6 steps for determining the ROI of an employee recognition program

Don’t exaggerate results — not all benefits can be directly tied to the program
By Andrew Clark
|Canadian HR Reporter|Last Updated: 01/28/2014

It’s a question that always comes up when companies are considering starting an employee recognition program — or questioning if they should continue implementing a program: “What’s our return on investment?”

It’s a valid and important question. Depending on the size of your organization, you could spend an average of $125 to $175 per employee per year on awards costs and another $50 to $75 per employee per year on administrative costs. That’s up to $250 per employee per year — $125,000 for a medium-sized firm with 500 employees or $2.5 million for a 10,000-employee corporate titan.

Of course, the CEO and CFO will want to know what they are getting for that kind of money.

If you can’t answer that question, your employee recognition budget could be the first thing on the chopping block when budgeting time comes around. So how do you measure the return on investment for a rather subjective initiative focused on recognition?

There are six steps:

Step 1: Define your recognition objectives. Recognition can be viewed simply as a “warm, fuzzy feeling” that is impossible to measure if you don’t first assign specific objectives to the program.

Common needs include:

•improving morale

•increasing productivity

•improving absenteeism

•reducing turnover to measure ROI

•reducing rework

•reducing costs

•reducing customer service complaints.

One of the biggest mistakes you can make is to try to set too many objectives and not focus on what really matters. What are the one or two most compelling needs that recognition can impact? What is leadership most concerned about? Your program may also positively impact other objectives, but if you focus on one or two, you’ll find it easier to create a defensible ROI.

Keep in mind that some metrics are easier to measure and to demonstrate ROI than others. For example, if a key objective is to improve employee morale, you should strongly consider using a credible control group to help demonstrate ROI (see step five).

As you evaluate key objectives, factor in how the financial benefit of improving a specific metric can be calculated. For example, the benefit of improving absenteeism could be calculated by offsetting any additional overtime wages incurred. Or, the value of reducing turnover may be calculated by the cost saved in recruiting costs and new employee training costs.

Using existing data that the company already collects will have more credibility than new data you need to create. Plus, it will be easier and faster for you to access.

Step 2: Identify the key metrics that already exist that align to your objectives. How do you currently measure morale? Employee surveys, perhaps? What about productivity or rework costs? Use measurements you already have in place. This gives you a baseline and you won’t have to come up with a new measurement system, which can be costly to implement and delay the start of the program.

Using generally accepted, credible and existing corporate metrics or your business objective will always provide more validity to your data. Senior leadership will understand your ROI logic when you can tie it to measures they have come to rely upon and trust. New metrics can invite skeptics to challenge your information.

Step 3: Establish a control group. Without having a control group — those not participating in the program — your data really isn’t reliable. The ability to see change among those who use recognition and those who can’t (as opposed to those who won’t) is important. Having a credible control group is crucial to demonstrating a program’s ROI.

The control group can be a selected segment of employees who will not have the option to participate. Or, the control group can be a baseline period to use for comparison. Either way, be sure to ask leadership and your analytics teams for help in selecting and developing the control group. This adds credibility to final ROI calculations and results.

Step 4: Clearly define and communicate what specific behaviours you want employees to recognize each other for. Too often, recognition programs offer vague advice on what to recognize. It’s common to see things like “going above and beyond” or “demonstrating our values” or “leading the way.”

Employees need more specific direction. If you can’t specify actions for the entire company due to the variety of work being done, have your management teams define those things that can impact change within their departments.

Localize the program as finitely as you need to so you can measure its impact. If turnover is a number one objective, ask each department to define why it believes turnover is too high in the group. Of course, you’ll get responses about poor pay and bad benefits, but help lead the discussion beyond those reasons. Ask, “If we can’t give everyone a raise, what else can we do?” Those are the things you can recognize.

Step 5: Set realistic expectations when defining a measurement schedule. Recognition programs can take a long time to get going. Some departments will get onboard right away, while in others you’ll be herding cats. It’s natural to want to have “great numbers” to share with management, but you should not expect to see any significant change against your key metrics for at least six months — and it could be as long as 36 months.

In the early stages of the program, focus your measurement on tactical results such as the:

•percentage of managers who have participated in program training

•number of recognitions employees have sent co-workers

•percentage of employees who have recognized a co-worker

•number of recognitions, per manager, that have been given

•percentage of managers using their discretionary awards budget.

It’s important to measure the tactical components to help identify if there are areas of the program that may require attention. You may discover certain departments aren’t participating at all while others are very active. Use this data to see what you can learn from the active groups to develop communications and training initiatives to help get non- or low-participation groups to get engaged.

Step 6: Calculate all your program costs to protect the validity of your data. In addition to awards costs and the administrative and communication fees you pay to your recognition vendor, you likely have other labour and materials costs that you are absorbing within your budget. Your staff is training managers, running kickoff meetings, fielding questions, making presentations, travelling to other sites and so on. While including these costs will lower your ROI, it will increase your credibility when management understands you are being completely transparent.

Here’s the formula: ROI = (metric during measurement period – base line) ÷ cost of program.

Be conservative when reporting your ROI to senior leadership. Consider reducing your ROI by a percentage factor such as 30, 40 or 50 per cent. Remember, other things going on in the company likely had some impact on the metric too. For example, if you can demonstrate a positive ROI by only claiming 50 per cent of it is directly related to your program, you are sure to have more credibility with leadership.

Andrew Clark is the Vancouver-based president of BI Worldwide Canada, which uses behavioural economics to drive employee engagement. For more information, visit www.biworldwide.com.

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