What is the ripple effect costing organisations?

Organisations are leaking millions of dollars each year in absenteeism, presenteeism, workers’ compensation, employee turnover, and the ripple effect of lost productivity from colleagues and family members – all because many employees are not well. What is this costing organisations and what can they do to minimise the impact?

This is the third article in our four-part series about the ripple effect of poor employee wellbeing. Our first one outlined how poor employee wellbeing can cause a ripple effect in the workplace. Our second explained why poor employee wellbeing can affect multiple workplaces. This one explores the hidden cost of the ripple effect and includes a case study of Nadira – one employee whose case affected many.

A discussion such as this is important because the more that organisations can recognise, track, quantify, and minimise the ripple effect of poor employee wellbeing, the more they can keep their people safe, well, engaged, and productive – so they can enjoy their work and perform at their best.

Sources: Direct Health Solutions, Australian Broadcasting Commission, The Centre for International Economics, Medibank, Safe Work Australia, Sonder

Direct costs

Most organisations track and quantify the direct costs of poor employee wellbeing in their workplace. These direct costs are generally calculated by taking the amount of time lost (in hours) and multiplying it by the hourly wage of the worker (although this approach fails to take into account the marginal value of the worker against their role – meaning, a worker holds more value to the company than only salary input). 

Direct costs are typically calculated via lagging indicators such as:

• Absenteeism;
• Workers’ compensation;
• Lost time injury frequency rates (LTIFR);
• Return to work rates; 
• Attrition; and 
• Presenteeism.

Note: Most organisations do not track and quantify presenteeism (i.e. being at work despite being unwell), despite that it can cause “reduced work performance” and “contribute substantially to productivity costs for employers”, concluded researchers Strömberg, Aboagye, Hagberg, Bergstrom, and Lohela-Karlsson, from the Karolinska Institute in Sweden. 

Sources: ScienceDirect, Journal of Organizational Behavior

Indirect costs

Few organisations acknowledge, track, and quantify their indirect costs of poor employee wellbeing – despite the reality that these usually outweigh the direct costs. 

Indirect costs are particularly important where a reduction in worker performance affects the productivity output not only of the worker but also of coworkers and team leaders. Job-specific factors related to an impacted worker, and their coworkers, can make the productivity costs to employers significantly higher than direct wages.

Indirect costs typically include:

• Time taken by colleagues and managers to help an employee with poor wellbeing;
• Reduced morale and productivity from colleagues who regularly take on extra duties; 
• Time taken to find substitute workers;
• Additional payments to substitute workers;
• Reduced quality of individual and/or team output; 
• Risk of burnout and attrition for colleagues taking on extra duties; and 
• Lost revenue opportunities where time-sensitive deadlines were missed.

Sources: ScienceDirect, Journal of Organizational Behavior

Wage multipliers

One way of calculating the ripple effect across a team or organisation is through wage multipliers, where the total productivity losses are calculated as a factor of the impacted employee’s wage. 

Total productivity losses from absenteeism can range between 1.4 to 2.8 times the value of the impacted worker’s wage. The variation depends on the employee’s role and industry, the ease of finding a substitute for that worker, the degree of time sensitivity of output, and the degree to which output is based on teamwork. 

Multiple studies such as Strömberg et. al. have identified an average wage multiplier for absenteeism of 1.97 (and 1.70 for presenteeism). Some occupations have higher wage multipliers (e.g. transport workers, couriers, engineers, and information technology workers). Others have lower wage multipliers (e.g. chefs, waiters, and workers in heavy industry and manufacturing).

Case study: Nadira

Nadira (fictional character) was a dedicated frontline worker at Superb Stores. She had been part of the team for 20 years, was loved by customers, and often won the company’s ‘employee of the month’ award. 

Unfortunately, on one of Nadira’s night shifts, her wrist was broken during a physical attack by an intoxicated customer. As a result of the assault, she also developed serious mental health concerns.

Scenario

• Nadira took three sick leave days to recover and to visit the hospital for treatment. Her colleagues picked up extra work duties to cover her absences.
  • Absenteeism = $1,225.

• After a while, the goodwill of her frontline colleagues wore off as they began to feel overworked and burnt out. Nadira’s direct manager spent three hours discussing Nadira’s case with their People and Culture manager.
  • Management time = $219.

• When Nadira returned to work full-time, she complained about pain in her wrist, but she kept her post-incident psychological struggles to herself. Her manager transferred her to light duties in the back office. Soon after, her upbeat demeanour changed. Nadira did not understand what she was experiencing, so she spent five work hours researching her symptoms.
  • Presenteeism = $237.

• Nadira’s back-office manager noticed she was frequently distracted at work, and she was fielding complaints from Nadira’s new colleagues. Her manager spent one hour each week for four weeks counselling Nadira.
  • Management time = $260.

• Within months, Nadira regressed into a depressed state. She was frequently sad and absent from work on sick leave. Her back-office colleagues were given extra duties to cover for her. This negatively affected morale and output.
  • Absenteeism = $3,674.

• Team tension grew, and, not knowing what else to do, Nadira’s back-office manager filled in all of the paperwork to report her to senior management, gave her a formal warning, and put her on a performance plan.
  • Management time = $200.

• One week later, Nadira resigned.
  • Recruitment, training, and management time = $19,562.
  • Total lost productivity cost = $25,377.

How can organisations minimise the ripple effect of poor employee wellbeing?

Our next article, the final in our four-part series, will suggest some next steps for organisational leaders. That fourth article will cover:

• Improving the wellbeing of employees
  • Cultivating a culture of wellbeing
  • Creating a safe and healthy workplace
  • Implementing meaningful support systems

• Improving the wellbeing of family and close friends
  • Broadening social initiatives
  • Extending meaningful support

Missed an earlier article in this series?

If you missed any of the previous articles in this series about the hidden cost of the ripple effect of poor employee wellbeing, here are some quick links for you:

How can poor employee wellbeing cause a ripple effect in the workplace?

Why does poor employee wellbeing affect multiple workplaces?

Download our new report

Alternatively, to access the content from all four articles, we invite you to download our full evidence-backed report, which aims to help you:

• Understand the ripple effect of poor employee wellbeing
• See the ripple effect in action
• Calculate the hidden cost of lost productivity
• Minimise the impact on your organisation

Want to learn more?

For more information about how Sonder can help you rethink your employee and/or student support, we invite you to contact us here.