Questioning the ROI Definition is Key to Measuring Return
Since the beginning of the downturn in the economy, much as been written and discussed on the value of employee recognition award programs. In an effort to cut costs during this recession, management is questioning the effectiveness of employee reward programs, and unfortunately, many award program budgets have been reduced. Some programs have been postponed or even canceled. Management wants a clear return on their incentive investment. Unfortunately, few employee recognition programs are developed with the ability to substantiate that investment. Why? In this installment, we discuss the questions that should be asked and the definitions that should be confirmed in order to effectively measure incentive program return.
Start by Defining What you Want
Return on investment (ROI), outcomes, cost effectiveness (CE) — these are all terms with extremely important meaning to employers as well as the vendors selling their awards and products. These three terms are different ways of asking, “Did it work?” The problem is that we rarely define and quantify what “it” is. The terms ROI, outcome and CE need to be operationally defined specifically for each organization. What’s an important outcome to one organization may not be for another. How does your organization define ROI? Is it improved health? Decreased absenteeism? Productivity? Profit? Engagement?
Incentive and reward programs can and should produce ROI, but that ROI is dependent on two factors: 1) How good the incentive program is, and 2) What is identified as the definition of return? The same holds true for the definition of outcomes and cost effectiveness. A program may or may not be cost effective depending entirely on how you define cost effectiveness.
This discussion leads to the overall problem of applying solid measurement in the evaluation of incentive programs. Vendors may state that their programs are cost-effective, produce outcomes and make for a significant return on investment. But it’s important that you ask exactly how the vendor measures these terms. For example, motivation is a key factor in reward and recognition programs. Do these programs boost motivation? Does motivation even matter in your organization?
Again, the answer lies in the measurement. Properly delivered reward programs can certainly influence behavior. At a more basic level, reward or reinforcement is a fundamental factor that certainly influences human behavior. The degree to which motivation plays a part or is even important depends completely on what is of interest. Does your organization care if employees’ motivation changes with the implementation of a rewards program? You would likely say “yes,” if and only if that motivation change is associated with a behavior change. Improved motivation with no action is not as valued as improved motivation with action.
Every vendor of every program must be able to quantify or at least define their claims. And you, as an HR professional, should be asking the vendor questions; measurement assures that the products we implement are legitimate. ROI, outcomes and CE are not universal truths. They are simply categories for a large number of metrics. Specify what each term means and you will know what you are getting.
A popular saying in the incentive industry is, “What gets measured gets moved,” or “What gets rewarded gets repeated.” But these are simply catch phrases from a time in history when the majority of incentive programs were designed to increase vendor sales. Sales management often justified these budgets based on increment sales and profits. As the recognition side of the industry grew from the traditional “years of service” programs to real employee recognition efforts, it became more difficult to prove a return. When measuring the performance of a group, the measurement almost always needs to be macro, and that can be a slippery slope. There are many factors that can affect the outcomes, often more so than just the motivation of the employees.
To date, one common measurement for recognition programs has been employee satisfaction. Recognition drives satisfied employees, satisfied employees provide better internal and external customer satisfaction and satisfied customers drive higher sales and profits. Another common measurement is turnover; the more satisfied the employee base, the less turnover you have. However, this is an assumption, one that must be documented. If recognition really drives employee satisfaction, document the satisfaction scores on an ongoing basis. If satisfied employees provide better service, show the relationship between employee satisfaction scores and customer satisfaction scores. If satisfied customers drive higher sales and profit, show the measurement.
The Best is Yet to Come
Earlier this year, The Human Capital Institute, the Incentive Research Foundation and the Forum for People Performance Management and Measurement joined forces to study the ROI of recognition. We are confident they will find compelling validation for the expense of recognition programs. We hope that they can produce qualitative and quantitative data to support the use of employee recognition systems. Until then, we believe that the closer you can tie your programs to the individual efforts of your employees, the easier it will be to measure the ROI and the effectiveness of the program. Of course, will keep you updated as the results of that study become available.
Post your comments or questions and read the discussion in the ongoing Science of Recognition column below.
Joshua C. Klapow, Ph.D., is a clinical psychologist and associate professor in the Department of Health Care Organization at the University of Alabama at Birmingham School of Public Health. Klapow is also the chief strategy officer and chief behavioral scientist for ChipRewards Inc., a consumer health incentive company.