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Achievement programs don’t just make employees feel good; managers demonstrate clear return on investment.
In the United States, companies spend $46.8 billion a year on incentive travel and merchandise for employee awards alone, according to a study released last August by the Incentive Federation Inc., in Vienna, Va. Yet few managers calculate the return on investment (ROI) of their incentive and recognition programs.
Furthermore, research by the Incentive Marketing Association in Naperville, Ill., finds that most incentive program sponsors are unconcerned with ROI or don’t consider it measurable.
Interviews conducted by Maritz Motivation of Fenton, Mo., in 2003 revealed similar findings. Incentive program administrators were “not concerned with measuring return on investment, but were interested in intangible measures like the buzz around a program, participation and satisfaction, and keeping rewards fresh and exciting,” says Paula Godar, Maritz’s director of brand communications.
Two years later, in other Maritz interviews, recognition sponsors said they were not concerned with ROI, says Godar. Instead, “They were interested in the recognition experience for employees and the development of management skills in effectively delivering recognition.”
Employers that do try to assess their programs tend to evaluate them competitively or anecdotally, adds Michal Kisilevitz, a managing director at the Corporate Executive Board (CEB) in Washington, D.C. They compare offerings to their competitors’ or attempt to determine effectiveness through focus groups and employee surveys. These approaches, she says, are neither scientific nor quantitative.
Now, however, consultants, industry representatives and academics have begun to develop the tools, resources, course work and training that human resource managers need to track the ROI of incentive and recognition programs, says Sandy Hodel-Runtz, manager of field training and product delivery at CCC Information Services Inc., in Chicago.
If surveys and anecdotes show that employees remain happy with awards and incentives, why go further? Following the accounting scandals that led to the collapse of Enron and WorldCom, Congress passed the Sarbanes-Oxley Act of 2002 to boost accountability and integrity. As a result, the pressure is on for all managers to track and justify expenses. Business leaders want to “measure and, ultimately, do more with less,” says Mike Ward, regional vice president of sales at American Express Incentive Services (AEIS) in Fenton, Mo.
Incentives vs. Rewards
Most practitioners agree that it is easier to calculate the ROI of incentives than of recognition programs. Generally, incentive programs have clear goals tied to concrete rewards, says Ira Ozer, president of Motivation Partners in Chappaqua, N.Y. A 20 percent increase in sales, for instance, has a direct dollar value, as does the cost of the sale and the cost of the reward, such as a trip to Hawaii. Equations prove straightforward: Revenues minus costs yield return. “If an incentive program is structured correctly,” Ozer says, “it should have an ROI.” (For one strategy, see “Step by Step Calculation.”)
In contrast, recognition programs encourage behaviors such as initiative, customer service or mentoring. They impact the bottom line dramatically, but tracking a seemingly intangible trait such as friendliness can’t be accomplished with the same tool used for monitoring sales.
Managers may have to parse the behavior. Bob Nelson, president of Nelson Motivation Inc. in San Diego, recalls consulting with bank managers who wanted tellers to be friendly but didn’t know exactly what that meant. An impromptu customer survey in the lobby told them: A friendly teller smiles, uses customers’ names and chats. Suddenly, he says, a “fuzzy notion could be labeled, put to work and linked to customer satisfaction.”
Calculating ROI for recognition programs may be complicated by the time lapse between incurred expenses and payback in terms of increased retention, faster hiring and improved revenue, says Nelson. In addition, recognition programs often acknowledge behavior and achievement after the fact and rewards become a “thank you.”
As a result, “It’s really hard to put an ROI on employee recognition,” admits AEIS’ Ward.
AEIS provides companies with reward, incentive and consumer-promotion solutions. The organization developed the Max! Recognition and Awards Program to engage and motivate its own employees. “Let’s say, for example, [we] want to drive employee satisfaction and thereby employee retention,” says Julie Hubert, director of employee development. Recognition is a factor in retention and engagement, but “it’s difficult to prove that the recognition program [we] designed is the only factor.” Consequently, instead of assessing the ROI of Max!, AEIS managers often weigh its return on objectives.
The Base Line
Before embarking on any motivation initiative, document the company’s or department’s current position as a starting point, says Deanna Baker, AEIS vice president of employee development and human resources.
When it comes to the kind of data required, says Godar, the “finance [department] can be your best friend” as the go-to source for rates of attrition, as well as costs of hiring and training replacements, absenteeism, accident rates, and the like.
Nearly four years ago, when Chrysler LLC in Auburn Hills, Mich., began planning an incentive-based, comprehensive wellness program for nonunion managers, it reviewed claims history, chronic health issues and sick days for the base line, says Kate Kohn-Parrott, director of integrated health care and disability. The program pays up to $240 per employee in health insurance premiums if individuals submit to glucose, cholesterol and blood-pressure screening. After a few years, Watson Wyatt & Co., in Arlington, Va., stated that Chrysler’s wellness effort reaps a $2.60 return per dollar spent.
Research shows how recognition and engagement connect to the bottom line. One 2004 study by the Forum for People Performance Management and Measurement in Evanston, Ill., identifies “a direct link between employee satisfaction and customer satisfaction and between customer satisfaction and improved financial performance.”
In other words, it pays to know what engages employees. The more effective the motivation, the greater the impact and the better return on the dollar.
Identifying motivators is easier said than done. Griffith Laboratories in Chicago “has different kinds of awards and incentive programs to motivate its sales team and reward employees who demonstrate company values,” explains Rajiv Burman, SPHR, vice president of human resources. Focus groups and surveys show that staff members appreciate the programs, but Burman considers this evidence anecdotal. “We don’t have hard data that say, ‘This is the dollar amount that we’re spending on awards and incentives, and this is the impact that it’s having on performance.’ I have yet to solve the ROI issue.”
This is precisely the problem members of the Corporate Executive Board try to address. Based on consumer market research, the CEB has developed a method for measuring return on investment that uses conjoint analysis. Instead of asking workers how much they value a specific program, they are asked to trade off features of hypothetical packages set at different levels of value. Respondents’ repeated choices reveal elements they value highly. Conjoint analysis, says Kisilevitz, demonstrates “how people value different types of awards, compensation and recognition vehicles,” and can forecast a program’s impact and the dollar cost.
Connect the Dots
Most sponsors evaluate programs after the fact through employee and customer focus groups and surveys and by measuring financial results. Regardless of the method, managers need to ensure that programs drive behavior that advances their companies’ missions and objectives, as The Ritz-Carlton Hotel Co. illustrates in “Making Ladies and Gentlemen.”
Without such scrutiny, recognition or incentives can become self-perpetuating, irrelevant and possibly counterproductive. Case in point: years-of-service awards. Nelson says 92 percent of U.S. companies give these awards, spending millions on programs that represent a “misalignment with today’s dynamic business environment.” In his view, “not one person in the world stays one more day in their job to receive a [yearsof- service] award.” In addition, such awards foster an attitude among employees that the company owes them, he says.
Look at collateral costs, advises Brian O’Hare, managing director at the Business Group Inc., in Westerly, R.I. It is possible to successfully increase sales, for instance, “but find out you lost money” by not considering how a sales initiative may impact purchasing, labor, payroll, inventory, distribution and accounts receivable.
Srinath Gopalakrishna, associate professor of marketing at the University of Missouri in Columbia, conducted a 2007 study on collateral for the New York-based Incentive Research Foundation (IRF).
In an IRF press release, Gopalakrishna said, “Developing an incentive program with a focus on sales growth alone is myopic.” Such an approach, he explained, “can produce a domino effect,” including adverse cash flow, possible disruption in supplies and the need for additional workers.
Incentives and recognition demand a balance of values, Nelson insists. “You have to make sure you’re not sacrificing one for the other.”
Just Do It
“Encourage managers and supervisors to document what they award, why, and what goals and values the recognition supports,” says Hodel-Runtz. Human resource professionals can track awards programs manually, adds Godar, but interactive, automated online systems simplify administration.
Ward estimates that companies spend 0.5 percent to 2 percent of total compensation on incentive and recognition programs. Since it is such a small slice of a corporate budget, one practitioner wonders if calculating the ROI of this investment is worth the frustration. But payroll represents many companies’ biggest expense, and “during hard times,” says Christi L. Gibson, executive director at Naperville, Ill.-based Recognition Professionals International, an association dedicated to enhancing organizational performance through employee recognition, 0.5 percent “of payroll may make the difference between a red or a black bottom line.”
The author is an Annapolis, Md.-based freelance writer.
Web sites:ROI Institute
Forum for People Performance Management and Measurement
Recognition Professionals International
Corporate Executive Board
The Max! Recognition and Awards Program, sponsored by American Express Incentive Services (AEIS) in Fenton, Mo., has a user-friendly web site where supervisors recognize team members, employees tip their hats to each other and individuals monitor the points they accumulate. As administrator of AEIS’ points-based system, Julie Hubert, director of employee development, checks the site to “see if people are actually allocating points” and what behaviors they acknowledge. When AEIS first began trying to get its nearly 200 employees to embrace a recognition culture, she says, “we didn’t have a high enough percentage of people using the tools.”
Dave and Buster’s restaurant group, based in Dallas, also uses an online site to administer and extend the reach of its two-year-old, points bank, MVP recognition program for employees of its 50 establishments. Its balanced scorecard tracks a combination of benchmarks such as sales, profits, new store openings, guest satisfaction and team satisfaction on a rolling basis—companywide and by individual restaurant. The scorecard helps the company measure the impact of its MVP program and the effectiveness of its managers at driving the company’s values.
The restaurant chain has a tradition of employee recognition, says Rob Birch, regional training manager. However, it has been only recently, at the behest of new ownership, that the company began putting in place the reporting tools needed to measure ROI.
Kelly Services Inc. launched its Kudos recognition program for employees in 2004. The company, based in Troy, Mich., wanted “a consolidated and consistent, companywide, scaleable and flexible program,” says Recruiting and Retention Program Manager Lisa Johnston. The primary analysis is done by group, says Johnston, measuring quality-control ratings, number of assignments worked and retention. Kelly calculates the ROI of its Kudos program annually to compare these measures over time.
Making Ladies and Gentlemen
Kathleen O. Smith, senior vice president of human resources at The Ritz-Carlton Hotel Co., of Chevy Chase, Md., knows how to improve employee retention, reduce accidents, increase revenue and improve customer satisfaction. Engaged employees accomplish these goals.
“With engaged employees, I can drive our revenue per available room by 20 percent to 30 percent more than if I have employees who come in and just do their jobs,” she says.To get results, the hotelier has identified “employee drivers” related to one principle: “Ladies and gentlemen serving ladies and gentlemen.” Drivers include giving employees the resources they need to do their jobs, clearly stating expectations, showing supervisor interest and concern, recognizing a job well done, and providing opportunities for career growth and development.
“Set your [corporate] value system, consistently deliver your value system and reinforce your value system,” says Smith. That boils down to: define, execute, reward. Recognitions include small, on-the-spot monetary awards given by supervisors when they catch a lady or gentleman delivering extraordinary service, as well as “First Class,” handwritten post cards given by and to staffers at any level when they see or receive first-class service. Managers in each location name a “Five Star” employee quarterly. They are recognized at “lineup” before each shift, when supervisors teach skills and review plans. Annually, one Five Star employee wins a trip, with a guest, to any Ritz-Carlton property. Every week, worldwide announcements herald the stories of two staffers who have delivered “wow” service.
In addition, Ritz-Carlton managers’ performance reviews are designed to ensure that they advance company values. The financial results of their properties are weighed against guest experiences and engagement as well as employee engagement surveys.
Gallup Inc., with headquarters in Washington, D.C., correlates Ritz-Carlton data from customer surveys and employee feedback with financial results.
Step By Step Calculation
To calculate the ROI of awards and incentive programs, managers need to:
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