This formula transforms your business’ profits

PBN Staff

03/12/2012

EE = EBITDA is an obscure but interesting formula that, once I came to understand it, has uncovered an exciting new source of increased profits that any business can realize.
The “blow up” of this formula is:
Employee Engagement = Earnings Before Interest Taxes Depreciation and Amortization.
Before going any further I want to say that Employee Engagement – EE – is certainly not the only factor that has an impact on EBITDA, but it does have a significant impact on your bottom line. It just also happens to be one of the easiest ways to increase profitability you will ever come across.
Why?
Because, of all the ways to increase profits, increasing your levels of EE is almost completely within your control. This is because EE is largely determined by the leadership culture of your organization. And you get to control that.
In fact, a recent Melcrum Employment Engagement Survey of more than 1,600 human resources professionals found that, “The actions of senior leaders and direct managers are the most important drivers of employee engagement by a factor of between 400 and 700 percent.”
In fact, I doubt you could find a single CEO of a Fortune 500 company who even questions whether increasing EE increases EBITDA.
An October 2011 study done by the Gallup Group involving thousands of participants revealed that, on average, 71 percent of people are “disengaged” from their work. Three-quarters of this group is considered “not engaged.” These people do their jobs but not much more. The remaining one-quarter of the disengaged population is considered “actively disengaged.” These are people who are actually working against the best interests of the organization.
This leaves only 29 percent of the workforce who are considered “highly engaged.” These are the ones who put in extra time; think about their jobs during off hours and are energized. They are the ones who generate the most per capita profit. This means that seven out of 10 people in organizations are not engaged in their work. Imagine the lost productivity and profits that represents! And in today’s economy this can spell death to an organization.
Let’s look at how the level of EE in your organization affects your profitability.
The following EE versus productivity numbers are generally accepted throughout the industry, give or take a few percentage points:
• “Highly engaged” workers are 90 percent productive.
• “Not engaged” workers are 60 percent productive.
• “Actively disengaged” workers are 40 percent productive.
When you combine the EE and the productivity numbers the impact on profits becomes clear:
• 29 percent are highly engaged and are 90 percent productive, therefore 0.29 x 0.90 x 100 = 26.1 percent productivity level.
• 55 percent are not engaged and are 60 percent productive, therefore 0.55 x 0.60 x 100 = 33 percent productivity level.
• 16 percent are actively disengaged and are 40 percent productive, therefore 0.16 x 0.40 x 100 = 6.4 percent productivity level.
This means that your overall productivity level is the sum of those three levels, in other words, 0.261 + 0.33 + 0.64 = 65.5 percent productivity level.
To make this real, let us assume a company spends $2 million on employee compensation. Under this scenario, its ROI on that investment is: $2 million x 0.655 = $1.31 million.
The represents a $690,000 “payment vs. performance” gap.
Now lets look at the impact to your bottom line that will occur if you simply increase the highly engaged numbers by only 5 percent and decrease the actively disengaged numbers by the same amount. And if your company is like most, and if you decide to make EE a priority in your organization, moving your EE numbers 5 percent in this fashion is not unrealistic at all. • 34 percent are now highly engaged at 90 percent productivity, therefore 0.34 x 0.90 x 100 = 30.6 percent productivity level.
• 55 percent are still not engaged and still 60 percent productive, leading to 0.55 x 0.60 x 100 = 33 percent productivity level.
• 11 percent are now actively disengaged and 40 percent productive, therefore 0.11 x 40 x100 = 4.4 percent productivity level.
The new productivity level is 0.306 + 0.33 + 0.44 = 68 percent.
And as a result, the new profitability calculation yields: $2 million x 0.68 = $1.36 million.
In comparison to the previous figures this is an increase of $50,000 to your bottom line … annually!
If you are like I was when I first started looking at these figures, you may think that they can’t be right. But I can tell you that study after study from organizations ranging from the Harvard Business School to the McKinsey Group prove them out.
So while we have all been trained to increase profits by cutting costs, capturing more clients and negotiating for higher prices, few of us have been taught how to activate one of the most significant profit drivers available to us: increased employee engagement.
And at a time when profits are very tight, competition is tough and the market is demanding, it should be very comforting to realize that with just a few internal adjustments, you can uncover a source of profits that will not only increase your bottom line but will also increase company morale.
During economic times such as these, understanding the EE=EBITDA formula can be a real life saver. •