Basic Math Reveals the Reward from Rewards

If you can obtain the right data, a simple formula will show return on investment.

By Kathryn Tyler Oct 1, 2011
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To calculate return on investment, HR professionalsneed three pieces of vital data: "numbers from a previous time period, new numbers from the current period of the same length, and program cost," explains Melissa Van Dyke, president of the nonprofit Incentive Research Foundation in St. Louis.

Currently, 87 percent of companies with 500 or more employees do not track the returns on recognition programs, according to a May survey of 745 HR professionals by the Society for HumanResource Management and Globoforce.

To justify the cost of awards and incentives, HR professionals need to plug hard data into a formula. Here’s how HR professionals are nailing down such returns:

Select a metric. If you can’t measure it, you can’t get a return from it, says Louise Anderson, president of Anderson Performance Improvement Co. in Hastings, Minn.

HR professionals need to identify metrics that correspond with desired outcomes. To increase retention, for example, calculate turnover costs, including recruitment and onboarding costs. To increase safety, track accidents.

"Don’t just track [program] utilization figures," says Derek Irvine, vice president of client strategy at Globoforce Ltd., headquartered in Southborough, Mass. A program might be well-used without yielding results.

Establish a base line.Measure "a base line of activity you expect to see if you didn’t put any incentives in place," advises Gary Beckstrand, vice president of research and assessment services at O.C. Tanner in Salt Lake City. Any figure that comes in more favorably can be at least partially attributed to the program.

Why is it important to establish a base line? Bill Grassie, director of strategic incentive compensation design at Microsoft Corp., notes that most people erroneously assume that "the only reason you got the desired result was because of the incentive. In many cases, you spent a bunch of money and got the same result you would have gotten anyway."

Design an Effective Rewards Program

  • Take three steps in designing solid rewards programs:
  • Determine the desired result.
  • Determine the behaviors required to get that result.
  • Reward desired behaviors long enough for the behavior to become ingrained.

For example, if a workplace with fewer accidents is the desired result, HR professionals should reward employees not for fewer accidents—results—but for behaviors that result in fewer accidents, such as wearing safety goggles or notifying supervisors of machine malfunctions so they can be fixed before an accident occurs.

If a three-month incentive program results in fewer safety accidents during that quarter but injuries skyrocket once the program ends, the program was not well-designed. In an ideal program, employees adopt safer behaviors because of the incentive program and then continue the behaviors after the program ends, thereby reducing injuries in the long term.

What kind of program will change behaviors—incentive or recognition, short-term or long-term? Incentives that drive behavior for a few months are for short-term solutions, explains Gary Beckstrand, vice president of research and assessment services at O.C. Tanner. In contrast, employee engagement and retention are issues that must be addressed in the long term. Incentives are less valuable for long-term behaviors, such as demonstrating loyalty by staying with the employer. In these cases, awards and recognition might be appropriate as a "thank you." Beckstrand says it takes 18 to 24 months to measure true return on investment for long-term awards and recognition programs.

Determine desired results. The result of a behavior is the outcome that can be tracked. HR professionals "have to prioritize and identify those things that can be tracked," says Louise Anderson, president of Anderson Performance Improvement Co. For example, if you want people to behave safely on the job, outcomes that can be tracked are fewer accidental incidents. Reward employees for the behaviors that get those results, such as checking machines for scrap pieces or wearing hearing protection, and not the results themselves.

If you are having trouble identifying or measuring metrics connected to desired behaviors, experts recommend asking for advice from the chief financial officer. "Break it down" to supervisors who are getting great results and those who aren't, Anderson says.

Determine required behaviors. "What are the early signs of the outcomes?" Anderson asks. "Is anyone performing at the desired level? Ask them what they are doing. You can't just reward the goal."

Bill Grassie, director of strategic incentive compensation design for Microsoft Corp., agrees. "If you run a results-based incentive, such as you pay me X for selling Y, you taught me nothing else about how to sell that product. As soon as the incentive goes away, I'm going to quit doing it. If you run a behavior-based incentive program, you make me a more effective salesperson."

Anderson likens it to learning a golf swing. If you teach an employee how to swing differently and reward him every time he practices that swing—the behavior—he will continue to swing that way after the incentive is over because he sees it yields results. If you reward employees for getting the ball on the green—the results—you are likely simply rewarding those who were already getting the desired results.

Reward desired behaviors. Anderson recommends offering personal rewards through online choice programs where employees can request gift cards for restaurants or golfing vacations or shop at online retailers. The reward can be an immediate gift for a flat amount, such as $25 or $50, or the employee can accumulate "points" toward future rewards.

Anderson tells an incentive horror story of a client who wanted to reward its star salespeople with $15,000 Rolex watches. Despite warnings, the client insisted on purchasing watches in advance. "Not one of the salespeople wanted the watch," Anderson says. "They said, 'Can you imagine me wearing a gold watch while trying to convince my customers I'm saving them money?' "

Recognize many people with small rewards rather than recognizing a few with large ones, says Jennifer Reimert, vice president of total rewards, human resources, for Symantec Corp. For example, in July 2008, the data security software company, headquartered in Mountain View, Calif., started its Applause recognition program. All employees are eligible and can be recognized by peers or managers for a job well done. "Before the Applause program, only 5 percent to 10 percent of the employees received rewards. We wanted to encourage behaviors so people would repeat them. We wanted it to be an everyday event. Last year, 81 percent of employees received an Applause reward," she said.

Applause rewards start at $25. Last year, the company distributed 20,000 $25 rewards. "You can reach a lot of people with a small investment if they are recognized often," Reimert says. "It's not necessarily about the amount. It's about the action. Large or small, at the end of the day people just want to be acknowledged."

If you have a truly valuable incentive program, it is behavior-based," Grassie summarizes. "When you remove the incentive, the employees continue to exhibit the behavior you taught them because they realize the value of it. Think past the incentive program to future behavior."

—Kathryn Tyler

Subtract the base line from the metric throughout the duration of the rewards program. In 2008, Symantec Corp., a data security software company headquartered in Mountain View, Calif., started its Applause program to create a culture of recognition. "Within the first year after we implemented the program, our engagement scores went up 14 points," reports Jennifer Reimert, vice president of total rewards.

Divide by program cost. Andtrack costs carefully.

Get the return on investment. HR professionals gain credibility with executives by demonstrating return on investment of every dollar spent. This formula can be applied to any rewards, but it is most effective for incentive programs with short-term goals.For instance, HR professionals might use incentives to encourage employees to sell certain products—say, last year’s car. Recognition programs are more behavioral in nature; calculating their returns may require longer time frames—up to two years.

On the flip side, Grassie points out that it is possible to calculate return on potential future results based on the current metric trajectories. If, for instance, employees learn behaviors that make them more productive, return on investment may last long after rewards have ended.

Return on Investment Formula

ROI = (metric during incentive period – base line) ÷ cost of program

Return on investment equals the metric throughout the duration of the incentive program minus the base line metric before the incentive program was offered, divided by program cost. Example: An employee loses 10 pounds per month. During the program, he loses 15 pounds per month. The program costs $50. Thus: (15 pounds – 10 pounds) ÷ $50 = one extra pound lost for every $10 spent.

Other metrics: Numbers of medication errors, amounts spent per customer or customer satisfaction ratings.

Irvine says: "Part of the problem with old-school recognition programs is that there is a ‘flavor of the month’ about them. They achieve some results, but then they flow back to the old situation. What we are aiming for is sustainable improvements."

Consider investing the savings. "Most companies invest 5 percent to 10 percent of the bottom-line cost savings" in the awards program, Beckstrand says.

The author, a former HR generalist and trainer, is a freelance writer in Wixom, Mich

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