ROI on Employee Recognition

Almost every day, REDII is asked for support on the business case for recognition, so here are answers to one of the most frequently asked questions by both CEOs and CFOs. How do you calculate the return on investment (ROI) of employee recognition? How do you prove that a recognition program – often seen as a ‘nice to have’ or ‘fuzzy, feel-good option for prosperous times – helps you become a more profitable, successful business?

Recognition increases engagement.
Increased engagement increases operating income.

Global data and research suggests that a best-practice, high-frequency behavioral recognition program can deliver over a 10% improvement to sustained employee engagement. Towers Watson have suggested this figure could be as high as 25%. And according to Aon Hewitt’s 2012 Engagement Database, even just a 1% increase in employee engagement equates to up to a 2.5% increase in operating income or EBIT.

What does this mean in $ dollars?

After a decade partnering with human resources professionals, we’ve learnt it’s best to keep our estimates conservative. So in the following example we’ve played it safe with the numbers.

Imagine you are 200-person business with a turnover of $100 million and an operating income of $5 million (or 5%, which is at the lower end of industry averages).

According to our statistics, a reasonably performing recognition program should deliver a minimum 5% increase in employee engagement over 12 to 18 months. This equates to a real bottom line cash increase of $625,000 to $937,500.

What would the Financial Director be prepared to invest or have at risk for a calculated return of $1m? $100,000? $200,000? $300,000?

What does your board demand as a return on capital?

Where does the money go?
The average spend per employee in a REDII program in 2014 was a little shy of $400 per year. We have clients spending around $120 per head up to well over $1000 all achieving decent results.

If REDII’s 30,000+ participant sample is washed against the average wage in Australia of $75,000[2], that means that average recognition spend is around 0.5% of payroll. Research in the US[3] that suggests 1% of payroll is the benchmark, so Australia has some way to go in understanding the value that this level of investment might return.

But even with these conservative figures, in our imaginary 200-person business, the recognition program (including all set-up fees, technology costs, support and rewards) in year one would cost less than $95k and less than $87k in each subsequent year.

Is a x 10 return on investment going to satisfy your Leadership team?
Wouldn’t that make HR a profit centre?

Measuring the impact of recognition

So the big question is: once we have made an investment in recognition, how do we understand if it’s having an effect on engagement? What tools do we have to understand the impact of recognition?

The great news is that you don’t need an expensive engagement report to understand if your recognition strategy is working. REDII’s Pulse Survey measures Employee Net Promoter Score (ENPS) before we launch a recognition program and 9, 18 and 24 months after launch, should you choose to track your improvements.

In addition to the ENPS result, the results of your business’ Pulse Survey also includes a Recognition Balance Sheet. Your Recognition Balance sheet is REDII’s measure of success and gives us as indication of how much impact recognition is having on your employee engagement and culture.

We know that recognition works when it creates a sense of belonging to a community and generates high levels of self-esteem. There are some best practice ways to ensure this happens (check REDII’s resource library for more information on best practice recognition strategies). To ensure recognition is actually having an impact on individuals, we aim to understand recognition both quantitatively (how frequently recognition occurs) and qualitatively (where the recognition came from and how well it was delivered).

A series of questions in the Pulse Survey tells us frequency and quality and we identify the instances when recognition was successfully delivered and amplified, and any that was lost, diluted or misheard. The difference tells us the impact of recognition.

SURPLUS:

A recognition balance sheet in surplus indicates that recognition is delivering an engagement and productivity return; it’s being delivered with enough frequency and specificity to cause positive changes in behaviour.

DEFICIT:

A balance sheet in deficit indicates that recognition could be working harder; there is an opportunity to increase frequency, improve the way in which it is delivered and by whom.

Organisations with a recognition surplus have strong ENPS results and organisations with a definite show weak ENPS result.

Tracking the quality of recognition gives you the best – and fastest – indication of ROI

The Recognition Balance Sheet gives us baseline from which to measure the ongoing success of your recognition program alongside the Employee Net Promoter Score results. Tracking the frequency and quality of your recognition program gives you visibility of progress, as well as the areas in your business that might be getting more out of the program than others.

Independent research indicates that improvements to key commercial metrics and customer satisfaction as a result of improvements in employees’ engagement can take between 6 to 18 months to flow through.[6] So while your business might start seeing and feeling the success of recognition as quickly as 3 months after launching, the CEO and CFO can’t report on commercial results until at least month 12. Using REDII’s Pulse Survey means your board doesn’t have to wait to start tracking progress.

Your business can go from average to awesome

Let’s assume that before they launch a recognition program, our 200-person business is has an average score when it comes to employee engagement. Based on our Engagement Capability research, an average business can only expect about 20% of people to be True Believers: people who give their best each day and everything they’ve got in every customer interaction. The rest are either Stayers or Achievers (60%) – these people have capacity for greater productivity and connection, or Underminers (20%) – these people require a significant change in the organisation to be engaged.

Given that 60% of this 200-business can be more engaged at work, and that over half (56%) of a person’s engagement is influenced by the amount of recognition they receive [4], a successful recognition program has the potential to positively impact over half of their workforce. Imagine what it would mean to your business’ customer service scores, productivity, profit and ENPS if you went from having ⅕ to ⅘ employees being highly engaged True Believers.

You don’t even have to spend more money

Contrary to popular belief, a recognition program is not necessarily going to cost your organisation more money. If anything, it will make your existing budget work harder and smarter for you (and get your employees doing the same thing)! Research by McKinsey & Co shows that a $1000 bonus or pay increase only shifts employee engagement by 1% but the same amount of money invested in ‘on the spot’ awards throughout the year drove a 10% increase in engagement.

The secret here is the frequency and immediacy of the recognition and reward. Take a look at the table below that shows a typical recognition program. A budget of $32,800 pays for for monthly, quarterly, and annual awards and a dinner for the leadership team, award winners and their partners – but only enables 68 instances of recognition. On the other hand, a program that encourages recognition and reward at any time by any one in the company costs the same amount of money but allows for over 1662 instances of recognition. That’s over a 2444% growth in opportunities throughout the year to engage, appreciate and bump of the morale of your employees, without spending a cent over what you have in the past.

How to build an employee recognition program?

When done well, employee recognition can deliver all sorts of commercial and cultural benefits for organisations. Here are ten ingredients for our recipe for success.

1. Build a brilliant business case.
Identify the area(s) of your business you need to improve. This might be attrition or retention rates, sales or customer service metrics or your employer net promoter score (ENPS). Calculate what this is costing your business and develop a case that explains what you could save or improve with a more engaged workforce.

2. Get yourself at least one executive sponsor.
Ideally your sponsor will be the CEO or someone on the executive level team who’s willing to work with the team who needs to get the program up and running (be that HR or communications). Your sponsor needs to be someone who will champion the project and has the respect of operational leaders. Make sure they know the business case as well as you do.

3. Involve employees from the outset.
Let employees decide what the program will be called, what it could and shouldn’t include and how it will work. This creates an army of recognition ambassadors before your program even kicks off. It’s also a fun process, and heightens a sense of ownership and belonging. It goes without saying that employee-led programs deliver fantastic results.

4. Identify the behaviours that you want to drive.
Best practice recognitions programs uses organisational values as the core stimulus or language thread. If your company values don’t resonate or you haven’t established any values yet, get them sorted before you start designing your recognition program.

5. Keep it super simple.
Your program shouldn’t be complicated. Assign one award for each company value you want to highlight, and enable employees to reward their peers and send simple, thank you e-cards. Together, these make recognition easy and intuitive.

6. Create a universal foundation.
Whatever commercial or cultural outcomes you are targeting with this program, its success depends on a strong presence across the whole organisation. Increase the opportunities people have to talk about the program by creating at least one award or recognition opportunity that can be given to anyone, regardless of their role or rank. Awards for individual business units or teams are just icing on the cake.

7. Develop a communications strategy.
Frequent communication (through face-to-face, company communication channels and the recognition technology itself) is essential to achieving awesome results. Build an events calendar that is accessible by advocates across the organisation.

8. Measure and report.
Track the progress of your program by accessing the rate your employees are giving and receiving recognition. This gives you an indication of the individuals and teams who are engaged and achieving in the business. Leverage the support of your executive sponsor by ensuring any managers who aren’t recognising their team or failing to lead by example are held to account.

9. Give it time.
It will likely take 3-9 months for your program to ramp up in terms of participation and velocity of recognition. The commercial impact generally takes 9 – 18 months to be visible, while improvements in communication and morale can affect different teams at different times.

10. Have fun!
Recognition – the experience of acknowledging others and understanding that what we are doing is impacting our workplace community – is a positive for everyone concerned. You’re allowed to inject humour, a little bit of sparkle, and even a dash of weird to really have it hit the mark.