Employee Engagement: Business Buzz or Serious Business?

1. Employee Engagement: Business Buzz or Serious Business? IABC International Conference June 28, 2005 Susan M. Suver VP, Global Human Resources Arrow Electronics, Inc.

2. Employee Engagement Defined • Two components: • Rational Engagement: the involvement, understanding and motivation an employee has in his/her job • Emotional Engagement: the attitudinal attachment an employee has to his/her company; source of pride • Excelling at only one is not sufficient to drive engagement • Must measure and understand both aspects to produce most actionable performance indicators

3. Emotional Engagement I am proud to tell others I work for my company The work I have to do is reasonable I am unlikely to look for a job in another company in the next 12 months I would recommend my company to a close friend as a good place to work My company inspires me to do my best work Rational Engagement I am willing to put in a great deal of effort beyond what is normally expected to help my company be successful I understand how my work group contributes to the success of my company I understand how my role is related to my company’s overall goals, objectives, and direction My job provides me with a sense of personal accomplishment Why Is Employee Engagement Important? Rational Engagement Emotional Engagement

4. Does Engagement Matter? Yes. Just Look At Motivation... Highly engaged 45% more motivated than those disengaged Individual Motivation ScoreOverall U.S. sample* Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

5. Engagement And Retention Risk Are Linked… Highly Engaged Moderately Engaged Disengaged Moving from moderate to high engagement makes employees almost twice as likely to stay (and invest their discretionary effort)! 80% of disengaged would actively (29%) or passively (51%) leave company I have no plans to leave I have made plans to leavemy current job I am actively looking for another job I am not looking for another job,but would consider another job I plan to retire in the next few years Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

6. Strong Correlation Between High Engagement And Financial Performance Revenue Growth Operating Margin With 5%, 10%, 15% Change in Engagement 14.5% 13.7% 12.9% 12.1% Engagement Index Score For a $10B company, that’s $80,000,000 SG&A Current 5% 10% 15% % Change in Employee Engagement Intent to Stay NOTE: Employee engagement strongly correlated to intention to stay Source: Towers Perrin 2003 Talent Report: New Realities in Today’s Workforce.

7. Maximum Impact of DiscretionaryEffort on Performance Percentile Maximum Impact of Engagementon the Probability of Departure 9.2% NumberofEmployees Probabilityof Departurein Next 12Months 87% 1.2% 50thPercentile 70thPercentile StrongDisengagement StrongEngagement Takeaway #1: The real business impact of employee engagement The Business Case for EngagementEmployee engagement drives employee performance and workforce retention • The Corporate Leadership Council’s research has found that organizations are (rightly) turning their attention to their employees’ level of engagement. • A Council survey of more than 50,000 employees at 59 member organizations in 27 countries and 10 industries demonstrates the real bottom-line impact of employee engagement. Highly committed employees perform up to 20 percentile points better and are 87% less likely to leave the organization than employees with low levels of commitment. • The Council’s analysis has yielded the two “rules” appearing at the bottom of this slide, which further convey the significant impact of employee engagement on the business. • The “10:6:2” Rule • Every 10% improvement in commitment can increase an employee’s effort level by 6%. • Every 6% improvement in commitment can improve an employee’s performance by 2 percentile points. The “10:9” Rule Every 10% improvement in commitment can decrease an employee’s probability of departure by 9%. Source: Corporate Leadership Council 2004 Employee Engagement Survey.

8. These employees exhibit moderate commitment to their work, teams, managers, and organizations High performers with low retention risk, who exhibit very strong emotional and rational commitment to their jobs, teams, managers, and organizations Poor performers putting in minimal effort and exhibiting strong noncommitment to their organizations, jobs, managers, and teams 20% 29% 27% 13% Leaning Toward Disengagement Leaning Toward Engagement 11% Neutral The “Disaffected” The “Agnostics” The “True Believers” Takeaway #2: Most employees are not highly committed to their organizations The Risk of Workforce DisengagementThe majority of employees are “up for grabs”—neither fully committed nor uncommitted • Of concern, given this potential impact of engagement, the Council’s 2004 Employee Engagement Survey identified significant employee ambivalence about their organizations. • The Council’s research found that only 11% of employees demonstrate very strong commitment to their organizations, while 13% are actively disengaged. • This examination further revealed, however, a real opportunity: 76% of employees are only moderately committed to their organizations. Organizations seeking to reap the benefits of a highly engaged workforce should therefore seek to sway these “agnostic” employees towards the “true believer” level of engagement. The State of Workforce Engagement Source: Corporate Leadership Council 2004 Employee Engagement Survey.

9. 15.8% 24% Percentage of Workforce in Highest Category of Discretionary Effort The “True Believers” Percentage of Workforce 3% 3% Organization A Organization B Organization A Organization B 42.9% 17% “Disaffected” Percentage of Workforce Percentage of Workforce in Highest Category of Intent to Stay 5% 15.3% Organization A Organization B Organization A Organization B Takeaway #3: There is a significant range in employee commitment between organizations The True Difference Engagement Can MakeThe example of two organizations participating in the 2004 Employee Engagement Survey • Also worthy of attention, the Council has identified a significant variation in engagement levels between surveyed organizations. • On this slide, you will observe a meaningful distinction in the engagement levels (and the related impact on discretionary effort and intent to stay) of employees at two participating organizations at either end of the workforce commitment scale. • The Council’s research indicates, in fact, that organizational differences are the only major demographic category accounting for variation in workforce commitment, suggesting that organizations cannot simply “write off” certain employee segments (such as Generation X) as being likely to be disengaged. The “True Believers” Discretionary Effort The “Disaffected” Intent to Stay Source: Corporate Leadership Council 2004 Employee Engagement Survey.

10. Takeaway #4: A list of top commitment drivers promoting discretionary effort and retention Checklist for Driving Workforce Performance and Retention Through Engagement Select Levers of Employee Commitment, Listed with Maximum Potential Percentage Impact on Employee Discretionary Effort and Intent to Stay • The chart at right provides a “checklist” of levers that organizations seeking to improve workforce commitment—and thereby to increase employee discretionary effort and intent to stay—might seek to employ. • You will observe the importance of clarity about how to do one’s job, and a belief in the importance to it, to employee discretionary effort and intent to stay. • Further, prominent among these top levers of engagement are managerial attributes, including excellence in people and process management. Source: Corporate Leadership Council 2004 Employee Engagement Survey.

11. Takeaway #4: A list of top commitment drivers promoting discretionary effort and retention Checklist for Driving Workforce Performance and Retention Through Engagement Select Levers of Employee Commitment, Listed with Maximum Potential Percentage Impact on Employee Discretionary Effort and Intent to Stay • The chart at right provides a “checklist” of levers that organizations seeking to improve workforce commitment—and thereby to increase employee discretionary effort and intent to stay—might seek to employ. • You will observe the importance of clarity about how to do one’s job, and a belief in the importance to it, to employee discretionary effort and intent to stay. • Further, prominent among these top levers of engagement are managerial attributes, including excellence in people and process management. Source: Corporate Leadership Council 2004 Employee Engagement Survey.

12. The Journey to High-Performance Through Leadership Involvement and Employee Engagement Arrow Electronics, Inc.

13. Key Factors in Decision to Drive Engagement • 2000 bust in the dot com, high tech and telecom sectors left electronics manufacturers and distributors overbuilt • New CEO Bill Mitchell arrives 1Q03 with 3 areas of focus: grow the business, return to profitability, build a winning team • Shift from 20 years of M&A to organic growth a fundamental strategic and operating shift • Legacy leaders were entrepreneurial, patriarchal, autocratic. Businesses operate in silos • Unwritten lifetime employment “contract” with employees created high company loyalty, high entitlement, high pay vs high-performance, high accountability • Success in high-performing, organic growth strategy would require substantial re-orientation of the leaders and workforce. A top-down, high involvement strategy in order. • Employee involvement would be required to execute, and to resume prior high levels of employee morale and confidence in management. • Alignment of business acumen, processes and performance standards required to rebuild “DNA” of gene pool

14. Arrow’s Culture Change Strategy: Convert to high-performance, accountability using Shared Leadership and Employee Engagement Define the competencies, skills, behaviors and practices necessary to create a common, unified culture capable of driving global strategy execution and supporting Arrow’s values. Design and deploy change management methods and new internal communication processes that will power the new Arrow culture.

15. The Architecture Of Culture Element E Element D Element C Element B Element A Culture The Exhibition And Aggregation Of Employee Behavioral Norms And Values Employee Behaviors Conduct And Actions Of Company Employees; Beliefs Turned Into Action Company Practices, Policies, Programs, Structures, Systems, Processes, Ceremonies, And Routines Framework For Driving Desired Employee Behaviors; Hardware For Building Culture Values Deeply Held Beliefs Of Company; Principals That Guide The Way The Company Operates; Software For Building Culture Vision Vivid Description About Desired Future State Of Company

16. 2003: What was our Operating Culture? Could it get us to new strategy successfully? Culture Assessment • 2003 Towers-Perrin quantitative web-based culture assessment survey (4,000 employees, 77% response, 8 languages, all regions) • 20 focus groups (300 employees), 16 executive interviews External Benchmarking • 7 leading companies • Extensive secondary research Evaluate Communication Capabilities • Management capability • Vehicle inventory • Culture survey inputs

17. Communicating/Involving Employee Engagement Cost Focused Collaborative Customer Focused Innovative Empowering/Decision-Making Authority Performance/Results Oriented Trusting Change Readiness/Action Oriented/Process Discipline Accountable High-Performance Cultural Attributes High-performing companies typically score better on these attributes Arrow survey also indicates these as critical gaps Source: Towers Perrin 2003 Talent Management study

18. From Today to Tomorrow Tomorrow Today Engaged Workforce Strengths • Cost-focus • Customer service mentality • Loyalty Strengths • Cost-focus • Customer service execution • Loyalty • Shared leadership • Performance-based team • Empowered employees • Sustained performance • Continuous improvement Areas for Improvement • Separate • Family • Hierarchy • Crisis-focused

19. Change Drivers that Produce Business Results… • Leadership Alignment with Strategy, Financial and Operating Models • Employee Engagement • Communication Environment, Tools, and Processes • Continuous Improvement Mindset and Processes

20. Aligning Leadership with Vision, Values, Strategy Our Vision To be the Clear #1 worldwide provider of products, services and solutions that connects technology with customers, powers the supply chain and delivers premium investment results. Our Values • Ethical • Open and Courageous • High-Performing, Accountable Teams • Working Effectively with No Barriers • Innovate and Execute • Passion for Service Excellence

21. The Arrow Strategy Clear #1 Operational Excellence Financial Stability Shared Leadership Growth Strategy for the future - Strengthen Arrow – Build the team Strategy Leadership Execution

22. The Road to High-Performance Recommendation #3 Improve business performance by increasing high-performance, employee engagement Recommendation #1 Embed Arrow values into daily behavior of all leaders/employees to drive successful execution of business strategy Recommendation #2 Create a communication infrastructure and environment that enables job understanding, involvement, motivation Recommendation #4 Establish continuous improvement culture to drive operational effectiveness, customer satisfaction and sustainable competitive advantage EnablersGetting started EmbeddersMaking it stick Desired Culture and Engaged Workforce that Executes Intended Strategy Effectively Leadership Communication Involvement Communicating/Involving Change/Action/Process Performance/Results Oriented/ Customer Focused IntendedStrategy Measurement

23. The Tools, Process and Discipline • Upgraded Employee Communications • New talent and vehicles • The “value creators”: • Managers as dialogue leaders • On-boarding, Benefits, Development, Performance Differentiation • Continuous Process Improvement – Lean Sigma • Voice of the Customer • Shared Leadership Model • Top 375 = Performance Leadership: Executive teams build new strategy • All managers = Leadership Inspires Full Engagement (LIFE): learn new strategy, plan and manage execution in regional/local markets • Leader Performance Criteria (financial, operating, individual and team leadership, talent-related, change agility, org savvy, strategic thinking) • Rewards • Pay for Performance, Introduction of Non-financial goals, Discretionary bonuses • Recognition • High profile assignments; access to senior leaders • Mentoring, executive education, public and private kudos on performance, invest time to know what’s on the mind of your key employees

24. Measuring & Monitoring Progress What we have: • Financial metrics • Operating metrics What we are (re)building: Key Performance Metrics • Annual Employee Engagement & Culture Assessment • Understanding Strategy; Aligned Goal-Setting • Seeking & implementing ideas from all levels • Leadership Success Model • Redefining High Performers and High Potentials • Retention • Readiness for new roles • Assimilation success • Productivity • Customer Satisfaction

25. Year 1 Progress • Nov 2004 survey: 11,200 employees, 84% participation rate, hundreds of focus groups • Two clear strengths: Ethics and Passion for Service Excellence • Company-wide efforts (e.g., Shared Leadership) are beginning to have a positive impact • Higher scores on involvement, confidence in senior leadership • More employees understand the business strategy • Percent of highly engaged Executives increased in 2004 • Engagement of recent hires up • Asia showed significant overall improvement • Degree of engagement impacted by many changes (e.g., restructuring, downsizing, leadership changes)

26. Early Results and Some Lessons Learned… • Focus on targeted, manageable results • Accept that you cannot change everything at once without creating chaos • Don’t underestimate the impact of organizational change to undercut your progress • Engagement is a continuous process – management’s credibility requires constant discipline and determination over time

27. Summary • Driving to Higher Levels of Engagement is a Journey • Engagement begins with the end in mind and requires a road map to get there • Alignment of practices, intent, process and discipline are must haves. • Communication is a fundamental driver of understanding the work and its relationship to strategy • Leaders using high degrees of involvement, coaching, recognition drive higher levels of engagement • When understanding and involvement are high, discretionary effort increases and retention risk decreases

28. QUESTIONS?