StrategyDriven Business Politics Impacts Article | Business Politics Impacts - Cost of Litigation, Fines, and Payouts

Business Politics Impacts – Cost of Litigation, Fines, and Payouts

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StrategyDriven Business Politics Impacts Article | Business Politics Impacts - Cost of Litigation, Fines, and PayoutsHarassment litigation represents a catastrophic leadership failure. In these instances, exhibited aberrant behavior may be non-compliant with applicable laws. Such occurrences represent large one-time costs associated with court mandated payouts as well as reduced productivity, heightened distraction, and elevated attrition.

Litigation events are acute occurrences unlike the more typically chronic workplace conditions resulting in diminished productivity, increased distraction, and elevated attrition. Consequently, all organizations can be subject to this type of litigation – it only takes one ill-fated event.[wcm_restrict plans=”49923, 25542, 25653″]

Cost of Litigation

Unlike productivity and attrition costs, litigation expenses are difficult to calculate and are far more subjective. Categorically, litigation costs can be divided into direct (quantitative) and indirect (qualitative) groupings that include such costs as:

Direct

  • Attorneys’ fees and court costs
  • Executive, manager, and employee litigation related time costs
  • Settlement payouts
  • Fines and fees assessed
  • Media and public relations costs
  • Internal training costs (training courses and employee time)
  • Internal communications costs (development, delivery, and reception)

Indirect

  • Reputational costs (diminished sales)
  • Executive, manager, and employee litigation related distraction costs (productivity loss)
  • Employee productivity reduction
  • Employee attrition

Litigation costs related to sexual harassment have been found to be:

  • $6.7 million is spent by the average large corporation for each sexual harassment lawsuit (Texas Bar Journal, November 1997)
  • $350,000 is the average court verdict for a sexual harassment plaintiff; not including defense costs or intangible costs the employer incurs as a result of bad publicity and diminished productivity
  • $150,000 per plaintiff is the average cost an employer faces to defend against a sexual harassment lawsuit1

Some high profile harassment litigation settlements include:

  • Coca-Cola: $192 million
  • Texaco: $176 million
  • State Farm Insurance: $157 million
  • Shoney’s: $105 million
  • Home Depot: $104 million
  • Publix Markets: $81 million2

Calculating the Cost of Litigation, Fines, and Payouts

Workplace harassment litigation can have a material financial impact. The calculation of this cost focuses on the frequency or probability of event occurrence.

  1. Estimate the per incident cost of a harassment-based lawsuit. The total per incident cost is determined by summing the estimated itemized direct and indirect costs (listed above). Note that if multiple plaintiffs are likely to be involved, higher settlement payouts will result. In this case, multiply the estimated settlement payout by the assumed number of plaintiffs when determining this portion of the per incident cost.
  2. Determine the organization’s estimated annual harassment litigation event occurrence rate (events per year if more than one event per year is expected) or probability (percent likelihood and event will occur if less than one event per year is expected). Factors to consider are those indicating the existence of stress points within the organization such as:
    • Frequent organizational change (people, processes, and/or technology) especially if concentrated within one part of the organization
    • Significantly negative feedback on a particular executive, manager, or employee from culture surveys, 360 degree feedback instruments, etcetera
    • Frequent employee concerns/complaints filed against a particular executive, manager, or employee
    • Introduction of a new hire executive, manager, or employee from a company with known harassment issues
    • An organization’s propensity to the excessive use/exertion of political power
    • The larger the organization (by number of people) the higher the risk of a harassment incident
    • The organization’s historical pattern of harassment cases
  3. Project the annual cost of harassment litigation by multiplying the per event cost identified in Step 1 by the event occurrence rate or probability estimated in Step 2.

Example Return On Investment Calculation for Employee Turnover Reduction

Background

Harassment Litigation Events per Year: 1 / year

Calculation (Illustrative)

  1. Per Incident Cost of Harassment Litigation: $6.70 million
  2. Harassment Litigation Events per Year: 1 / year
  3. Current Annual Cost of Harassment Litigation: $6.70 million / year

Final Thought…

StrategyDriven’s Diversity and Inclusion – Return on Investment, part 4: Litigation, Fine, and Payout Reduction reveals the available return on investment from improved workplace civility. It assumes, however, that leaders capable of making such improvements desire to do so.
Improvement initiatives reducing the prevalence of business politics within an organization are rarely pursued because those empowered to do so enable the political environment through complacency/indifference or benefit from its existence. Consequently, improvements are most likely achieved by newly appointed, strong leaders.

Sources

  1. “One Sexual Harassment Lawsuit Can Devastate Even the Largest Employer,” Momkus McCluskey LLC, March 2011
  2. “The Price of Discrimination: The Nature of Class Action Employment Discrimination Litigation and its Effects,” Michael Selmi, Texas Law Review, 2003

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StrategyDriven Business Impacts Article | Employee Distraction

Business Politics Impacts – Cost of Employee Distraction

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StrategyDriven Business Impacts Article | Employee DistractionAll workplace environments have distractions diverting employees’ attention and diminishing productivity. Some of these distractions are simply a part of the human condition, our physical, intellectual, and social needs for diversionary activity. Others, however, are induced by workplace structures, policies, and employees (executives, managers, supervisors, and individual contributors) including through the abusive exercise of business politics.

Business politics vary in their impact on employee productivity. The exercise of power in a coercive or intentionally disrespectful and demeaning way creates a hostile work environment driving employees to spend significant non-productive time worrying about and avoiding these situations and people.[wcm_restrict plans=”49804, 25542, 25653″]

Cost of Distraction

Employees not fully dedicating their time and energies to the achievement of the organization’s goals because of workplace politics represents a real and significant opportunity cost to the company. In 2002, The Orlando Business Journal cited a survey of 9,000 federal employees that revealed a $90 million per year loss because of employee distractions associated with disrespectful and demeaning acts.3 These costs are derived from a multitude of sources including:

  • Distraction from tasks on the part of the victims, witnesses, and politicians
  • Absenteeism
  • Time spent at work looking for different work
  • Time spent at work talking about being coerced, manipulated, or otherwise negatively impacted instead of working
  • Time spent at work by others gossiping about the politician and his or her behavior
  • Time spent by other employees and management calming and counseling victims
  • Time spent by management appeasing, counseling or disciplining politicians
  • Time spent soothing victimized customers, suppliers and other key outsiders
  • Time spent planning and executing on counters to the politicians
  • Time spent reorganizing departments and teams
  • Time spent interviewing, recruiting, and training replacements for departed victims, witnesses, and politicians
  • Time and financial resources spent on anger management, communication, leadership and other training

Additionally, there are other qualitative impacts that potentially distract employees including:

  • Reduced psychological safety and associated climate of fear
  • Loss of motivation and energy at work from victims and witnesses
  • Stress induced psychological and physical illness
  • Possible impaired mental ability4

Considering the large number of physical and mental distractions associated with destructive political behaviors, it is easy to understand how an organization can incur considerable incivility-related employee distraction costs.

An Abusive Work Environment

A recent survey of 800 people by Christine Pearson and Christine Porath revealed that 10 percent of those interviewed witnessed acts of incivility in the workplace daily and 48 percent said they were treated uncivilly at least once per week.5

A similar study conducted by The Center for Human Capital Analytics found disrespectful and demeaning acts to have a profoundly negative impact on employees:

  • 10 percent reduced the effort they gave at work
  • 12 percent considered leaving to avoid the politician
  • 14 percent decreased their commitment to the organization
  • 16 lost time worrying about the politician6

Clearly, acts of incivility result in lost productivity because of time spent worrying about and avoiding the politician.

Example Acts of Political Incivility

Acts of political incivility are the unwelcome, unjustified, and unreasonable behaviors intended to create feelings of humiliation, hurt, embarrassment, and degradation often associated with the exercise of coercive power. They can be exhibited by executives, managers, and peers and seek to manipulate victims and witnesses. Examples of political incivility include:

Blatant Management Acts of Political Incivility

  • Setting impossible deadlines
  • Constantly changing targets
  • Deliberately withholding work-related information and/or resources
  • Continually assigning tasks that are meaningless or beyond a person’s skill level

Blatant Personal Acts of Political Incivility

  • Losing one’s temper and/or yelling at someone in public
  • Consistently criticizing
  • Making someone the ongoing brunt of teasing, pranks, and/or practical jokes
  • Rude or obnoxious behavior in the workplace
  • Badgering and/or back-stabbing in the workplace
  • Withholding important customer/client information
  • Sabotaging a project and/or damaging someone’s reputation

Subtle Acts of Political Incivility

  • Arriving late to a meeting
  • Checking email and/or texting during a meeting
  • Not answering calls and/or responding to emails in a timely manner
  • Ignoring and/or interrupting a colleague in the workplace
  • Not saying “please” and/or “thank you”

Calculating the Cost of Employee Distraction

Business politics contributes to employee distraction which in turn directly impacts the organization’s bottom line. Estimating the cost of employee distraction involves the following steps:

  1. Determine the portions of the workforce impacted by hearing about, witnessing, or experiencing destructive workplace politics weekly – This rate can be calculated using workforce surveys or interviews. Since surveys and interviews seldom cover the entire workforce, it is important the sample data taken be representative of the employee population as a whole.
  2. Identify the amount of time per week impacted employees spend on non-productive time related to uncivil acts by impact category – This time can be calculated using workforce surveys or interviews, typically the same one used for Step 1. Again, since surveys and interviews seldom cover the entire workforce, it is important the sample data taken be representative of the employee population as a whole.
  3. Determine the annual cost of employee distraction – Use the StrategyDriven Calculating the Cost of Employee Distraction nomograph to determine the annual cost of employee distraction based on the size of the organization, percent of employees distracted, and the average employee salary. Care should be taken when selecting the appropriate nomograph to ensure the estimate can be made directly or extrapolated (a multiple or divisor of the nomograph’s output) based on the average employee distraction time per week and the time basis of the nomograph.

Example Calculation for the Cost of Employee Distraction

Background

  • Organization Size: 400 employees
  • Average Employee Salary: $43,000 / year
  • Length of Year: 50 weeks (average employee works 2000 hours per year)

Calculation (Illustrative)

  1. Portion of the Workforce Discussing, Witnessing, or Experiencing One or More Acts of Incivility per Week: 58 percent
  2. Average Amount of Time per Person Spent on Worrying About or Avoiding the Politician: 2.5 hours / week or 30 minutes / day
  3. Annual cost of Employee Distraction: $623,500

Final Thoughts…

StrategyDriven’s Diversity and Inclusion – Return on Investment, part 2: Employee Distraction Reduction reveals the available return on investment from improved workplace civility. It assumes, however, that leaders capable of making such improvements desire to do so.

Improvement initiatives reducing the prevalence of business politics within an organization are rarely pursued because those empowered to do so enable the political environment through complacency/indifference or benefit from its existence. Consequently, improvements are most likely achieved by newly appointed, strong leaders.

Sources

  1. “The Brutus SyndromeTM,” Craig B. Clayton, Sr., The Sp@rtacus Group, January 2005
  2. “Workplace Incivility on the Rise: Four Ways to Stop It,” Diane Berenbaum, Human Resources iQ, March 23, 2010
  3. “Workplace bullying’s high cost: $180M in lost time, productivity,” Liz Urbanski Farrell, Orlando Business Journal, March 15, 2002 (http://orlando.bizjournals.com/orlando/stories/2002/03/18/focus1.html?page=1)
  4. “The Cost of Workplace Bullying: How much is your corporate bully costing you?,” Catherine Michael Mattice, NoWorkplaceBullies.com, July 2009
  5. “Workplace Incivility on the Rise: Four Ways to Stop It,” Diane Berenbaum, Human Resources iQ, March 23, 2010Note: Numeric survey findings taken from The Cost of Bad Behavior by Christine M. Pearson and Christine L. Porath
  6. “The Brutus SyndromeTM,” Craig B. Clayton, Sr., The Sp@rtacus Group, January 2005

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StrategyDriven Business Politics Impacts Article | Employee Attrition

Business Politics Impacts – Cost of Employee Attrition

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StrategyDriven Business Politics Impacts Article | Employee AttritionThe staggering cost of employee turnover goes largely unrecognized. There is no financial statement line item, no general ledger entry, and no budget explicitly set aside for this expense that can cost evenly modestly sized companies well over a million dollars each year. Yet a significant portion of voluntary attrition is directly related to an abusive work environment created, in part, by excessive business politics. Thus, reduced workplace politics can directly improve the organization’s bottom line.

A company of 250 employees making an average of $43,000 per year experiencing a 20 percent attrition rate spends an estimated $2.15M on employee replacements annually.

Cost of Employee Attrition

The American Management Association estimates the cost of employee turnover as ranging from between 25 percent (for entry level employees) and 250 percent (for executive level employees) of the employees annual salary.1 These costs are derived from a multitude of sources including:[wcm_restrict plans=”45349, 25542, 25653″]

  • Exit costs including time to conduct the exit interview, stop payroll, change benefits, turn-in equipment, etcetera
  • Turnover costs associated with managerial exit interviews, work-in-progress turnover to other employees, rescheduling of ongoing work, etcetera
  • Lost productivity of employees filling in for the vacant position
  • Overtime and/or temporary employee costs to fill in for the vacant position
  • Cost to hire a replacement employee including advertising, resume screening time/cost, manager and staff interview time, interview travel costs, and new hire relocation costs and signing bonuses
  • New hire training costs including general on-boarding and employee training and position specific training
  • Lost/low productivity until the new employee is fully productive in his/her new role

Additionally, there are the qualitative costs including:

  • Loss of customers and contacts
  • Lost business knowledge and technical expertise

Based on a U.S. average annual salary of $43,0002 and average annual voluntary turnover rate of 23.6 percent3, it is easy to see how an organization can have considerable employee turnover expenses.

An Abusive Workplace Environment

According to the Employment Law Alliance (ELA), 44 percent of Americans indicated they have worked for an employer or supervisor who they consider abusive. A WBI/Zogby survey revealed that 37 percent of workers reported being bullied at work.4

Workplace incivility profoundly impacts a company’s financial performance as revealed in the research report, Assessing & Attacking Workplace Incivility5. From among the 775 individuals surveyed, instances of workplace incivility resulted in:

  • 28 percent lost work time avoiding the instigator
  • 53 percent lost work time worrying about the incident or future interactions
  • 37 percent believed that their commitment to the organization declined
  • 22 percent decreased their effort at work
  • 10 percent decreased the amount of time that they spent at work
  • 46 percent contemplated changing jobs to avoid the instigator
  • 12 percent actually changed jobs to avoid the instigator 6

In addition to those who do leave, Sp@rtacus Group research finds that 73 percent of employees experiencing disrespectful and demeaning behavior would leave the company if a better job were available – making these employees six times more likely to quit than those not experiencing workplace incivility.7

Calculating the Cost of Employee Turnover

Political incivility within the workplace clearly contributes to employee attrition which in turn directly impacts the organization’s bottom line. Estimating the cost of employee attrition involves the following steps:

  1. Determine the annual organizational attrition rate caused by political incivility – This rate can be calculated using exit surveys and resent culture surveys balanced against benchmark studies. Note that direct measurement using exit surveys alone may result in a lower than actual rate if such feedback is not collected anonymously.
  2. Estimate the cost to the organization of a 1 percent turnover rate – Use the StrategyDriven Calculating the Cost of Employee Attrition Nomographs tool to calculate the cost to the organization of a 10 percent annual attrition rate. Divide this value by ten.
  3. Determine the annual cost of political incivility related employee attrition – Multiply the annual organization attrition determined in Step 1 by the 1 percent turnover cost per year value determined in Step 2.

Example Employee Turnover Cost Calculation

Background

Organization Size: 400 employees
Average Employee Salary: $43,000 / year

Calculation (Illustrative)

  1. Annual Organization Attrition Due to Political Incivility: 12 percent
  2. Cost to the Organization of 1 Percent Annual Attrition: $172,000 / year
  3. Annual Cost of Political Incivility Based on Actual Employee Turnover: $2,064,000

Final Thoughts…

StrategyDriven’s Diversity and Inclusion – Return on Investment, part 1: Employee Turnover Reduction reveals the available return on investment from improved workplace civility. It assumes, however, that leaders capable of making such improvements desire to do so.

Improvement initiatives reducing the prevalence of business politics within an organization are rarely pursued because those empowered to do so enable the political environment through complacency/indifference or benefit from its existence. Consequently, improvements are most likely achieved by newly appointed, strong leaders.

Sources

  1. “The High Cost of Employee Turnover,” Scott Allen, American Express, April 7, 2010Note: Quantitative employee turnover cost estimate provided by the American Management Association.
  2. “May 2009 National Occupational Employment and Wage Estimates – United States,” U.S. Department of Labor – Bureau of Labor Statistics, May 14, 2010 (http://www.bls.gov/oes/current/oes_nat.htm#00-0000)
  3. “U.S. Annual Employment Turnover Rates by Industry and by Geographic Region Through August 2006,” Nobscot Corporation, 2010 (http://www.nobscot.com/survey/us_voluntary_turnover_0806.cfm)Note: Data supplied by the U.S. Department of Labor
  4. “The High Cost of the Bad Boss,” American Management Association, October 2, 2007 (http://www.amanet.org/training/articles/The-High-Cost-of-the-Bad-Boss.aspx)
  5. “Assessing and Attacking Workplace Incivility, “ C.M. Pearson, L.M. Andersson, and C.L. Porath, Organizational Dynamics, Volume 26(2), Fall 2000
  6. “The Brutus SyndromeTM,” Craig B. Clayton, Sr., The Sp@rtacus Group, January 2005
  7. “Linking Employee Commitment & Workplace Incivility to Corporate Earnings,” Craig B. Clayton, Sr., The Sp@rtacus Group, July 2004

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