Investing in employee recognition programs to make your people feel appreciated can have significant impacts for your business. Doug Conant (Former President of Campbell Soup Company) once said: “To win in the marketplace, you must first win in the workplace”.
Measuring the Return on Investment (ROI), or quantifying the potential ROI, will solidify that it’s worth recognizing your people or help you build your case to management. This article will walk you through the calculations (you can also click here to try our ROI calculator yourself).
What is ROI?
ROI is a way of measuring the value of an investment. For example, if you’re looking at different options to invest $1000 in, calculating the ROI will help you decide the best option. It is calculated as follows:
ROI = Return / Investment
ROI = (Additional Revenue + Cost Savings - Investment) / Investment
Let’s take a closer look at the various components.
There are many great ways (beyond standard pay increases) to invest in showing employees appreciation for their contributions:
- Monetary recognition - rewarding performance, accomplishments, milestones or behaviours that aligns with company core values
- Non-monetary recognition - handwritten letters, company announcements, or peer-to-peer programs that allow employees to nominate colleagues
While building your recognition program, the biggest challenge is creating one that can be executed consistently across the entire organization, and keeping track of all the expenses. An employee recognition platform enables you to do both.
Let’s take an example: You have a company of 600 employees, invest 1% of employee salaries in rewards and spend $1.50/employee/month for a peer-peer nomination program:
Annual Investment = Cost of Rewards + Platform Fees
Annual Investment = 600 x 1% x $50,000 + 600 x $1.50 x 12 months
Annual Investment = $310,800
A more engaged workforce will align better with the company’s vision, which will provide a better brand experience for prospects and customers. While this does lead to increased revenue, this component is hard to measure. Therefore, we will focus the ROI calculations on the associated cost savings.
A Gallup study estimated that the cost of employee disengagement is $1 trillion a year in lost productivity in the U.S. alone. The study also showed that 26% of workers ranked recognition in the top three factors for staying in their job and about 20% pointed to a lack of recognition as the main reason they’d consider leaving for a new job. An effective recognition program can boost productivity, while reducing turnover, absenteeism and on-boarding costs.
Research shows that companies with higher than average employee engagement levels benefit from 21% higher productivity. For the purpose of incorporating different scenarios, let’s be conservative and estimate that an effective employee recognition program can lead to 10% higher productivity (i.e. your people could produce 10% more, saving you from having to hire 10% more people to complete a job).
Total Productivity Gain = # of Employees x Salary x Productivity Increase
Total Productivity Gain = 600 x $50,000 x 10%
Total Productivity Gain = $3,000,000
High employee turnover is one of the largest costs to employers. It includes the cost of re-hiring, training, ramp-up periods, loss of expertise, and higher workloads for other employees while that position is vacant. Voluntary turnover is often due to a disengaged workforce, and in search of jobs that offer better pay, more challenging work, and with a better culture of recognition.
The Bureau of Labor Statistics reports an average turnover rate of 44% annually in the US, as well as an average turnover costs at 38% of the annual salary. This includes hiring, training, ramp-up, loss of expertise during time, higher workloads for other employees while position is vacant.
Besin by Deloitte research found that companies that scored in the top 20% for building a “recognition-rich culture” had 31% lower turnover rates.
Turnover Savings = # of Employees Leaving x Cost of Losing Employee x Turnover Reduction
Turnover Savings = (# Employees x Turnover Rate) x (Salary x Turnover Cost ) x Turnover Reduction
Turnover Savings = (600 x 44%) x ($50,000 x 38%) = 31%
Turnover Savings = $1,554,960
Absenteeism in the workplace is often caused by low morale and disengagement. A survey by the US Department of Labour Statistics showed that employees are absent around 8 days a year. Creating a more engaged workforce can lead to reduced absenteeism and reduces costs related to lost productivity.
Absenteeism Savings = # of Employees x (Salary / # of Work Days) x Reduced Days of Absenteeism
Absenteeism Savings = 600 x (50,000/240) x 2
Absenteeism Savings = $250,000
On-boarding new hires is a time consuming and expensive process. According to a survey by Korn Ferry, 74% of executives believe that on-boarding is a key factor in retaining new hires. The survey also showed that 67% of the executives believed that including mentors in on-boarding could help new hires acclimate better, but half these companies did not have any mentorship programs in place. Having a mentor during on-boarding saves training time as well as improves new hire transition - this depends on commitments from older, highly engaged employees to create a welcoming environment.
On-boarding cost is the cost of lost productivity in a 60 working day on-boarding period, out of a 240 working day year. We estimate an engaged workforce can speed up on-boarding by 10%.
The number of on-boarded employees include new employees through business growth (assumed to be 10% here) as well as from turnover (at 44%).
On-boarding Savings = On-boarding Cost x Savings % x # of On-Boarded Employees
On-boarding Savings = (Training Period x Salary) Savings % x # Employees x (Growth + Turnover)
On-boarding Savings = (60/240 x $50,000) x 10% x 600 (10% Growth + 44% Turnover)
On-boarding Savings = $405,000
Total Cost Savings
Total Cost Savings = $3,000,000 + $1,554,960 + $250,000 + $405,000
Total Cost Savings = $5,209,960
It’s crazy Not To Invest in Recognition
The total calculation results in the following:
ROI = (Additional Revenue + Cost Savings - Investment) / Investment
ROI = ($X + 5,209,960 - 310,800) / 310,800
ROI = 1576% Per Year
This means that for every dollar invested in your employee recognition program, you see a $1,576 return. Not bad!
Your people are your biggest asset. By creating an environment where they feel valued, employees will feel more engaged with their tasks and teams - which will lead to improved loyalty and retention, faster ramp-ups, lower absenteeism and higher productivity.
It’s okay to start small and measure the success of your program along the way. Ad hoc programs, however, won’t do the trick - for your program to work, it needs to be executed consistently. To learn more, you may be interested in reading our blog on how to build an impactful recognition program.
Ready to try it yourself? Click here to enter your own values in our ROI calculator.
Your employees are often focusing on day-to-day, short term projects and deadlines which can become unfulfilling, causing your business to suffer. So, next week we’ll be exploring - How to get your employees thinking big picture. It will cover the following in detail:
- The benefits of getting employees thinking big picture
- 5 ways to get your employees thinking big picture
Hope you’ll join us for the discussion. Have something you want to learn more about? Let me know in the comments below or connect with me on LinkedIn.
Muucho Guusto :)