Money can't buy happiness, but recognition can!
You might be well aware of the perks of employee recognition. Happier employees. Lower turnover rates. Higher engagement and performance. Even an improved employer brand to drive recruitment of better talent.
But how do you make room in your budget for recognition with so many competing priorities? From acquiring talent to developing new business strategies, to streamlining operations, it can be difficult to imagine where recognition might come into play.
And if you do get approval for a program, how much do you need? And how should you allocate your employee recognition budget for maximum impact?
In this blog, we’ll provide guidance for how much you should be spending on recognition, how to make it work if funds are tight, and some strategies to actually use your budget to drive your program’s success.
How much should an employee recognition budget be?
Based on data from SHRM, the gold standard rule of thumb for an effective employee recognition budget is to set your total spend at about 1% of payroll.
Some organizations who really value the potential impact of recognition might go as high as 2,3 or even 10%, but 1% generally hits a ‘sweet spot’ of being affordable enough for most companies while still being enough to provide meaningful rewards and make a real impact on your culture.
7 steps to determining your employee recognition budget
Of course, whether this is too much, too little, or just enough for your company will depend a lot on your company’s situation, what kind of programs you are introducing, and what you hope to accomplish.
Rather than plan your program based on a set budget allocation or percentage of payroll, we’d recommend working to the other way around – determine what kind of program you need, and how much it would cost to make it effective. Not only will this ensure that your employee recognition budget is right for your needs, but you will be better prepared to make your case to your leadership team.
1. Determine your company’s goals
What are you looking to accomplish from your recognition program? Are you simply looking to update an outdated milestone program? Equip your managers with tools to drive better performance? Build culture and improve big-picture metrics like retention and engagement at a company-wide level?
As a general rule of thumb, the loftier your goal, the more employee recognition budget you’ll need, but that doesn’t mean an effective program has to cost the earth. We’ll go through some smart strategies to help make your funds go further later in this piece.
2. Factor in your total program costs
When it comes to recognition programs, you’ll often hear the word ‘budget’ used in about five different ways.
This is because there’s a lot of different aspects to planning a recognition budget, such as:
- Rewards spend: The total amount your company spends on rewards
- Allowances: The spending limits allocated to your team members, e.g. $100 per month.
- Program costs: The amount you spend on your program outside of rewards. This would include subscription fees and setup costs, and you may even want to factor in admin time or any time and resources you need to promote the program internally.
It’s important to have a plan for all of these areas, and to factor in all the costs that will contribute to the total amount of spend on the program. While you might be tempted to show your leadership a smaller number, you’re much better off presenting them with the full picture so they won’t be unpleasantly surprised down the line.
It will also help you to determine what you can spend more accurately. For instance, if you know that a large portion of your budget is going to be swallowed by subscription costs, you can reduce the budget allocations to employees for rewards, or consider alternatives platforms that don’t have such high base fees.
3. Design recognition budgets tailored to the programs you’re running
Your total spend might include a number of different types of recognition programs, such as:
- Real-time programs for day-to-day spot recognition
- Milestone programs for anniversaries and other special occasions
- Gifting for holidays and other company-wide appreciation initiatives
- Rewards that are tied to social and team-building events
Generally speaking, you should try and separate each of these programs in your budget. Each one will require different rewards amounts and different strategies.
For example, a $5-25 reward is perfect for real-time, day-to-day recognition, but if you’re rewarding an employee for 5 years of service, you might want to offer something more substantial.
4. Give the right budgets to your leaders and managers
A lot of rewards experts and recognition companies oversimplify budget distribution. They might recommend you set a budget based on a simple ‘headcount’ formula. For example, if a manager has 10 direct reports and you want each person to get an average of $25 a month in rewards, that manager needs a $250 monthly allocation.
But in a larger organizational structure, you might have 1 VP who oversees 5 managers, who each manage 10 people. In this situation, you may want the VP to get some additional budget to recognize people two levels below them, so that they can lead by example with their participation in the program.
A good approach is to budget a set amount for each person’s direct reports, and then a smaller set amount for each employee a level under that.
5. If your doing peer-to-peer recognition, make sure your budget isn’t too small
If you’re running a budgeted peer-to-peer program, the allowances you give individual contributors will vary depending on how large your total budget is, and how much you want to empower your people to recognize each other.
As a general rule of thumb, giving each employee an allowance of $25 per month is a healthy amount for a mid-size company, as it gives them enough flexibility to send one larger monetary reward per month or several smaller ones. Smaller companies may be able to give slightly higher budgets to make it a bigger part of their culture.
Of course, for companies with large numbers of employees, budgeting $25 a month could amount to significant outlay. We’ll often see larger companies with employee recognition budgets that stretch to less than $5 for every employee. In these cases, we actually recommend using non-monetary recognition alternatives (more on that later).
6. Set the right allowance frequency
With most recognition programs, each user is given a set allocation of rewards they can send over a given period. At the end of that period, the allocation resets, and any amount they haven’t used is gone.
We encourage monthly limits for the majority of programs because they are easy to manage, encourage consistent recognition, and promote timely recognition habits across the organization.
However, some admins have found that quarterly budget limits are a more suitable option, as it gives busy managers more time to get round to using their budgets, especially in the early days when you might still be working to drive full adoption across the company.
In a lot of these cases, though, we typically see low participation in the first 2 months followed by a spike in the 3rd month before the budget resets. That means it's not always as effective as monthly limits for driving consistent, year-round participation, but it may be something to experiment with if you’re trying to encourage more people to try the program.
7. Make sure that you use your employee recognition budget!
A lot of advice about budgeting for HR programs tends to focus on the initial budget you’ll need to get started.
That’s all well and good, but as the program manager, you also have to think about getting your budget renewed, and possibly even increased if it’s successful. And the easiest way to make sure of that is to make sure the budget is being used.
As your program moves forward, do everything you can to drive participation across all levels of the company. Highlight recognition in your internal communications, bring it up in meetings, and even take time to encourage and coach individual leaders to make sure they participate.
Your recognition software program can also help, enabling your employees to receive automated messages reminding them to use their budgets before they expire, and other prompts to inspire them to recognize each other.
How do you recognize employees on a budget?
Of course, for some companies the recommended outlay for some recognition programs might seem like a lot, particularly if times are tight.
In those cases, you might be able to work out a cheaper strategy. Here’s some tips on how to reward employees on a budget, plus some other creative strategies to help you secure more funding for the program you want.
Consider non-monetary recognition
If you can only afford a small employee recognition budget, your team won’t see a lot of impact from it. They won’t be able to send rewards very often, and the rewards they do send will be so small that the gesture will lose a lot of its value.
Instead, you could spend that money on a non-monetary peer-to-peer solution like Guusto’s Shoutouts. For a small subscription fee, all of your employees will be able to send unlimited non-monetary recognition any time they want, which will make recognition more visible and frequent.
If you have any budget left over, you can use it to supplement your non-monetary program with additional rewards. For example, you could use Guusto’s Draw feature to randomly select Shoutouts for rewards at your team meetings, or offer rewards to top 3 people in your Leaderboards every month.
You could also mix and match, and run a non-monetary peer-to-peer program for your entire team, while giving each of your managers a small employee recognition budget to send spot rewards.
Investigate other ways of recognizing employees on a budget
You could try to find ways to show your appreciation that come at little to no cost. This might include things like giving up an executive parking space to an employee as a reward, or holding an in-house office party so you can buy in food and drink on a lower cost than taking employees to a venue. And if all else fails, simply reminding your managers to say ‘thank you’ more regularly can go a long way, provided it’s genuine and meaningful.
Be aware, though, that some of these options can fall a bit flat. If you’re trying to reward employees with no budget, it will be easy for them to see that, and they will start to feel like you don’t value them.
Nonetheless, it is possible to brainstorm a few employee recognition ideas on a budget that will still make your team feel appreciated, and at least cut down on the cost of some of your reward spend.
Find more funds
If you’re having trouble obtaining a significant employee recognition budget, it might be worth diving deeper into where your other money is going. For one thing, it’s possible your leaders and managers are already expensing money on lunches, gift cards, and other things to show appreciation to their team on a regular basis, and that it’s just not being tracked. We call this Hidden Manager Spend.
These funds could be used to put a program in place that will be structured and formalized, while also creating less headaches for your accounting department.
Another area which our former Head of People Noah Warder often highlighted is your neglected benefits packages. You may have a number of benefits programs that aren’t being fully utilized, and spending that money on recognition would be more impactful.
Show the savings (and the ROI)
When looking at areas like hidden manager spend, it might also be worth looking at how much you are spending in admin time to look after ad hoc recognition. If your team is having to manually buy gift cards and other rewards, expense them, and track them in spreadsheets, it might be adding up fast. Your finance team may also be spending considerable time tracking what rewards are taxable.
On the other side of the coin, you can also show some of the projected ROI of recognition, and the potential gains in productivity, retention, and other areas.
Crawl. Walk. Run.
Having said all of this, we should stress that the important thing is to make sure your budget is enough to make an impact. If you really need $1 million to run a successful program but can only get your execs to agree to $50,000, you might find it hard to make it work. Your team members won’t be able to recognize enough people often enough, the program won’t have much of an impact on your culture.
You might be better off putting that money into a smaller pilot program as a ‘proof of concept’ with one department or branch while you continue to try and get buy-in from your leaders. Then you can launch a larger program when you have the funds you need to make it a success.
This is one of the key benefits of the ‘Crawl. Walk. Run’ approach we offer clients through our platform, as they can slowly build a program that works rather than having to commit upfront to an expensive company-wide program. You can even get started for free and send rewards instantly with a single user account to see how it works.
Get the employee recognition budget you need by making a winning case to your leaders
If you need to get buy-in from your leaders to secure an employee recognition budget, our Executive Pitch Kit could be an invaluable tool for your mission. This free resource includes:
- Pitching Recognition to the C-Suite, a guide featuring tips from HR experts on how to get your program approved
- A fillable PowerPoint template for your executive presentation
- A one-page proposal template
- Our ROI Calculator to help you quantify the potential payoff of your program
Fill out the form below to get instant access to all 4 of these assets for free!
*Editor's note: This blog was originally published in November 2020 but has been updated with additional insights and resources.