showed that there's a difference of about 12% on customer engagement or loyalty metrics between top-quartile and bottom-quartile business units. In large organizations, that affects thousands of customers.

GMJ: What additional research do you think needs to be done on this topic?

Dr. Schmidt: There is much research being done in this area by a variety of people in different universities. One developing idea that seems to have a lot of promise is that the correlations among different employee attitudes -- whether it's job satisfaction or engagement or organizational commitment and so on -- are substantial and tap into one basic thing, which is employees' positivity, such as positive attitudes toward their work and their jobs.

The unique thing about the Gallup Q12 is that it doesn't just measure how employees feel; it measures their attitudes toward specific things that are actionable and can be changed to improve their attitudes and their perceptions. It's important to have an instrument that gives you actionable advice on what to do if you need to improve employee performance. Most of the metrics don't do that; they just ask how you feel in general. In general, are you very satisfied or moderately satisfied or not satisfied, or low in satisfaction or high in dissatisfaction? That doesn't tell managers what they need to know to improve the situation.

GMJ: So how can organizations improve their financial performance? What actions can managers take to have an impact on financial performance?

Dr. Harter: The first thing you must measure is employee perceptions. Second, you must measure issues that employees and managers can do something about. Then, you must have good education about how great managers create change. You must have a long-term commitment to say, "This is not going away -- it's part of how we evaluate management in our organization."

Then, there are a lot of practical things within each of the Q12 elements that managers can do something about. Managers can work to clarify expectations by helping employees see the outcomes the organization is working to achieve -- and how employees can play a role in achieving those outcomes. A lot of times, this seems to be overlooked. In fact, only a little over half the people we've studied around the world really know what's expected of them at work.

Managers can provide individualized training and development that's aligned with the talents of their employees. They can provide timely and specific feedback when employees achieve outcomes so they know what they contributed and why it's important to the organization. Managers can provide goals and metrics that assess quality so people know what quality is and how they're held accountable for it, which in turn improves morale and a sense of equity.

These are all things that great managers do, but they are often overlooked in average organizations because managers think that their job is to tell people what to do. But that's really only a small part of the role of a manager. Great managers give employees direction, of course, but they also understand where their employees are at right now and how they can help them become great in their current role -- and they help them see where they can be in the future.

-- Interviewed by Jennifer Robison

Additional Reading

Harter, J., Schmidt, F., Asplund, J., Killham, E., & Agrawal, S. (2010). Causal impact of employee work perceptions on the bottom line of organizations. Perspectives on Psychological Science, 5(4), 378-389.


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