Employee Engagement: Business Buzz or Serious Business?

IABC International Conference

June 28, 2005

Susan M. Suver

VP, Global Human Resources

Arrow Electronics, Inc.

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Employee Engagement Defined

► Two components:

► Rational Engagement: the involvement, understanding and motivation an employee has in his/her job

► Emotional Engagement: the attitudinal attachment an employee has to his/her company; source of pride

► Excelling at only one is not sufficient to drive engagement

► Must measure and understand both aspects to produce most actionable performance indicators

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Why Is Employee Engagement Important?

EmotionalEmotionalEngagementEngagement

RationalRationalEngagementEngagement

Emotional EngagementEmotional Engagement

► I am proud to tell others I work for my company

► The work I have to do is reasonable

► I am unlikely to look for a job in another company in the next 12 months

► I would recommend my company to a close friend as a good place to work

► My company inspires me to do my best work

Rational EngagementRational Engagement

► I am willing to put in a great deal of effort beyond what is normally expected to help my company be successful

► I understand how my work group contributes to the success of my company

► I understand how my role is related to my company’s overall goals, objectives, and direction

► My job provides me with a sense of personal accomplishment

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Does Engagement Matter? Yes. Just Look At Motivation...

Highly engaged 45% more motivated than those disengaged

Individual Motivation ScoreOverall U.S. sample*

Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

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7892

Disengaged ModeratelyEngaged

HighlyEngaged

5

2%4%

25%

66%

6%3%

8%

47%

36%

7%

6% 12%

23%

51%

8%

Engagement And Retention Risk Are Linked…

I have no plans to leave

I have made plans to leavemy current job

I am actively looking for another job

I am not looking for another job,but would consider another job

I plan to retire in the next few years

Moving from moderate to high engagement makes employees almost twice as likely to stay (and invest their discretionary effort)!

80% of disengaged would actively (29%) or passively (51%) leave company

Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

Highly Engaged DisengagedModerately Engaged

6

10%

14%

18%

22%

26%

30%

LOW HIGH

Strong Correlation Between High Engagement And Financial Performance

Operating Margin With 5%, 10%, 15% Change in Engagement

% Change in Employee Engagement

Current

12.1%

5%

12.9%

10%

13.7%

15%

14.5%

Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

Engagement Index Score

Revenue Growth

19%

21%

23%

25%

27%

LOW HIGH

SG&A

NOTE: Employee engagement strongly correlated to intention to stay

Intent to Stay

For a $10B company, that’s $80,000,000

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Takeaway #1: The real business impact of employee engagement

• The Corporate Leadership Council’s research has found that organizations are (rightly) turning their attention to their employees’ level of engagement.

• A Council survey of more than 50,000 employees at 59 member organizations in 27 countries and 10 industries demonstrates the real bottom-line impact of employee engagement. Highly committed employees perform up to 20 percentile points better and are 87% less likely to leave the organization than employees with low levels of commitment.

• The Council’s analysis has yielded the two “rules” appearing at the bottom of this slide, which further convey the significant impact of employee engagement on the business.

The Business Case for EngagementEmployee engagement drives employee performance and workforce retention

Maximum Impact of DiscretionaryEffort on Performance Percentile

NumberofEmployees

50th

Percentile70th

Percentile

Maximum Impact of Engagementon the Probability of Departure

Probabilityof Departurein Next 12Months

StrongDisengagement

StrongEngagement

9.2%

1.2%

87%

The “10:6:2” Rule• Every 10% improvement in commitment can increase an employee’s effort level by 6%.

• Every 6% improvement in commitment can improve an employee’s performance by 2 percentile points.

The “10:6:2” Rule• Every 10% improvement in commitment can increase an employee’s effort level by 6%.

• Every 6% improvement in commitment can improve an employee’s performance by 2 percentile points.

The “10:9” Rule

Every 10% improvement in commitment can decrease an employee’s probability of departure by 9%.

The “10:9” Rule

Every 10% improvement in commitment can decrease an employee’s probability of departure by 9%.

Source: Corporate Leadership Council 2004 Employee Engagement Survey.

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The Risk of Workforce DisengagementThe majority of employees are “up for grabs”—neither fully committed nor

uncommitted

Takeaway #2: Most employees are not highly committed to their organizations

• Of concern, given this potential impact of engagement, the Council’s 2004 Employee Engagement Survey identified significant employee ambivalence about their organizations.

• The Council’s research found that only 11% of employees demonstrate very strong commitment to their organizations, while 13% are actively disengaged.

• This examination further revealed, however, a real opportunity: 76% of employees are only moderately committed to their organizations. Organizations seeking to reap the benefits of a highly engaged workforce should therefore seek to sway these “agnostic” employees towards the “true believer” level of engagement.

The State of Workforce Engagement

The “Disaffected”

Poor performers putting in minimal effort and exhibiting strong noncommitment to their organizations, jobs, managers, and teams

The “Agnostics” The “True Believers”

These employees exhibit moderate commitment to their work, teams, managers, and organizations

High performers with low retention risk, who exhibit very strong emotional and rational commitment to their jobs, teams, managers, and organizations

13%

20% 29% 27%

11%Leaning Toward Disengagement

NeutralLeaning Toward Engagement

Source: Corporate Leadership Council 2004 Employee Engagement Survey.

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Takeaway #3: There is a significant range in employee commitment between organizations

• Also worthy of attention, the Council has identified a significant variation in engagement levels between surveyed organizations.

• On this slide, you will observe a meaningful distinction in the engagement levels (and the related impact on discretionary effort and intent to stay) of employees at two participating organizations at either end of the workforce commitment scale.

• The Council’s research indicates, in fact, that organizational differences are the only major demographic category accounting for variation in workforce commitment, suggesting that organizations cannot simply “write off” certain employee segments (such as Generation X) as being likely to be disengaged.

The True Difference Engagement Can MakeThe example of two organizations participating in the 2004 Employee

Engagement Survey

Source: Corporate Leadership Council 2004 Employee Engagement Survey.

Percentage ofWorkforce in

Highest Categoryof Intent to Stay

42.9%

15.3%

OrganizationA

OrganizationB

The “True Believers”

The “Disaffected”

Discretionary Effort

Intent to Stay

The “TrueBelievers”

Percentage ofWorkforce

24%

3%

OrganizationA

OrganizationB

“Disaffected”Percentage of

Workforce5%

17%

OrganizationA

OrganizationB

Percentage ofWorkforce in

Highest Categoryof Discretionary

Effort

15.8%

3%

OrganizationA

OrganizationB

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Takeaway #4: A list of top commitment drivers promoting discretionary effort and retention

• The chart at right provides a “checklist” of levers that organizations seeking to improve workforce commitment—and thereby to increase employee discretionary effort and intent to stay—might seek to employ.

• You will observe the importance of clarity about how to do one’s job, and a belief in the importance to it, to employee discretionary effort and intent to stay.

• Further, prominent among these top levers of engagement are managerial attributes, including excellence in people and process management.

Checklist for Driving Workforce Performance and

Retention Through Engagement

Lever Percentage Impact—

Discretionary Effort

Percentage Impact—Intent to

Stay

Employees understand connection between work and organizational strategy

32.8 36.4

Employees understand importance of their jobs to organizational success

30.3 34.1

Internal communication 29.2 37.5

Manager demonstrates strong commitment to diversity

28.5 36.5

Manager demonstrates honesty and integrity

27.9 35.1

Manager adapts to changing circumstances

27.6 36.1

Manager clearly articulates organizational goals

27.6 35.7

Manager possesses needed job skills 27.2 35.8

Select Levers of Employee Commitment, Listed with Maximum Potential Percentage Impact on Employee Discretionary Effort and Intent to Stay

Source: Corporate Leadership Council 2004 Employee Engagement Survey.

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Takeaway #4: A list of top commitment drivers promoting discretionary effort and retention

• The chart at right provides a “checklist” of levers that organizations seeking to improve workforce commitment—and thereby to increase employee discretionary effort and intent to stay—might seek to employ.

• You will observe the importance of clarity about how to do one’s job, and a belief in the importance to it, to employee discretionary effort and intent to stay.

• Further, prominent among these top levers of engagement are managerial attributes, including excellence in people and process management.

Checklist for Driving Workforce Performance and

Retention Through Engagement

Lever Percentage Impact—Discretionary

Effort

Percentage Impact—Intent to

Stay

Manager sets realistic performance expectations

27.1 35.6

Manager puts the right people in the right roles at the right time

26.9 36.8

Manager helps find solutions to problems on the job

26.8 35.4

Manager breaks down projects into manageable components

26.7 35.6

Select Levers of Employee Commitment, Listed with Maximum PotentialPercentage Impact on Employee Discretionary Effort and Intent to Stay

Source: Corporate Leadership Council 2004 Employee Engagement Survey.

The Journey to High-Performance Through Leadership Involvement and Employee Engagement

Arrow Electronics, Inc.

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Key Factors in Decision to Drive Engagement► 2000 bust in the dot com, high tech and telecom sectors left

electronics manufacturers and distributors overbuilt

► New CEO Bill Mitchell arrives 1Q03 with 3 areas of focus: grow the business, return to profitability, build a winning team

► Shift from 20 years of M&A to organic growth a fundamental strategic and operating shift

► Legacy leaders were entrepreneurial, patriarchal, autocratic. Businesses operate in silos

► Unwritten lifetime employment “contract” with employees created high company loyalty, high entitlement, high pay vs high-performance, high accountability

► Success in high-performing, organic growth strategy would require substantial re-orientation of the leaders and workforce. A top-down, high involvement strategy in order.

► Employee involvement would be required to execute, and to resume prior high levels of employee morale and confidence in management.

► Alignment of business acumen, processes and performance standards required to rebuild “DNA” of gene pool

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Arrow’s Culture Change Strategy: Convert to high-performance, accountability using Shared Leadership and Employee Engagement

Define the competencies, skills, behaviors and practices necessary to create a common, unified culture capable of driving global strategy

execution and supporting Arrow’s values.

Design and deploy change management methods and new internal communication processes that will power the new Arrow culture.

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The Architecture Of Culture

Element E

Element C

Element B

Element A

Element D

Vision

Vivid Description About Desired Future State Of Company

Values

Deeply Held Beliefs Of Company; Principals That Guide The Way The Company Operates; Software For Building Culture

Company Practices, Policies, Programs, Structures, Systems, Processes, Ceremonies, And Routines

Framework For Driving Desired Employee Behaviors; Hardware For Building Culture

Employee Behaviors

Conduct And Actions Of Company Employees; Beliefs Turned Into Action

Culture

The Exhibition And Aggregation Of Employee Behavioral Norms And Values

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2003: What was our Operating Culture? Could it get us to new strategy successfully?

Culture Assessment►2003 Towers-Perrin quantitative web-based culture assessment

survey (4,000 employees, 77% response, 8 languages, all regions)►20 focus groups (300 employees), 16 executive interviews

External Benchmarking►7 leading companies►Extensive secondary research

Evaluate Communication Capabilities►Management capability►Vehicle inventory►Culture survey inputs

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High-Performance Cultural Attributes

► Communicating/Involving

► Employee Engagement

► Cost Focused

► Collaborative

► Customer Focused

► Innovative

► Empowering/Decision-Making Authority

► Performance/Results Oriented

► Trusting

► Change Readiness/Action Oriented/Process Discipline

► Accountable

High-performing companies typically score better on these attributes

Arrow survey also indicates these as critical gaps

Source: Towers Perrin 2003 Talent Management study

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From Today to Tomorrow

Strengths

► Cost-focus

► Customer service mentality

► Loyalty

Areas for Improvement

► Separate

► Family

► Hierarchy

► Crisis-focused

TodayToday TomorrowTomorrowEngaged Workforce

Strengths

► Cost-focus

► Customer service execution

► Loyalty

► Shared leadership

► Performance-based team

► Empowered employees

► Sustained performance

► Continuous improvement

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Change Drivers that Produce Business Results…

► Leadership Alignment with Strategy, Financial and Operating Models

► Employee Engagement

► Communication Environment, Tools, and Processes

► Continuous Improvement Mindset and Processes

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Aligning Leadership with Vision, Values, Strategy

Our Vision

To be the Clear #1 worldwide provider of products, services and solutions that connects technology with customers, powers the supply

chain and delivers premium investment results.

Our Values

►Ethical

►Open and Courageous

►High-Performing, Accountable Teams

►Working Effectively with No Barriers

►Innovate and Execute

►Passion for Service Excellence

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The Arrow Strategy

Execution LeadershipStrategy

Clear #1

Strategy for the future - Strengthen Arrow – Build the team

FinancialStability

SharedLeadership

Operational Excellence

Growth

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The Road to High-Performance

EnablersGetting started

LeadershipCommunicationInvolvement

LeadershipCommunicationInvolvement

EmbeddersMaking it stick

Communicating/InvolvingChange/Action/ProcessPerformance/Results Oriented/Customer Focused

Communicating/InvolvingChange/Action/ProcessPerformance/Results Oriented/Customer Focused

Recommendation #1

Embed Arrow values into daily behavior of all leaders/employees to drive successful execution of business strategy

Recommendation #4 Establish continuous improvement culture to drive operational effectiveness, customer satisfaction and sustainable competitive advantage

Desired Culture and Engaged Workforce

that Executes Intended Strategy

Effectively

Desired Culture and Engaged Workforce

that Executes Intended Strategy

Effectively

IntendedStrategy

Recommendation #2

Create a communication infrastructure and environment that enables job understanding, involvement, motivation

MeasurementMeasurement

Recommendation #3

Improve business performance by increasing high-performance, employee engagement

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The Tools, Process and Discipline

► Upgraded Employee Communications► New talent and vehicles► The “value creators”:

— Managers as dialogue leaders

— On-boarding, Benefits, Development, Performance Differentiation

► Continuous Process Improvement – Lean Sigma

► Voice of the Customer

► Shared Leadership Model ► Top 375 = Performance Leadership: Executive teams build new strategy► All managers = Leadership Inspires Full Engagement (LIFE): learn new strategy,

plan and manage execution in regional/local markets

► Leader Performance Criteria (financial, operating, individual and team leadership, talent-related, change agility, org savvy, strategic thinking)

► Rewards► Pay for Performance, Introduction of Non-financial goals, Discretionary bonuses

► Recognition ► High profile assignments; access to senior leaders► Mentoring, executive education, public and private kudos on performance, invest

time to know what’s on the mind of your key employees

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Measuring & Monitoring Progress What we have:

► Financial metrics

► Operating metrics

What we are (re)building:

Key Performance Metrics ► Annual Employee Engagement & Culture Assessment

— Understanding Strategy; Aligned Goal-Setting

— Seeking & implementing ideas from all levels► Leadership Success Model

— Redefining High Performers and High Potentials

— Retention

— Readiness for new roles

— Assimilation success► Productivity► Customer Satisfaction

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Year 1 Progress ► Nov 2004 survey: 11,200 employees, 84% participation rate, hundreds of focus

groups

► Two clear strengths: Ethics and Passion for Service Excellence

► Company-wide efforts (e.g., Shared Leadership) are beginning to have a positive impact

► Higher scores on involvement, confidence in senior leadership

► More employees understand the business strategy

► Percent of highly engaged Executives increased in 2004

► Engagement of recent hires up

► Asia showed significant overall improvement

► Degree of engagement impacted by many changes (e.g., restructuring, downsizing, leadership changes)

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Early Results and Some Lessons Learned…

1)Focus on targeted, manageable results

2)Accept that you cannot change everything at once without creating chaos

3)Don’t underestimate the impact of organizational change to undercut your progress

4)Engagement is a continuous process – management’s credibility requires constant discipline and determination over time

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Summary► Driving to Higher Levels of Engagement is a Journey

► Engagement begins with the end in mind and requires a road map to get there

► Alignment of practices, intent, process and discipline are must haves.

► Communication is a fundamental driver of understanding the work and its relationship to strategy

► Leaders using high degrees of involvement, coaching, recognition drive higher levels of engagement

► When understanding and involvement are high, discretionary effort increases and retention risk decreases

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QUESTIONS?