ROI Study Methodology

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2003/2004 Communication ROI StudyTM 2

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, you’re 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




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.

1 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 presentationof 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.




Introduction

The 2003 Watson Wyatt Communication ROI Survey studies the relationship

between firm’s 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 organization’s 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 samedepartment, 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 anincrease/decrease in shareholder value. This relation is merely a correlation between effectivecommunication and shareholder returns. Two variables are correlated if one variable changes when theother changes. This does not mean that changes in one variable causes changes in the other.




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 average-

sized 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

Number of EmployeesPercentage of Respondents

Less than 1,000 10.5%

1,000 to 2,499 13.2

2,500 to 4,999 14.0

5,000 to 9,999 28.1

10,000 to 24,999 19.3

Greater than 25,000 14.9

We also asked executives to report on their organization’s 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




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 RatesPercentage at or Below

Competitors

Voluntary Involuntary Voluntary Involuntary

Management/professional 3.0% 2.0% 92.9% 91.9%All employees 7.0% 3.0% 87.0% 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 firm’s industry

affiliation has important implications for the variation in communication effectiveness.

Table 3. Percentage of Respondents by Industry Sector

Industry Number of Firms

Percentage Highly

Effective

Energy 3 66.7

Materials 23 46.5

Industrials 46 26.1

Consumer Discretionary 35 37.1

Consumer Staples 17 41.2

Health Care 41 36.6

Financials 43 46.5Information Technology 19 31.6

Utilities 19 42.1

Non-Profit/Univ./Hospitals 19 15.8

Not Identified 2 50.0

Total 267 34.5




Methodology

The questionnaire asked respondents to rate their organization’s 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.




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 firm’s equity and debt to the

replacement value of its underlying physical assets – more formally known as Tobin’s 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 togenerate 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 Tobin’s 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 high-

effectiveness 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 low-




effectiveness group would have dropped to $85 over the same period. As such, the most

effective communicator’s 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

Number of

Companies Avg. Q

Avg. Industry

Adjusted Q

5-Year TRS

(1998-2002)

High 32 1.340 0.467 26.1 %

Medium 52 1.081 0.179 5.2 %

Low 37 1.056 0.138 -15.0 %

Notes: Q represents Tobin’s Q – the ratio of the market value of equity plus book value of debt divided bythe book value of assets. Industry-adjusted Q is the firm’s 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 & Poor’s Compustat database.

We asked executives to report on their company’s 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 costsassociated 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.




Table 5. Turnover and Communication Effectiveness

Percentage of Firms with Turnover Below Competitors

CommunicationEffectiveness Management/professional All employees

High 51.7% 51.6%

Medium 43.4% 32.0%

Low 31.8% 33.3%

Notes: Percentages represent the firms that said their turnover rates are “below” or “significantly below” their competitor’s 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 firm’s 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 company’s 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 Tobin’s Q and the log of Tobin’s Q as the

dependent variables. Tobin’s 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 firm’s Q

minus the median industry Q. Differences among firms in the observed valuation ratio




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 firm’s 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 Q’s, 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 Tobin’s 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).




Table 6. Regression Results of Communication Effectiveness and Shareholder

Value.

Log of Tobin's Q Industry Adjusted Tobin's Q

STD Betas (t-values) (1) (2) (3) (4) (5) (6)

Comm. Effective 0.2127 0.2223 0.1770 0.2006 0.2036 0.1755(2.87) (3.05) (2.19) (2.38) (2.48) (2.18)

Research & Dev 0.3282 0.2888 0.4139 0.4913 0.4841 0.4553

(3.55) (3.28) (4.96) (4.69) (4.89) (5.46)

Capital Intensity 0.0404 0.1130

(0.30) (0.74)

Leverage 0.1822 0.0780

(2.02) (0.76)

Size -0.0964 -0.0883 -0.1683 -0.1354 -0.0986 -0.0896

(-1.00) (-1.08) (-1.98) (-1.24) (-1.07) (-1.06)

Industries1

Consumer Discret. 0.0573 -0.0368 0.0269 -0.0766

(0.41) (-0.34) (0.17) (-0.64)

Consumer Staples 0.2201 0.2022 0.2163 0.1825

(2.39) (2.42) (2.07) (1.94)

Energy 0.0861 0.0609 0.0398 0.0166

(1.10) (0.81) (0.45) (0.20)

Financials -0.2571 -0.3452 0.0304 -0.0026

(-2.40) (-3.40) (0.25) (-0.02)

Health Care 0.1492 0.1233 -0.0372 -0.0760

(1.47) (1.32) (-0.32) (-0.73)

Industrials 0.1562 0.0511 0.1669 0.0621(1.11) (0.46) (1.05) (0.50)

Information Tech 0.1919 0.0869 0.0558 -0.0203

(1.54) (0.79) (0.39) (-0.16)

Materials -0.0797 -0.1170 0.0055 -0.0371

(-0.78) (-1.24) (0.05) (-0.35)

RSquare 0.4782 0.4645 0.2656 0.329 0.3218 0.2682

Adj RSquare 0.413 0.4105 0.2468 0.2451 0.2534 0.2494

N 117 120 120 117 120 120

F Value2 7.33 8.60 14.10 3.92 4.70 14.29

1 Utilities is the base industry2 All values are significant at the 1 percent level.




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 Tobin’s 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 Tobin’s Q. This is equivalent to an 18 percent increase in Tobin’s 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 firm’s 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

organization’s 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




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 organization’s 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).




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 organization’s 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 organization’s performance. The initial regression, reported in




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 Estimated Change in Market Value

Behavioral:

Drives supervisors’/managers’ behavior 7.3%

Creates employee line of sight 4.8%

Strategic:

Facilitates change 4.3%

Focuses on continuous improvement 2.8%

Connects to the business strategy 2.1%

Foundation:

Follows a formal process 5.0%

Uses employee feedback 1.4%

Leverages technology 0.5%

Integrates total rewards 1.3%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.




Figure 1. Hierarchy of Effective Communication

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 formalcommunication 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.

Follows a Formal

Process Leverages Technology

Utilizes

Employee

Feedback

Integrates

Total

Rewards

Focuses on Continuous

Improvement

Facilitates

Change

Connects to the

Business Strategy

Creates Employee

Line of Sight

Drives Supervisory

/Managerial Behavior

Effective

Communication

Action

Awareness

FOUNDATION

STRATEGIC

BEHAVIORAL

Follows a Formal

Process Leverages Technology

Utilizes

Employee

Feedback

Integrates

Total

Rewards

Focuses on Continuous

Improvement

Facilitates

Change

Connects to the

Business Strategy

Creates Employee

/Managerial Behavior

Effective

Communication

Action

Awareness

FOUNDATION

STRATEGIC

BEHAVIORAL




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 Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

Communication programs are developed proactively64.0%* 65.6% 87.1%

Internal and external communication are coordinated effectively 40.4% 51.6% 76.5%

The organization has a documented communication strategy41.6% 43.0% 65.9%

A systematic orientation program for new hires (for example,customized information and individualized follow-up) exists

36.0% 36.6% 60.0%

The organization uses internal opinion surveys to verify employeeunderstanding of key internal messages 18.6% 12.2% 49.4%

The organization culture effectively supports the sharing of knowledgeacross the organization 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 4or 5 on a 5-point Likert scale.




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 Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

The organization actively collects information to assess the value of benefit programs to employees

19.1% 31.2% 36.5%

Employees have meaningful input on decisions that affect them 3.4% 15.1% 35.3%

The organization conducts internal surveys and focus groups 4.5% 5.4% 22.4%


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




package can reinforce the message that employees are valued business partners and key

contributors to business success.

Integrate Total Rewards

Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

Pay is viewed as a means of engaging and involving people in improving business performance

44.9% 49.5% 77.6%

Employees understand the importance of participating in benefit programs 46.1% 34.4% 58.8%

Employees understand the value of their total compensation package 15.7% 26.9% 50.6%

The organization has a clear employer brand 19.1% 26.9% 41.2%


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 Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

Employees use web technology to communicate, collaborate and shareresources inside the organization 36.0% 38.7% 54.1%

Total retirement income projections are delivered via the Web/Internet 22.5% 29.0% 44.7%

Total compensation statements are delivered via the Web/Internet 21.3% 20.4% 31.8%





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 long-

term performance than other organizations.

Facilitate Change Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

The organization explains the reasons behind major decisions to all

employees46.1% 58.1% 78.8%

The internal communication function was involved in theorganization’s restructuring to a significant or very great extent

22.5% 36.6% 63.5%

The organization implements a communication strategy as part of anyrestructuring initiative 21.3% 31.2% 62.4%

The organization implemented a new communication initiative (e.g.,the roll-out of a new vision, values, etc.) 12.4% 20.4% 47.1%

The organization measures whether communication is effective inleading to behavior change

19.1% 29.0% 38.8%


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




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 function’s 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.




Focus on Continuous Improvement Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

The organization measures whether information helps employees dotheir jobs better

34.8% 45.2% 69.4%

Changes made as a result of internal opinion survey feedback are

communicated effectively to employees 17.1% 26.8% 50.6%

The organization uses communication audits to measurecommunication effectiveness

19.1% 19.4% 35.3%

The organization uses objective measures of changed behavior tomeasure communication effectiveness

7.9% 19.4% 21.2%

The organization makes extensive use of measurement to verifycommunication function’s contribution to achieving strategic businessgoals

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 organization’s 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 Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

The organization directly links communication objectives to businessobjectives

53.9% 64.5% 90.6%

Senior management recognizes the importance of communication inachieving business objectives 49.4% 65.6% 87.1%

Corporate communication is an essential part of the company’s business strategy

41.6% 46.2% 76.5%

The organization's internal opinion surveys are designed to obtainfeedback relating directly to key business objectives 28.6% 23.2% 62.3%





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.

Drives Supervisory/Managerial Behavior

Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

Senior managers tie communication initiatives to corporate businessobjectives 38.2% 51.6% 81.2%

Leaders give managers information before sharing it with employees53.9% 63.4% 80.0%

Managers support the leadership’s vision through their actions 31.5% 44.1% 76.5%

Managers have a high level of communication responsibility44.9% 48.4% 62.4%

Senior management bases all communication ona clear, well-definedcommunication strategy 19.1% 26.9% 51.8%

Managers develop a more participatory style 9.0% 12.9% 50.6%

Executives/line managers are aware of and accept the findings of communication measurements

15.7% 15.1% 36.5%

Managers at all levels are rewarded for communicating effectively5.6% 14.0% 17.6%





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 leadership’s 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.




Creates Employee Line of Sight

Low

Effectiveness

Medium

Effectiveness

High

Effectiveness

The organization communicates openly to employees about matters that

affect them.47.2%* 62.4% 88.2%

The organization shares business plans and/or goals with employees 30.3% 40.9% 81.2%

The organization shares financial information with employees 33.7% 37.6% 78.8%

Leaders consistently communicate company information to employees 15.7% 22.6% 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 today’s 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 organization’s overall success.




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



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

Documents

ROI Study Methodology