Connecting Organizational Communication to Financial Performance: The Methodology Behind the 2003/2004 Communication ROI StudyTM

by Richard Luss Watson Wyatt Worldwide and Steven A. Nyce Watson Wyatt Worldwide

April 15, 2004

The opinions and conclusions stated here are the authors and should not be construed to be those of Watson Wyatt Worldwide or any of its other associates. Please direct correspondence to Rich Luss at (202)715-7912 or Steve Nyce at (202)7157918. Email: Richard.Luss@watsonwyatt.com & Steven.Nyce@watsonwyatt.com

Executive Summary The better you communicate, the better your return on investment (ROI). Research findings show that organizations that communicate effectively dramatically outpace other organizations. Key Findings A significant improvement in communication effectiveness is associated with a 29.5 percent increase in market value. Over the last five years, firms with better organizational communication earned shareholder returns nearly 50 percent higher than firms that communicated less effectively. If you communicate effectively, youre 50 percent more likely to report employee turnover rates below or significantly below those of your industry peers. How does effective communication drive superior performance? It comes down to connections: Employees feel connected to the business and understand how their actions can support it. New employees exhibit solid connections to the company culture starting from their initial days on the job. Communication quickly connects employees to changing business challenges, facilitating faster adjustments to fluctuating market conditions. Management effectively connects with employees through strong leadership during times of organizational change. Communicate effectively and you can improve business performance by: Building a strong foundation of formal communication structure and processes, which rely on employee feedback and effectively use technology to connect with employees

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Dealing directly with the strategic issues of change, continuous improvement and business strategy integration and alignment Changing employee behavior by inducing changes in managers and supervisors behavior and by creating a line of sight between employees and customers

In the sections that follow, we discuss the methodology used to determine the relationship between communication effectiveness and increases in market value.1 Communication is no longer a soft function. It affects business performance and is a key contributor to organizational success.

The accompanying paper includes a detailed discussion of the statistical methods used to estimate the effect of communication on firm performance and the relation between communication practices and results. For those interested in a non-technical presentation of the findings, copies of the complete survey report, Connecting Organizational Communication to Financial Performance: 2003/2004 Communication ROI Study, are available at http://www.watsonwyatt.com/research/reports.asp.

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Introduction The 2003 Watson Wyatt Communication ROI Survey studies the relationship between firms communication practices, processes, motives and tactics and shareholder returns. The purpose of the analysis is twofold: (1) to identify the characteristics of effective communication programs and (2) to estimate the degree to which these programs are associated with surplus market value for the organization.2 As a result, this study illustrates how firms can enhance their shareholder returns by changing the culture and methods of communication across their organization. Our Approach Description of the Sample of Firms The 2003 Watson Wyatt Communication ROI Survey was completed by 267 human resources and/or communication executives in the United States. The questionnaire asks each organization to provide information on the general structure of its communication department. A key element of an organizations communication program is the coordination between its internal and external communication functions. Roughly 55 percent of all surveyed firms have both the internal and external functions in the same department, while nearly 30 percent have separate functions, each with its own director/executive. In one-half of surveyed organizations, both functions share a single budget; in the other half, each function has its own budget. In nearly 70 percent of the organizations, the communication staff is mostly centralized in the corporate office. Nearly 40 percent of organizations have all communication staff located at company headquarters, while over 70 percent have at least 75 percent of their staff centrally located. On average, companies have about 18 percent of their staff based outside headquarters (but in U.S. offices), while an average of only 4 percent are located outside the United States.
2

It is important to note that we are not saying that an increase in communication effectiveness causes an increase/decrease in shareholder value. This relation is merely a correlation between effective communication and shareholder returns. Two variables are correlated if one variable changes when the other changes. This does not mean that changes in one variable causes changes in the other.

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As for written materials, policies and other internal communication pieces are available only in English at 62 percent of the surveyed organizations. Nearly 30 percent of surveyed organizations translate their policies and communication into local languages, while less than 10 percent develop culturally-specific communication in local languages. Communicators role at surveyed organizations is more often to use the professional discipline of communication to meet strategic business objectives. Roughly 60 percent view their role as integral to the strategic business objectives, whereas about 25 percent view their position as more non-strategic in nature, but more skilled in communication programming. The remaining 15 percent see their role as both strategic and non-strategic. Firms largely do not have formalized training programs for managers to promote more effective internal communication. Less than 25 percent have such a formalized program, though about half of the organizations have a process in place to identify and communicate with high performers. The survey also asked executives to describe their organization. The averagesized firm in the sample has nearly 6,000 full-time employees and roughly 300 part-time workers. The median annual revenue is $1.1 billion (with mean revenues of $3.8 billion). Table 1 provides a breakout of respondents by the size of their organization as measured by the number of employees.
Table 1. Percentage of Respondents by Employer Size Percentage of Respondents Number of Employees Less than 1,000 10.5% 1,000 to 2,499 2,500 to 4,999 5,000 to 9,999 10,000 to 24,999 Greater than 25,000 13.2 14.0 28.1 19.3 14.9

We also asked executives to report on their organizations voluntary and involuntary turnover rates for management/professionals and for all employees. Table 2 shows that average annual turnover rates were 5 percent for management/professionals 5
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and 10 percent for all employees. The study participants have relatively low turnover rates relative to their peer group. On average, roughly 90 percent of respondents indicated that their turnover rate is at or below that of their competitors. Table 2. Turnover Rates and Market Comparisons Medians Annual Turnover Rates Voluntary Management/professional All employees 3.0% 7.0% Involuntary 2.0% 3.0% Percentage at or Below Competitors Voluntary 92.9% 87.0% Involuntary 91.9% 95.0%

Table 3 groups the surveyed organizations by their industry affiliation. We use the Global Industry Classification Standard (GICS) for this analysis. See Appendix I for more detail on the GICS. The table provides estimates of the percentage of firms in each industry sector that rank among the most highly effective communicators. On average, firms within the financials, utilities and materials sectors rank among the most effective communicators, whereas non-profit and industrial companies tend to rank more often among the less effective communicators. The table shows that a firms industry affiliation has important implications for the variation in communication effectiveness. Table 3. Percentage of Respondents by Industry Sector Industry Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Utilities Non-Profit/Univ./Hospitals Not Identified Total Number of Firms 3 23 46 35 17 41 43 19 19 19 2 267 Percentage Highly Effective 66.7 46.5 26.1 37.1 41.2 36.6 46.5 31.6 42.1 15.8 50.0 34.5

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Methodology The questionnaire asked respondents to rate their organizations overall communication effectiveness in a number of dimensions. We grouped these into a single construct that we refer to as communication effectiveness. We did this to capture all facets of effective communication in a single summary variable. We define communication effectiveness as doing the following activities successfully: Helping employees understand the business Providing employees with financial information and objectives Exhibiting strong management leadership during times of organizational change Aligning employees actions with customer needs Educating employees about organizational culture and values Explaining and promoting new programs and policies Integrating new employees into the organization Providing employees with information on the value of their total rewards program Though this grouping is based on an a priori assessment, we confirmed its validity using the Cronbach alpha measure for scale reliability based on internal consistency (Cronbach 1951). The Cronbach alpha coefficient is a measure between 0 and 1 that increases when the items are more highly correlated. For a scale to be considered reliable, we used the standard criterion that the alpha coefficient had to meet or exceed 0.70. The communication effectiveness construct had an alpha of 0.89. We assigned an overall score by summing an equally weighted value of the responses for each communication category. Firms scoring the highest value were deemed to be the most effective communicators. While these activities are critical to effective communication across an organization, each one alone does not guarantee a successful communication program. Instead, the most successful organizations structure these tactics and processes in an integrated way to deliver a results-oriented and effective communication program.

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Effective communicators exhibit higher shareholder value We asked participants to rate the effectiveness of their internal communication programs across a number of subject areas. We ranked the organizations into three subgroups based on their overall level of communication effectiveness for a comparison to shareholder value. Table 4 provides three measures of shareholder value. The first is average Q, which is the ratio of the market value of a firms equity and debt to the replacement value of its underlying physical assets more formally known as Tobins Q. Differences among firms in the observed valuation ratio, Q, reflect the perceived differences in organizations abilities to provide above-average earnings and in the riskiness of their earnings and asset value. A Q greater than 1.0, a market value greater than the value of the physical assets of the firm, indicates that the firm has some ability to generate surplus value for shareholders. This ability frequently comes from intellectual capital, such as superior human resources or communication programs that improve production efficiency or customer service. As shown in Table 4, firms with the highest levels of communication effectiveness are able to generate the highest levels of surplus value for their organization. Firms able to clearly convey the messages that effectively align business and employee objectives earn a premium in the marketplace. When we compare communication effectiveness to an industry-adjusted measure of Tobins Q by subtracting from each firm the average Q for firms in their industry we find similar evidence that good communicators generate greater surplus value for their organization relative to other firms in their industry. When we compare the level of effective communication to total returns to shareholders (TRS), we again see that good communicators have generated higher shareholder returns relative to their peers. Companies with the highest levels of effective communication experienced a 26 percent total return to shareholders from 1998 to 2002, compared to a -15 percent return experienced by firms that communicate least effectively. An investment of $100 made in the stock of organizations in the higheffectiveness group would have grown to $126, on average, by the end of the five-year period. By contrast, a $100 investment made in the stock of firms in the low2003/2004 Communication ROI StudyTM

effectiveness group would have dropped to $85 over the same period. As such, the most effective communicators shareholder returns were nearly 50 percent higher over the last five years than that of firms that communicated less effectively. Table 4. The Link Between Effective Communication and Shareholder Value
Communication Effectiveness High Medium Low Number of Companies 32 52 37 Avg. Q 1.340 1.081 1.056 Avg. Industry Adjusted Q 0.467 0.179 0.138 5-Year TRS (1998-2002) 26.1 % 5.2 % -15.0 %

Notes: Q represents Tobins Q the ratio of the market value of equity plus book value of debt divided by the book value of assets. Industry-adjusted Q is the firms Q minus the median industry Q. See below for industry breaks. Tests between two sub-groups of communication effectiveness for each performance measure are significant at conventional levels. Source: Watson Wyatt Worldwide 2003 Communication ROI Survey; Standard & Poors Compustat database.

We asked executives to report on their companys turnover rates for management/professionals and for all employees. Firms with lower turnover relative to their competitors generally are more successful by reducing direct costs, such as the costs of recruiting, overtime and unemployment. Also lower turnover can reduce indirect costs, such as lost productivity due to overwork of the remaining employees and the costs associated with managers time spent on the new hire process. As shown in table 5, firms with the highest level of communication effectiveness report turnover rates below their competitors more often than do organizations that communicate less effectively. In fact, the former stand out: over 50 percent of the effective communicators report below-average turnover rates for the entire workforce, while only 30 percent of the average and below-average communicators report having turnover rates below their competitors. Organizations that communicate highly effectively were most likely to report having lower turnover than their competitors, while there was very little difference in the proportion of medium and low communication effectiveness organizations that reported turnover rates below their competitors.

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Table 5. Turnover and Communication Effectiveness Percentage of Firms with Turnover Below Competitors Communication Effectiveness
High Medium Low

Management/professional 51.7% 43.4% 31.8%

All employees 51.6% 32.0% 33.3%

Notes: Percentages represent the firms that said their turnover rates are below or significantly below their competitors voluntary and involuntary turnover rates.

Multivariate Regression Results While the results shown in Table 4 and Table 5 indicate that organizations that communicate more effectively generate higher shareholder value and experience lower turnover rates, this analysis does not control for outside influences that could cause differences in firm performance. For example, are the differences in performance the result of industry/sector influences -- where a rising tide lifted all boats -- as opposed to the communication programs per se? Are there certain company characteristics such as the riskiness of the firms capital structure or the impact of non-balance sheet investments that account for the variation in company performance? Because of these uncertainties, we employed a multivariate regression analysis, regressing firm performance on the score for communication effectiveness and other control variables. The value of the regression analysis is twofold. First, it isolates the effectiveness of a companys communication programs and quantifies their impact on shareholder returns while controlling for the confounding impact of the other factors. Second, in a similar vein, this approach enables us to estimate how the increased (or decreased) use of a particular communication practice is associated with changes in surplus market value. We used an industry-adjusted Tobins Q and the log of Tobins Q as the dependent variables. Tobins Q is the ratio of the market value of equity plus the book value of debt divided by the book value of assets. Industry-adjusted Q is the firms Q minus the median industry Q. Differences among firms in the observed valuation ratio 10
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reflect perceived differences in the firms abilities to provide above-average earnings and in the riskiness of their earnings and asset value. The potential earning ability of a firm also depends on other things, such as market position, patents and expertise. The specification we used for this analysis controls for these factors by including the ratio of R&D expenditures plus advertising expenditure relative to total assets. Though these are expenses that do not create assets that go on the balance sheet, they are just as valuable at creating value within an organization through branding and the creation of new products as is with the purchase of new equipment. We use a second control: capital intensity as measured by the ratio of assets per employee. By using capital intensity, we control for the capital structure of the firm and, more importantly, for expenditures on human capital. We must resort to an indirect measure of labor expenses, because more direct measures are not publicly available. Another important factor that creates differences in surplus value across organizations is the degree of risk associated with a firms capital structure. When all else is equal, firms with higher levels of debt (relative to assets) increase their risk of bankruptcy and also suffer the adverse effects of higher debt on investment opportunities. As in earlier studies, we also include size as a control variable, because larger firms tend to be in multiple lines of business and previous research has shown that firms in multiple lines of business tend to have lower Qs, particularly if the lines are unrelated. Finally, we include industry dummies based on the GICS to control for industry effects across firms. For both measures of Tobins Q, we estimate the relation between communication effectiveness and shareholder value for three different model specifications. The purpose of this approach is to check the robustness of the estimates when various control variables are eliminated from the model specification. The estimates in Table 6 are standardized so that they represent the effect on surplus value of a one standard deviation change in communication effectiveness (and any other independent variable).

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Table 6. Regression Results of Communication Effectiveness and Shareholder Value.

Log of Tobin's Q STD Betas (t-values) Comm. Effective Research & Dev Capital Intensity Leverage Size Industries1 Consumer Discret. Consumer Staples Energy Financials Health Care Industrials Information Tech Materials (1) 0.2127 (2.87) 0.3282 (3.55) 0.0404 (0.30) 0.1822 (2.02) -0.0964 (-1.00) 0.0573 (0.41) 0.2201 (2.39) 0.0861 (1.10) -0.2571 (-2.40) 0.1492 (1.47) 0.1562 (1.11) 0.1919 (1.54) -0.0797 (-0.78) 0.4782 0.413 117 7.33 -0.0883 (-1.08) -0.0368 (-0.34) 0.2022 (2.42) 0.0609 (0.81) -0.3452 (-3.40) 0.1233 (1.32) 0.0511 (0.46) 0.0869 (0.79) -0.1170 (-1.24) 0.4645 0.4105 120 8.60 0.2656 0.2468 120 14.10 -0.1683 (-1.98) (2) 0.2223 (3.05) 0.2888 (3.28) (3) 0.1770 (2.19) 0.4139 (4.96) Industry Adjusted Tobin's Q (4) 0.2006 (2.38) 0.4913 (4.69) 0.1130 (0.74) 0.0780 (0.76) -0.1354 (-1.24) 0.0269 (0.17) 0.2163 (2.07) 0.0398 (0.45) 0.0304 (0.25) -0.0372 (-0.32) 0.1669 (1.05) 0.0558 (0.39) 0.0055 (0.05) 0.329 0.2451 117 3.92 -0.0986 (-1.07) -0.0766 (-0.64) 0.1825 (1.94) 0.0166 (0.20) -0.0026 (-0.02) -0.0760 (-0.73) 0.0621 (0.50) -0.0203 (-0.16) -0.0371 (-0.35) 0.3218 0.2534 120 4.70 0.2682 0.2494 120 14.29 -0.0896 (-1.06) (5) 0.2036 (2.48) 0.4841 (4.89) (6) 0.1755 (2.18) 0.4553 (5.46)

RSquare Adj RSquare N F Value2

1 2

Utilities is the base industry All values are significant at the 1 percent level.

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The estimates shown in Table 6 indicate that communication effectiveness has a significant impact on surplus shareholder value. Model 1 indicates that a one standard deviation change in communication effectiveness is associated with a 21 percent increase in Tobins Q. This is equivalent to a 29.5 percent increase in the equity market value. Even after we eliminate several of the control variables, the impact on communication effectiveness is similar in magnitude, and it remains significant at conventional levels. Models 4 to 6 show a very similar relationship. Model 4 shows that a one standard deviation increase in communication effectiveness is associated with a 0.20 increase in industry-adjusted Tobins Q. This is equivalent to an 18 percent increase in Tobins Q or roughly a 24 percent increase in the equity market value. Again, the magnitude changes only slightly with the elimination of the control variables, indicating a robust relationship between surplus value and communication effectiveness. These results indicate that a firms ability to communicate effectively to its employees and to the investment community matters. Firms that do it well can earn a significant boost to shareholder value. Throughout the remainder of this analysis, we investigate which processes, tactics and programs are associated with an increase an organizations communication effectiveness. Communication Programs and Practices that Affect Communication Effectiveness The second stage of the analysis was to determine which communication programs and practices are associated with higher levels of communication effectiveness. We designed the survey questionnaire, with the help of professional communicators, to capture as much information as possible on various aspects of communication programs and practices likely to have a significant effect on communication effectiveness. We grouped these items into categories of effectiveness based on an a priori assessment, and then assessed their reliability using the Cronbach alpha. All of the scales we created had a Cronbach alpha greater than 0.70. We then performed statistical analysis to determine their relation to the communication effectiveness score. This analysis took two forms: regression analysis to estimate the effect of each category on communication effectiveness and statistical tests 13
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to identify differences in means between highly effective and less effective communicators. We used the regression analysis to allocate the estimated effect of communication effectiveness on firm performance to the individual categories. We used the difference in means tests to confirm the data presented in the supporting tables discussed throughout the body of the paper. While the regression analysis provides a good view of the impact of particular practices on effective communication, the statistics presented describe the characteristics of effective communicators. Estimating the Effect of Communication Dimensions on Market Value As we discuss above, the questionnaire asked organizations to provide information on their communication policies and practices. We grouped these policies and practices into scales and tested for reliability (based on their Cronbach alphas). The next step was to analyze the effect of these scales on the organizations communication effectiveness, as measured by the communication effectiveness scores described above. We chose to do this through regression analysis, with the communication effectiveness score as the dependent variable and the scales as independent variables. Ordinary least squares regression analysis assumes the independent variables are orthogonal to each other. This assumption is never strictly true, but tends to be particularly problematic with survey data. The scales formed from the survey responses were significantly correlated with each other. This was expected, as there is a tendency for organizations that are strong in some areas of communication to also be strong in others. To facilitate the regression analysis, we performed factor analysis on the scales. Factor analysis is a statistical tool used to combine items (in this case, the scales we previously formed) that are significantly correlated with each other based on their variance-covariance matrix. We performed a principal components analysis and examined the scree pattern and other statistics to determine the proper number of factors to use to combine the scales. We also tested the factors formed, based on their rotated factor pattern, to make sure that they achieved what is known as a simple structure (based on the rotated factor pattern).

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To determine the structure of a set of factors, we examine the relation between each scale and the factors. The stronger the correlation between an item (or, in this case, a scale) and the factor formed, the more the item (or scale) is said to load on the factor. A simple structure implies that the items (or scales) load significantly (typically assumed to have an absolute value between 0.3 and 1.0) on one and only one factor. It is also desirable that each factor have at least three items (or scales) that load significantly on it. Through this analysis, we determined that rotating three factors yielded the simplest structure. In a standard variance-covariance matrix, the diagonal elements, which represent the covariance of an item with itself, are equal to 1. When we performed our factor analysis, we set the diagonal items equal to the R-squared of the regression with the scale as the dependent variable and all of the other scales employed as the independent variables. This adjustment reduces the probability we will overfit the data, basing our analysis on the random error in the responses to the items in the scales. As part of the process in forming the factor scores, we rotated the factors using a Varimax rotation. There are two types of rotation methods available to the researcher: oblique and orthogonal. Orthogonal methods rotate the factors so that, to the greatest extent possible, the factor scores that are formed from the scales are orthogonal to (or uncorrelated with) each other, while oblique rotation methods do not produce this result. In general, some realism is lost by using an orthogonal rotation method, since the underlying factors the factor scores are meant to measure are probably not uncorrelated with each other. However, it is standard practice to use an orthogonal rotation method like the Varimax method when the factor scores are being used as independent variables in a regression, as in this case. Our next step was to regress the communication effectiveness scores against the factor scores that we formed from the scales through our factor analysis. This regression analysis provided us with an estimate of the effect of a one standard deviation change in the factor scores on the organizations communication effectiveness score. Each of these factors were individually and collectively significant at conventional levels. The final stage in the process was to determine the relative impact of the individual scales on the organizations performance. The initial regression, reported in 15
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Table 6, estimated the effect of a significant (one standard deviation) change in communication effectiveness on organizational performance (29.5 percent). The next regression, not presented here, estimated the effect of each of the factors on the communication effectiveness score. We allocated the estimated effect based on the relative weight of each of these factors on communication effectiveness. The factor scores, in turn, are determined based on a system of linear equations with the values on the scales. Therefore, in allocating the estimated effect of each factor on firm performance via their effect on communication effectiveness, we merely invert that matrix to determine the appropriate weight for each scale. The results of this process are provided in Table 7.
Table 7. Effect of the Communication Dimensions on Market Value Category Behavioral: Drives supervisors/managers behavior Creates employee line of sight Strategic: Facilitates change Focuses on continuous improvement Connects to the business strategy Foundation: Follows a formal process Uses employee feedback Leverages technology Integrates total rewards 5.0% 1.4% 0.5% 1.3% 7.3% 4.8% 4.3% 2.8% 2.1% Estimated Change in Market Value

Note: This is the change in market value associated with an improvement in each area.

Hierarchy of Effective Communication: The Characteristics of Highly Effective Communication Organizations that communicate effectively overall are significantly more likely to be effective in a number of specific aspects of communication. The following model depicts the hierarchy of effective communication. It is composed of the practices that are most closely linked to effective communication.

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Figure 1. Hierarchy of Effective Communication

Action

Effective Communication Drives Supervisory /Managerial Behavior Creates Employee Line of Sight

BEHAVIORAL Facilitates Change Focuses on Continuous Improvement STRATEGIC Follows a Formal Process Utilizes Employee Feedback Integrates Total Rewards Leverages Technology Connects to the Business Strategy

Awareness

FOUNDATION

Behavioral Tier Reaching the Pinnacle The most important aspect of an effective communication program is that it motivates employees and management to act upon and achieve the goals set by the organization. This is the behavioral level of the hierarchy, and the pinnacle to which all world-class communicators aspire. Strategic Tier Planning for Success For this kind of employee engagement to happen, it is critical for organizations to be strategic in the way they design their communication programs. Communication at this level facilitates change and promotes continuous improvements in business operations. Foundation Tier Building a Strong Base At the foundation of an effective communication program, companies need to create a strong sense of awareness among its employees by establishing formal communication processes, using employee feedback and leveraging technology. An effective communication program also engages employees in the business with clear links between desired behaviors and the rewards program.

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Building the Foundation The first step in driving superior shareholder returns through effective communication is to establish a strong foundation by addressing process and resource issues. Organizations that communicate effectively: Follow a formal process Use employee feedback Integrate their total rewards messages into the communication process Leverage technology to facilitate communication

Follow a Formal Process Organizations that communicate effectively start by handling process issues correctly: they develop their programs proactively, document their communication strategy and coordinate their internal and external messages to eliminate confusion. New employees are brought up-to-speed quickly through a systematic orientation process and an organizational culture that supports knowledge-sharing and information exchange. These organizations also use internal opinion surveys to verify that employees understand key messages.
Follow A Formal Process
Communication programs are developed proactively Internal and external communication are coordinated effectively The organization has a documented communication strategy A systematic orientation program for new hires (for example, customized information and individualized follow-up) exists The organization uses internal opinion surveys to verify employee understanding of key internal messages The organization culture effectively supports the sharing of knowledge across the organization Low Effectiveness 64.0%* 40.4% 41.6% Medium Effectiveness 65.6% 51.6% 43.0% High Effectiveness 87.1% 76.5% 65.9%

36.0%

36.6%

60.0%

18.6%

12.2%

49.4%

15.7%

28.0%

47.1%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

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Use Employee Feedback Organizations that communicate effectively understand that communication has to flow freely in every direction within the organization, so they create an environment that maximizes their ability to use employee input in every area. In these organizations, employees have more input into decisions that affect them, into how their work gets done, into changes in how the business is run and into company programs, including benefit programs. Organizations that communicate effectively are more likely to make effective use of internal surveys and focus groups when they go through major organizational change initiatives such as restructuring efforts. Finally, these organizations also include action planning and improvement programs as essential parts of the employee survey and feedback process.

Use Employee Feedback The organization actively collects information to assess the value of benefit programs to employees Employees have meaningful input on decisions that affect them The organization conducts internal surveys and focus groups

Low Effectiveness 19.1% 3.4% 4.5%

Medium Effectiveness 31.2% 15.1% 5.4%

High Effectiveness 36.5% 35.3% 22.4%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

Integrate Total Rewards Organizations that communicate effectively do a better job than other organizations of communicating to employees about total rewards and compensation. These organizations encourage employees to take advantage of their benefits and help them understand the value of their total compensation packages. This is critical, both because of the money involved and because rewards issues often affect turnover. The programs themselves also communicate to employees messages about the organization and its values. Organizations that communicate effectively are more likely to develop a clear employer brand and to use pay as a means of engaging and involving employees in improving business performance. Developing and communicating the right total rewards

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package can reinforce the message that employees are valued business partners and key contributors to business success.

Integrate Total Rewards Pay is viewed as a means of engaging and involving people in improving business performance Employees understand the importance of participating in benefit programs Employees understand the value of their total compensation package The organization has a clear employer brand

Low Effectiveness

Medium Effectiveness

High Effectiveness

44.9% 46.1% 15.7% 19.1%

49.5% 34.4% 26.9% 26.9%

77.6% 58.8% 50.6% 41.2%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

Leverage Technology Organizations that communicate effectively use technology to amplify their message: Employees at these organizations use web technology to communicate, collaborate and share resources. The communication department plays a lead role in developing and managing the content of their intranet. These organizations are more likely to use the Internet to provide employees with access to total compensation statements, total retirement income projections and decision-making tools.
Leverage Technology Employees use web technology to communicate, collaborate and share resources inside the organization Total retirement income projections are delivered via the Web/Internet Total compensation statements are delivered via the Web/Internet Low Effectiveness 36.0% 22.5% 21.3% Medium Effectiveness 38.7% 29.0% 20.4% High Effectiveness 54.1% 44.7% 31.8%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

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Evolving through Strategic Communication As communication programs evolve and mature, the focus shifts to a more strategic and targeted approach more directly linked to business results. These are communication interventions that: Facilitate change Focus on continuous improvement Connect to the business strategy

Facilitate Change Over the past two years, many organizations have undergone major changes, such as restructurings, that have required them to undertake significant communication efforts to help employees adjust to and thrive during and after the change process. Our earlier research has shown that organizations that handled their restructurings well in the early 1990s gained a sustainable competitive advantage and enjoyed significantly better longterm performance than other organizations.
Facilitate Change The organization explains the reasons behind major decisions to all employees The internal communication function was involved in the organizations restructuring to a significant or very great extent The organization implements a communication strategy as part of any restructuring initiative The organization implemented a new communication initiative (e.g., the roll-out of a new vision, values, etc.) The organization measures whether communication is effective in leading to behavior change 46.1% 22.5% 58.1% 36.6% 78.8% 63.5% Low Effectiveness Medium Effectiveness High Effectiveness

21.3%

31.2%

62.4%

12.4% 19.1%

20.4% 29.0%

47.1% 38.8%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

Organizations that communicate effectively handle major changes more effectively than other organizations. The Communication ROI research indicates that these organizations involve internal communication professionals earlier in the process 21
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and to a greater extent. These organizations proactively develop a communication strategy to help manage change. They also make more effective use of written communication, including targeted communication in various media to explain the reasons behind major changes to all employees. And these organizations also are more likely to introduce communication practices designed to help employees recover from the changes, thereby accelerating their return to full productivity. Focus on Continuous Improvement Excellence is a moving target, and achieving it requires continuous improvement and ongoing communication. Organizations that communicate effectively leverage information such as customer feedback to help employees improve their performance. They also make changes based on internal opinion surveys and communicate these changes to employees, sending a powerful message to employees about their contributions. Continuous improvement relies on measurement, including hard measures such as those recorded by communication audits and objective measures of behavior change and the degree to which information provided helps employees do their jobs better. Organizations that communicate effectively ensure that the communication function supports strategic business plans, making the business case for investments in the communication function. One opportunity for improvement highlighted in this dimension of the Communication ROI survey is the importance of frequent measurement of the results achieved by communication programs and activities. Only 16.5 percent of the highly effective organizations in our survey indicated they extensively measure the communication functions contribution to the achievement of strategic business goals. As the communication function becomes more strategic in nature, communicators must increasingly quantify their contribution in terms other business leaders can value and understand. This data also helps successful companies prioritize their efforts and make the best use of limited resources.

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Focus on Continuous Improvement The organization measures whether information helps employees do their jobs better Changes made as a result of internal opinion survey feedback are communicated effectively to employees The organization uses communication audits to measure communication effectiveness The organization uses objective measures of changed behavior to measure communication effectiveness The organization makes extensive use of measurement to verify communication functions contribution to achieving strategic business goals

Low Effectiveness 34.8%

Medium Effectiveness 45.2%

High Effectiveness 69.4%

17.1% 19.1%

26.8% 19.4%

50.6% 35.3%

7.9%

19.4%

21.2%

4.5%

7.5%

16.5%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

Connect to the Business Strategy Effective communication that affects behavioral changes and increases shareholder returns is connected directly to the organizations business objectives and strategy. Organizations that communicate effectively use the voice of the employee to enhance and implement key business objectives. Senior managers at these organizations recognize the importance of communication and employee engagement in achieving business objectives and are actively involved in the communication process.
Connect to the Business Strategy The organization directly links communication objectives to business objectives Senior management recognizes the importance of communication in achieving business objectives Corporate communication is an essential part of the companys business strategy The organization's internal opinion surveys are designed to obtain feedback relating directly to key business objectives Low Effectiveness 53.9% Medium Effectiveness 64.5% High Effectiveness 90.6%

49.4% 41.6%

65.6% 46.2%

87.1% 76.5%

28.6%

23.2%

62.3%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

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Effecting Change at a Behavioral Level Organizations that build the foundation of process, technology, rewards and feedback and that connect the elements of this foundation at the strategic level are likely to be rewarded at the behavioral level, where the most significant increase in shareholder value can be realized. At this level, communication interventions: Drive supervisory/managerial behavior Create employee line of sight

Drive Supervisory/Managerial Behavior Formal communication processes are just one means of communicating with employees. Employees interact with managers and supervisors continuously, and these interactions may be the most powerful form of communication in the organization. In organizations that communicate effectively, senior managers tie communication initiatives to business objectives and base all communication on a clear, well-defined communication strategy.
Low Effectiveness 38.2% 53.9% 31.5% 44.9% Medium Effectiveness 51.6% 63.4% 44.1% 48.4% High Effectiveness 81.2% 80.0% 76.5% 62.4%

Drives Supervisory/Managerial Behavior Senior managers tie communication initiatives to corporate business objectives Leaders give managers information before sharing it with employees Managers support the leaderships vision through their actions Managers have a high level of communication responsibility Senior management bases all communication ona clear, well-defined communication strategy Managers develop a more participatory style Executives/line managers are aware of and accept the findings of communication measurements Managers at all levels are rewarded for communicating effectively

19.1% 9.0% 15.7%

26.9% 12.9% 15.1%

51.8% 50.6% 36.5%

5.6%

14.0%

17.6%

Note: Numbers provided indicate the percentage of respondents that gave a favorable response to that item, typically a response of 4 or 5 on a 5-point Likert scale.

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2003/2004 Communication ROI StudyTM

While all of this is important, if managers do not support the key messages through their actions, the communication strategy is likely to fail. Though most organizations recognize the importance of managers exhibiting appropriate leadership behaviors, organizations that communicate effectively are much more likely to report that their managers consistently display the appropriate behaviors. Managers at these organizations understand what is expected of them and are given information in advance. They also do a better job of supporting the leaderships vision through their actions and by enthusiastically implementing new approaches to work. They are more likely to develop a more participatory style and to give employees recognition. The result is that these organizations are more effective at regularly communicating company information to employees. Create Employee Line of Sight Organizations that communicate effectively do a better job of creating a line of sight for employees. Line of sight means that employees understand the big picture and, more importantly, clearly see how their actions move the organization closer to achieving its performance goals. Organizations that are effective in this activity have fostered a culture of information exchange, and they consistently share financial information, business plans and organizational goals with employees. Best practice organizations consistently communicate openly with employees about matters that affect them and engage them in helping to solve business problems. Communication flows freely within the organization up to management and down to employees. As a result, employees with a clear line of sight are more likely to provide the kind of feedback that is connected to the business strategy and is useful to the organization as it makes continuous improvements or initiates major changes. In this type of organization, employees also are more likely to take appropriate actions without direction because they understand how their actions are directly linked to the business results. Their quick reaction to changing circumstances gives the organization a major advantage over its competitors whose employees lack this line of sight.

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2003/2004 Communication ROI StudyTM

Creates Employee Line of Sight The organization communicates openly to employees about matters that affect them. The organization shares business plans and/or goals with employees The organization shares financial information with employees Leaders consistently communicate company information to employees

Low Effectiveness

Medium Effectiveness

High Effectiveness

47.2%* 30.3% 33.7% 15.7%

62.4% 40.9% 37.6% 22.6%

88.2% 81.2% 78.8% 60.0%

There is still significant room for improvement in linking managers rewards to effective communication. Only 17.6 percent of organizations with high communication effectiveness reward managers at all levels for communicating effectively.

Conclusion As organizations are becoming increasingly global and finding it ever more challenging to compete within the rapidly changing market environment, companies are constantly searching for ways to get a leg up on their competition and enhance their bottom line. The results of the 2003 Watson Wyatt Communication ROI Survey clearly illustrate that effective communication programs do make a difference. Organizations that communicate effectively earn significantly higher shareholder returns and are associated with lower rates of turnover than other organizations. This can become a key differentiator in todays highly competitive business environment. What does it mean to be an effective communicator? It means you have developed a strong foundation by creating formal communication processes, leveraging technology in your communication programs, integrating total rewards with business goals, and soliciting and responding to employee feedback to generate higher shareholder returns for the organization. It means you are thinking and acting strategically by using communication to facilitate organizational change to achieve your business goals. And you are measuring your success. It also means you are using communication to change employee behavior, by helping managers become better communicators and change agents, and by ensuring that employees see how what they do each day makes a difference to the organizations overall success. 26
2003/2004 Communication ROI StudyTM

Appendix I Sector Descriptions for the Global Industry Classification Standard (GICS) Energy Sector: Oil & Gas Drilling Oil & Gas Equipment & Services Integrated Oil & Gas Oil & Gas Exploration & Production Oil & Gas Refining & Marketing & Transportation Materials Sector: Chemicals Construction Materials Containers & Packaging Metals & Mining Paper & Forest Products Industrials Sector: Aerospace & Defense Building Products Construction & Engineering Electrical Equipment Industrial Conglomerates Machinery Trading Companies & Distributors Commercial Services & Supplies Air Freight & Logistics Airlines Marine Road & Rail Transportation Infrastructure Consumer Discretionary: Auto Components Automobiles Household Durables Leisure Equipment & Products Textiles, Apparel & Luxury Goods Hotels, Restaurants & Leisure Media Distributors Internet & Catalog Retail Multiline Retail Specialty Retail 27
2003/2004 Communication ROI StudyTM

Consumer Staples: Food & Staples Retailing Beverages Food Products Tobacco Household Products Personal Products Health Care: Health Care Equipment & Supplies Health Care Providers & Services Biotechnology Pharmaceuticals Financials: Commercial Banks Thrifts & Mortgage Finance Diversified Financial Services Consumer Finance Capital Markets Insurance Real Estate Information Technology: Internet Software & Services IT Services Software Communications Equipment Computers & Peripherals Electronic Equipment & Instruments Office Electronics Semiconductors & Semiconductor Equipment Utilities: Electric Utilities Gas Utilities Multi-Utilities & Unregulated Power Water Utilities

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2003/2004 Communication ROI StudyTM