Those involved in safety need to speak in the language of management—
about profit margins, productivity, quality, ROI, and return on equity. Accident
costs have to be evaluated in terms of equivalent earnings. Equivalent earnings
equal total cost expressed in terms of the profit margin. Dividing the equivalent
earnings by the total number of outstanding shares will give a cost per share.
Let’s say that Company A has a 5 percent profit margin, 1 million outstanding
shares, and a total accident cost of $100,000. What would this cost be in equivalent earnings? It would be $2 million, because—with margins at 5 percent—the
profit that revenue generates is $100,000 ($2,000,000 × 0.05). Put another way,
the company must earn an additional $2 million in revenue to wipe out the effect of a $100,000 accident. And because the company has 1 million outstanding shares, the accident—again, with equivalent cost to earnings of $2 million—
would cost shareholders $2 a share ($2 million accident cost/1 million shares =
$2 a share).
Working With Middle Management
Middle management tends to be more concerned about production levels and
budget, but the goal is still profit, not just production. Lost production from an
accident leads to costs, which have an earnings equivalent based on the profit
If a company has the equivalent earnings number, it can determine an accident’s cost per unit and, ultimately, determine the number of units that need to
be produced to pay for the accident. Of course, there’s no guarantee the company will sell those additional units! So, if an accident’s earnings equivalent is
$2 million, and a widget costs $100 per unit, the manufacturer needs to make
20,000 units to pay for the equivalent cost ( 20,000 × $100 = $2 million). Of course,
it wouldn’t actually make 20,000 extra units after an accident. Instead, the earnings equivalent of $2 million is charged back to the department and considered
a budget item. Managers are responsible for production and budgets, so this is a
good method to hold managers accountable for accidents and safety.
Another way to communicate the importance of safety is determining the cost
per labor-hour as well as the cost per employee on a machine (see Figure 3).
This cost comprises direct costs, including the indemnity pay and medical expenses that come from workers’ compensation. An accident also has indirect
costs, such as plant floor interruptions, time that it takes supervisors to manage
a safety situation, and the time it takes to do an accident report. According to the
safety literature, this cost can be anywhere between three and 10 times an accident’s direct costs. A good estimate to use is five times the direct accident costs.
All this helps make the financial case for safety. Viewed in this way, good safety
practices improve profits, provide an ROI on productivity, improve organizational
metrics, and help an operation align with corporate financial goals and values.
This view complements the formal risk assessment, which objectively measures the current state of hazard on the plant floor, safety training, and machine
safeguarding. Taken together, this view puts safety in a business framework
and, ultimately, helps manufacturers do the right thing.
Douglas Raff is vice president, Paragon Industrial Controls, 714-564-9925, www.
paragon-ind.com. Brian Roberts is risk control director, manufacturing and
ergonomics, CNA Financial Corp., 800-262-2000, www.cna.com/fma.
Cost per Labor-Hour
Accident costs = Indemnity pay, medical (workers’ compensation)
Indirect costs = Direct accident costs × 5
(Accident cost + Indirect cost)/Direct labor-hours = Added cost per labor-hour
Accident cost = $10,000
Indirect costs = $10,000 × 5 = $50,000
Labor-hours = 20,000
($50,000 + $10,000)/20,000 = $3 added cost per labor-hour
Base hourly rate = $20
New base hourly cost = $23
Costs increased by 15 percent
Accident Cost per Employee on a Machine
(Accident costs + Indirect cost)/Number of employees working on machines
Accident cost = $30,000
Indirect costs = $30,000 × 5 = $150,000
Number of employees working on machines = 8
($30,000 + $150,000)/8 = $22,500 cost per employee
These calculations help put safety in a business perspective. Accident costs include
the direct costs under workers’ compensation. Indirect costs are estimated to be five
times the direct accident costs.
Middle management tends to be more concerned
about production levels and budget, but the goal
is still profit, not just production. Lost production
from an accident leads to costs, which have an
earnings equivalent based on the profit margin.