EE = EBITDA

Why and How Improving Leadership Skills Maximizes Company Value

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 Amortization

Before going any further I want to say that Employee Engagement (EE) is certainly not the only factor that impacts 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 such as increasing prices; decreasing costs and generating more sales 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 over 1600 HR 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%.

So not only is this “silent profit driver” largely in your control but the financial impact of increasing the levels of EE in your organization is undeniably real.

In fact, I doubt you could find a single CEO of a Fortune 500 company who even questions whether increasing EE increases EBITDA

The Numbers behind the Science:

In an effort to be as informative as possible as quickly as possible let me get right to the math.

A recent study done by the Gallup Group in October of 2011 involving thousands of participants revealed that, on average, 71% of people are “disengaged” from their work. Within this group 55% are considered “not engaged”. These people do their jobs but are not highly engaged. The other 16% are considered “actively disengaged”. These are people who are actually working against the best interests of the organization.

This leaves only 29% 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 7 out of 10 people in organizations are not engaged in their work. Imagine the lost productivity and profits that represents! And whether you are looking to build your company or prepare it for a sale this fact should not be ignored. Doing so will be one of the most costly mistakes you could ever make as an executive.

The High Cost of Low Employee Engagement

The following EE vs Productivity numbers are generally accepted throughout the industry, give or take a few percentage points:

Let's look at how EE in your organization affects your profitability.

• “Highly engaged” workers are 90% productive
  
• “Not engaged” workers are 60% productive
  
• “Actively disengaged” workers are 40% productive.
  

When you combine the EE and the productivity numbers the impact on profits becomes clear:

29% are highly engaged and are 90% productive.

.29 * .90 * 100 = 26.1% productivity level

55% are not engaged and are 60% productive.

.55 * .60 * 100 = 33% productivity level

16% are actively disengaged and are 40% productive

.16 * 40 *100 = 6.4% productivity level

This means that your overall productivity levels are:

26.1% + 33% + 6.4% = 65.5%

To make this real lets assume a company spends $2 million on employee compensation. Under this scenario their ROI on that investment is:

2,000,000.00 * 65.5% = 1,310,000.00.

The represents a $690,000 “payment vs. performance” gap.

The Big Difference of a Small Adjustment

Now lets look at the impact to your bottom line that will occur if you simply increase the highly engaged numbers by only 5% 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% in this fashion is not unrealistic at all.

WARNING: These numbers are almost un-believable! 

34% are now highly engaged @ 90% productivity.

.34 * .90 * 100 = 30.6% productivity level

55% are still not engaged and still 60% productive.

.55 * .60 * 100 = 33% productivity level

11% are now actively disengaged and 40% productive

.11 * 40 *100 = 4.4% productivity level

New productivity levels are

30.6% + 33% + 4.4% = 68%

New Profitability Calculations:

2,000,000.00 * 68% = $1,360,000.00

In comparison to the previous figures this is an increase of $50,000.00 to your bottom line….annually!

In Closing

In my many years as a business owner and a consultant I have discovered the following truism: Anything previously ignored or overlooked quickly improves once it is focused upon.

Time and time again I have seen situations that been previously overlooked significantly improve once the proper attention is put upon them. In time results plateau, requiring more sophisticated and long term attention to continue the improvement. However, as shown in the above calculations even a small 5% improvement in EE, which is not difficult to achieve, results in a significant improvement in EBITDA.

I can assure you it takes very little effort to improve the levels of EE in an organization that hasn’t had the benefit of learning the fastest and easiest ways to move that needle. Furthermore, such improvement can be realized within months of introducing a low cost program.

So, if you are like I was when I first started looking at these figures, your initial thinking may be 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 fewer still have been trained in the new leadership methods necessary to best mobilize today’s modern, highly independent minded workforce.

So whether you are looking to maximize your profits as a matter of achieving business excellence or are preparing your organization to be sold, one of the best uses of your time and your financial capital is to invest in developing the skills of your managers and leaders.

It is one of the few investments one can ever make where there is no downside.

Jeffrey S. Deckman is a Thought Leader in the discipline of converting human capital into financial capital. He does this by working with people and organizations to develop healthy and resilient leadership teams and cultures....on human at a time. He can be reached via email at JDeckman@CapabilityAccelerators.com. To visit his corporate web site go to www.CapabilityAccelerators.com. To visit his training website go to www.TheBiggerKnow.com

This post is part of a series of posts that the upcoming speakers of the 2013 XPX (Exit Planning Exchange) Summit are contributing. The theme of this year’s summit is The Art and Science of Collaborative Innovation. The event will be widely attended by business owners and trusted advisors to privately held companies which are preparing for a successful exit. For more information about the event please visit Summit 2013 page.

Originally posted by Posted Jeffrey Deckman on January 15, 2013 at 2:22pm