Let us walk you through the 10-step calculation to determine absenteeism costs and the projected savings with increased engagement.
To get you started, we broke this walk through down into 3 different parts:
- Absenteeism Costs for Engaged Employees
- Absenteeism Costs for Disengaged Employees
- Total Absenteeism Costs + Projections.
Absenteeism Costs for Engaged Employees
We'll start with calculating absenteeism costs for engaged employees. Here is a snippet from the Reference Page (page 2 of the Cost Analysis PDF) as a cheat sheet.
Step 1: Determine Average Revenue per Employee
The first step in the equation is calculating the average revenue per employee. Using $63 million dollars in revenue, we divide by total number of employees (which is 290) to get the average revenue per employee. The average revenue per employee is $217,241. This is important because this measures the average productivity and financial output of each employee.
Here's the formula for Average Revenue per Employee:
- Average Revenue / # of Employees = Average Revenue per Employee
- $63,000,000 290 employees = $217,241
Step 2: Determine Average Salary (if more than one salary is provided)
The next piece of the calculation we need is the R&D division’s average salary. (If you have just one salary, skip this step). Otherwise, add up the total average salaries by position type you have and divide the sum by the total number of average salaries provided.
For our example, we received two salaries: entry level ($31,200) and technical ($135,500). So the average salary is $83,350. This is a critical step because it estimates the average costs that are lost when you are paying for work that isn’t being done when an employee is out sick.
Here’s the formula for Average Salary:
- (Entry Level Salary + Technical Salary) / 2
- ($31,200+$135,500) / 2 = $83,350
Step 3: Determine Absenteeism Costs for One Engaged Employee
To bring this all together, we can now determine the absenteeism cost for a single engaged employee. For the first part of the calculation, we need the average revenue per employee (determined from step 1- $217,241) multiplied by the average number of sick days that engaged employees will take each year which is 1% (2.7 sick days).
For the purpose of this calculation, the number of sick days is converted into a percentage. We calculate it based on an 8 hour work day. For engaged employees, 2.7 sick days converts to 21.6 hours per year. Dividing 21.6 hours by 2,080 (total work hours in a year) gives you 1%.
Next, we need to uncover the average dollars that the division is losing when an engaged employee takes a sick day. We need the average salary (calculated in Step 2 - $83,350) and multiply it by 1% (representing 2.7 sick days).
Here's the formula for Engaged Employee Absenteeism Costs:
- (Avg Revenue Per Employee x Avg Sick Days) + (Avg Salary x Avg Sick Days)
- ($217,241 x 1%) + ($83,350 x 1%)
- ( $2,712.41) + ($833.50) = $3,006
The absenteeism costs for one engaged employee is $3,006:
This equation takes into account the average salary and the average revenue to capture the costs and lost productivity when an employee takes a sick day. The average revenue represents lost productivity and the salary represents the money the employee still receives, and the company loses, when they don't work.
Step 4: Determine Number of Engaged Employees
Now that we have the cost for a single engaged employee, we need to identify how many engaged employees there are to calculate the total cost. We are going to use a trusted source.
Gallup found that on average 17% of the workforce is actively disengaged. Because of this, we use 83% (100% - 17% = 83%) to identify employees who are engaged or neutral.
For our example, we have 290 employees. 83% of 290 is 240, which means that 240 of the employees are engaged or neutral. In other words, this is the number of employees that are most likely taking an average of 2.7 sick days per year.
Here's the Formula for Number of Engaged Employees:
- Number of Employees x Percentage of Engaged Employees
- 290 employees x 83% = 240 employees
Step 5: Determine Total Absenteeism Costs for Engaged Employees
Let’s bring it all together! To calculate the total absenteeism costs for engaged employees, we take the absenteeism cost we calculated for one engaged employee and multiply it by the total number of engaged employees within the department.
Here’s the formula for Total Absenteeism Costs for Engaged Employees:
- Engaged Employee Absenteeism Costs x Number of Engaged Employees
- $3,005.91 x 240 employees = $723,523
The total annual absenteeism costs for engaged employees is $723
Absenteeism Costs for Disengaged Employees
On to part two, which brings us to step 6. We are going to replicate the calculations we just did to find out the total absenteeism costs for the disengaged employees. Once we get this number, we will add the engaged and disengaged employees total absenteeism cost to get the total projected annual costs.
Step 6: Determine Disengaged Employee Absenteeism Cost
To determine absenteeism costs for disengaged employees, we are going to repeat the process from step 3 to uncover absenteeism costs for engaged employees.
First, we will take the average revenue (Step 1 - $217,24) and multiply that by the average sick days taken by a disengaged employee which is 2.4% (6.2 days).
Again, for the purpose of this calculation, the number of sick days is converted into a percentage. We calculate it based on an 8 hour work day. For disengaged employees, 6.2 sick days converts to 49.6 hours per year. Dividing 21.6 hours by 2,080 (total work hours in a year) gives you 2.4%.
Next, we multiply the average salary (Step 2 - $83,350) by 2.4% (6.2 sick days) and add the two together to get the total absenteeism cost for one disengaged employee.
Here's the formula for Disengaged Employee Absenteeism Costs:
- (Average Revenue Per Employee x Average Sick Days) + (Avergage Salary x Average Sick Days)
- ($217,241 x 2.4%) + ($83,350 x 2.4%)
- ($5,214) + ($2,000) = $7,214
The total absenteeism costs for one disengaged employee is $7,214
Step 7: Number of Disengaged Employees
Now that we have the cost for a single disengaged employee, we need to find out what percentage of Stark Industries is disengaged. Again, because they haven’t completed an engagement survey, we rely on Gallup who found that an average of 17% of employees are highly disengaged in the U.S.
This means that an average of 49 out of 290 employees are highly disengaged. In other words, this is the number of employees who are taking an average of 6.2 sick days per year.
Here’s the formula for Number of Disengaged Employees:
- (Number of Employees x Percentage of Disengaged Employees) + (Total Number of Disengaged Employees)
- 290 employees x 17% = 49.3 Disengaged Employees
Step 8: Determine Total Annual Absenteeism Costs for Disengaged Employees
Next, we multiply the absenteeism cost for one disengaged employee (Step 6 - $7,214) by the total number of disengaged employees (Step 7 - 49 employees) to determine the total annual absenteeism costs for disengaged employees. These projected costs come out to $355,660 a year for Stark Industries’ R&D division.
Here's the formula to Determine Total Absenteeism Costs for Disengaged Employees:
- Disengaged Employees Absenteeism Cost x Number of Disengaged Employees
- $7,214 x 49.3 = $355,660
Total Absenteeism Costs + Projected Savings
Step 9: Determine Total Annual Absenteeism Costs
After adding up the absenteeism costs for engaged and disengaged employees, we have an estimated $1,079,183 in annual absenteeism costs!
Here's the formula for Total Absenteeism Costs:
- Absenteeism Costs for Engaged Employees + Absenteeism Costs for Disengaged Employees
- $723,523 + $355,660 = $1,079,189
Step 10: Determine Projected Annual Absenteeism Savings
By increasing engagement strategies Gallup shows that companies in the top 25th percentile of engagement save an average of 37% of absenteeism costs by reducing the number of sick days. We have almost $400,000 in potential savings that's on the table!
Here's the formula to Determine Projected Absenteeism Savings:
- Total Annual Absenteeism Costs x 37%
- $1,079,183 x 37% = $399,298
- Go back to the Cost Analysis Resource Page to learn more about the different sections of the Cost Analysis. This is our Ultimate HR Guide to get Leadership Buy-In!
- Check out Calculating Absenteeism Costs and Projected Savings for an explanation how to explain these calculations.