When companies start looking for areas where they are leaving money on the table, they typically look at quality management programs and supply chain systems and agreements. They invest in Kaizen programs and 5S initiatives to eliminate waste, improve standardized processes, and drive savings through efficiencies. Companies include non-performance clauses in their supply-chain agreements, consolidate the different types of inventory items they purchase, and make huge investments in ERP (Enterprise Resource Planning) software. What many corporate leaders don’t realize is that while it is very important to invest in these areas, their company stands to earn an even higher return on investment by improving their leadership effectiveness.
The Link Between Leadership and Employee Performance
In their book First, Break All The Rules, authors Marcus Buckingham and Curt Coffman site a compelling study conducted by Gallup that highlights the financial difference leadership can make. A very successful retailer employing thirty-seven thousand people spread across three hundred stores asked Gallup to measure their employee engagement (morale, motivation, emotional connection to the organization). Keep in mind that employee engagement is a direct reflection of (1), and the most common measurement of, leadership effectiveness. Gallup then compared the results to individual store performance. They found that stores with top quartile employee engagement earned 44% more profit than stores with bottom quartile employee engagement. The same products. The same access to corporate resources. The difference was leadership.
On a more global scale, Towers Watson, a leading Human Resources Professional Services firm, compared the engagement scores and the financial results of 50 international companies. The companies they studied with low employee engagement had an average operating margin (profit per $ of sales) of 9.9%. Companies with high employee engagement had an average operating margin close to three times higher at 27.4%.
For anyone who may think these findings are anomalies, leadership author Kevin Kruse cites 32 more studies that reveal similar results.
Quality of Leadership Makes a Big Impact on the Bottom Line
The reality is, leaders at all levels of the organization matter massively to the bottom line. Leaders are the difference between employees who invest their own time into learning more about their profession and those who dread coming to work every day. They are the difference between employees who refer their friends and families to their company’s products and services and those who passive-aggressively undermine their company’s performance. Leaders are the difference between employees who go above and beyond to win the hearts and minds of their customers and those who recite the mantra “Sorry sir, that’s our policy”. The problem is that for the most part leaders do not fully appreciate, or notice, that every interaction they have with those they lead, even their tone and body language, either inspires or demotivates (2). There are very few neutral interactions.
So if you are one of the decision makers in your organization, take your laser focus off of process improvement initiatives for a moment to see if there is room to improve the effectiveness of the people leading them. Achieving your profitability goals may be simpler than you think.
Let me know if you have seen first-hand examples of the link between leadership and employee performance.