How to measure the value of employee recognition
When Kevin Ford reached his 27th work anniversary at a famous fast food chain, the occasion was marked with a gift pack. Despite never missing a shift in nearly three decades of work, his rewards were a movie ticket, a Starbucks tumbler, and some candy.
When Ford made a video to show off his rewards, the clip went viral. While some viewers praised Ford’s loyalty and positivity, many were shocked by the paltry compensation for his hard work. A GoFundMe campaign, aiming to give Ford the recognition his employer had failed to deliver, reached nearly $400,000 in donations. Meanwhile, rightly or wrongly, his employer's brand took a major hit on social and traditional media worldwide.
In other words, employee recognition can have a huge impact on how your employees, and the rest of the world, perceives your business. Getting it wrong can cost you a fortune in poor PR and disengaged employees.
Ursula Mead, CEO of InHerSight, explains: “Everyone, from babies to billionaires, wants to be recognized. It’s human nature to want a pat on the back. Instead of thinking of employee recognition programs as an option, all business leaders should be building them into their expected expenses and programming.”
However, for many businesses, especially those in a hyper-growth phase where every dollar has to deliver results, it can be hard to quantify the impact of investing in employee recognition. In this article, we’ll break down:
- How your People team can demonstrate the ROI of employee recognition to business leadership;
- Why getting employee recognition right is critical to growing your business;
- How to get the most bang for your buck when it comes to employee recognition and rewards.
Does employee recognition deliver ROI?
Well, that’s an easy one - yep!
Research by Gallup shows that poor recognition programs can cost large enterprises up to $16.1 million. But where are these costs coming from?
1. High turnover
The main cost of poor employee recognition is in higher turnover rates: employees who feel their contributions are underappreciated are twice as likely to soon jump ship.
2. Low employee engagement
On the flip side, Michael Alexis, CEO of Teambuilding.com, points out that employees who are recognized are not only less likely to leave, but also far more engaged and productive.
“Companies with high employee recognition and engagement report 17% higher productivity and 21% greater profitability,” he says.
“Businesses that are low in these areas account for an estimated loss of $450 - $500 billion annually in the US alone.”
3. Reduced absenteeism
A Gallup poll found that employee recognition reduced absenteeism by as much as 27%. It’s no surprise really–you’re far more likely to show up for work if you feel like your manager is going to notice when you’re there!
4. Improved company culture
Recognition doesn’t just boost performance for the employees who receive a reward. Researchers found that employees who witness others getting recognition are also inspired to greater productivity, even if they don’t receive a reward themselves.
5. Greater employee alignment
By rewarding specific achievements, actions, and efforts, you make it clear to the whole workforce exactly what managers are looking for and how each role contributes to the company’s goals.
How can you get buy-in for an employee recognition budget?
OK, let’s say you’re already convinced that you need an employee recognition program - but you can’t get business leadership to sign off on a budget.
Too often, employee recognition can fall into the category of a “nice to have”, rather than a necessary business expense. This may be because it seems tricky to demonstrate direct causality between investing in your employees and the resulting bottom-line gains.
If you’re struggling to make a case for employee recognition and reward, then it’s time to get a little creative. For instance, can you build a program that quickly starts to pay for itself?
Bill Catlette, Managing Partner of Contented Cow Partners, believes that employee recognition can be self-supporting after an initial outlay. “In most organizations today, group productivity and employee retention are key indicators,” he says.
“If I've got 86 people on staff and an overall operating budget of $19 million, I should be able to commit to a minimum level of improvement [to those indicators], with recognition program costs covered by some established ratio (e.g. 5%) of the excess above the target.”
How to measure the ROI of employee recognition programs
To make sure that your program is delivering the greatest possible value to the business, keep your focus on the metrics that really matter to the bottom-line: employee performance, engagement, and retention.
Tracking the impact of employee recognition on performance
The most effective way to measure this is with your performance management data. You can compare and contrast employee performance before and after you implement an employee recognition program. The metrics to focus on include:
- # employee goals or OKRs reached
- # team goals or OKRs reached
- Employee time spent on learning and development
- Management-employee performance ratings
Couple this with a survey of your managers to get more qualitative data about employee performance. You could ask questions like:
- How satisfied are you with your team’s performance?
- How motivated is your team?
- How well do your direct reports collaborate with each other?
- How often do you recognize your employees for their work?
To turn this more intangible benefit into dollars and cents, you can start by measuring your revenue per employee - simply your business revenue divided by your number of employees. The difference in revenue from the period before and after you introduce employee recognition can be a helpful approximation of the impact on performance.
Measuring employee recognition and engagement
Michelle Hague, HR Manager of Solar Panels Network USA, says while there are many factors to consider when calculating the ROI of employee recognition, “the most important factor is the morale and satisfaction of employees.”
“If an employee is feeling appreciated and valued, they are more likely to be productive and committed to the company,” she says.
“Ultimately, it is important to assess the impact of employee recognition on the overall culture and productivity of the company.”
In fact, organizations that invest at least 1% of payroll in recognition programs can earn an 85% improvement in engagement levels, according to the Society for Human Resource Management.
To track the impact on engagement, start by using anonymous employee surveys to establish a baseline. Ask questions like:
- Do you feel proud to be part of this company?
- Would you recommend us as an employer?
- Do you feel appreciated for your work?
- Does your manager notice when you go above and beyond?
- When was the last time you received recognition for a job well done?
For a more quantitative number to use to demonstrate financial ROI, you can use absenteeism as a proxy. For a rough calculation, your cost of absenteeism is the daily wage of the employee, times two (to account for lost productivity and disruption). If you want a more accurate calculation, try Houtzagers’s formula (see here for a handy guide).
Calculating the impact of employee recognition on turnover
For Ursula Mead, the high ROI of employee recognition is found in retention.
“We all know turnover is expensive. Training new employees costs thousands of dollars,” she says.
“On the flip side, many types of recognition—but not all—are free and not overly time-consuming. One Friday off a month to celebrate a team’s consistent good work, for instance, is going to do much more good culturally than it will harm a company’s business endeavors.”
The calculation for the impact on ROI is easy–assuming you already know your cost per hire. If not, there’s a simple formula:
Cost per hire = External recruitment + Internal recruitment costs/Total number of hires
For a complete list of all the costs you should include in your calculations, check out the American National Standards Institute’s guide here.
Once you know your cost per hire, then the amount you’re saving on turnover after you implement your recognition program can be chalked up as a return on investment.
Putting it all together: The value of employee recognition
In the end, a lot of what makes employee recognition so valuable can be hard to quantify. However, creating a proxy measure to track the ROI of your recognition program in financial terms can be a helpful way to secure long-term buy-in. To summarize our breakdown above, here’s a quick and dirty formula for the ROI of employee recognition:
Explore how to maximize ROI by finding low-cost ways to recognize and reward
As we have seen, employee recognition is about more than just money. Bill Catlette argues recognition “done well" means “going beyond a simple, automated, bureaucratic ‘tickets and prizes for good behavior’ scheme. It should be both personal and meaningful”.
Luckily, personal and meaningful recognition can be given without much or even any expenditure. Let’s look at your low-cost options.
1. Introduce a peer recognition scheme.
Foster an environment where peer-to-peer recognition is given freely and reap the rewards.
Employee recognition software, like HiThrive, can allow staff to easily offer praise and thanks for achievements big and small. HiThrive also allows you to run peer nomination campaigns and keep track of birthdays and anniversaries.
2. Train your managers.
Managers may overestimate how much their gratitude and appreciation are already understood by their staff and make little extra effort to make their feelings clear. However, failure to communicate appreciation and offer overt signs of recognition can hurt both morale and the bottom line. Managers can’t afford to take it for granted that their employees feel valued.
Establish workshops to bring managers up to speed on the importance of recognition to your company, its benefits in terms of productivity and retainment, and how they can help grow a successful culture of recognition.
With HiThrive you can also give managers the power to reward team members with praise or gifts whenever appropriate.
3. Build employee recognition into the flow of work.
With the right employee recognition software and program, you can better focus on increasing the ROI you get from your program.
Matt Tresidder, the CEO of Leadr, argues that your employee recognition program should be integrated within your other people development activities.
“Having recognition visible in the same tool as your 1:1 meetings, feedback tool, and goals tracking ensures recognition doesn’t happen in isolation but is actually a part of your organizational culture,” he says.
For instance, HiThrive integrates with Slack, so your managers and employees can recognize and reward one another right in the same place they’re usually collaborating. This is far more effective than sending people off to yet another platform every time they want to give or receive recognition.
4. Encourage employee recognition program uptake.
If you want your employee recognition program to deliver a real ROI, then it goes without saying that you need employees to actually use it. According to Ursula Mead, the success of employee recognition programs depends on two things:
- A quick spark of excitement and adoption to get people engaged.
- Long-term champions to make sure they continue to be used and effective.
“Managers and leaders are your long-term champions,” she says.
“The best way to drive home the message employees are valued is to pair a reward system with more cultural practices, like praise. You need to shift benefits and culture to make something last.”
5. Foster a feedback culture.
Matt Tresidder says recognition alone is not enough to see a significant ROI.
He recommends building a feedback culture by holding consistent 1:1 meetings “where there is space to identify and recognize areas of growth and success as well as improvement opportunities”.
“Talking through the specifics behind recognition is where growth and development happen, not simply in offering recognition alone,” he says.
“Implementing a culture of two-way feedback where there is an expectation of communication, both positive and constructive, day in and day out is the key.”
What types of recognition actually work?
As Kevin Ford’s employer discovered, if you’re going to do employee recognition, you have to do it right.
Here’s what makes a recognition program meaningful, rather than gimmicky:
1. Keep it personal.
Above all, recognition should be personally tailored to your employee. This means you need information about their achievements, personality, and how they respond to various types of recognition. The more data you gather, the more effective you can make your program.
In fact, significant gains can be achieved with something as simple as a thank you card. Researchers ran a study with social workers and arranged for half of them to receive positive feedback in a personalized letter from their managers. Workers who got letters felt significantly more supported, valued, and recognized by their organization even a month later and improvements in absence rates, motivation, and well-being were also seen.
2. Make sure it also comes from the top.
Peer recognition is great, but Gallup found that most employees would rather receive praise from their manager.
3. Timing is everything.
Frequent small acts of genuinely felt recognition are far more effective than grand gestures made once in a blue moon.
4. Be specific.
Recognition should be given for specific, identifiable achievements or behaviors. Make sure everyone knows what is being rewarded. Recognition that is too general can prompt feelings of favoritism and breed resentment. For maximum effect, link the recognition with the company's values.
Here are some things worthy of recognition:
- Meeting or exceeding targets
- Working overtime
- Reaching a long-term service milestone
- Receiving positive feedback from clients
- Succeeding in a new role or secondment
Integrating recognition into your company culture
The best employee recognition software should allow you to fold a culture of praise into your daily routines. Even better if the software can allow you to effortlessly incorporate recognition into your existing tools.
HiThrive makes it a snap to connect praise to core values using tags for employee contributions that drive your mission–especially important for fast-growth businesses experiencing rapid change.
HiThrive lets you seamlessly integrate a great employee recognition program into your existing workflow. Why not schedule a demo today?