The Value and ROI in Employee Recognition

The Value and ROI in Employee Recognition: Linking Recognition to Improved Job Performance and Increased Business Value — The Current State and Future Needs August 2009 Contents Executive Summary ..............................................1 Introduction ...........................................................2 The Place of Recognition in the Total Reward Package .................................................................7 From Recognition to Business Value: The Recognition—Motivation—Engagement—Job Performance—Business Value System ..............10 Measuring the Value of Recognition ................13 Case Studies: Recognition Programs to Improve Specific Business Functions ...............................24 Conclusions: The Current State and Future Needs of Studies into the Link between Recognition and Business Value........................28 Appendix I: Theories of Motivation ..................31 Appendix II: The Future of Measuring the Business Value of Recognition ...........................34 Works Cited.........................................................35 i The Value and ROI in Employee Recognition Copyright © 2009 Human Capital Institute. All rights reserved. Executive Summary Today’s economic challenges require n Increased employee engagement has a organizations to find new ways to not only dramatic positive effect on improving job reward top performers, but to motivate performance and capturing business value. all workers to improve performance while n Organizations actively seeking to improve maintaining or increasing business value. Both employee engagement, including through must be done as cost-effectively as possible. the use of formal and informal recognition, Traditional methods for keeping and motivating financially outperform their competitors. workers utilize compensation and benefits. n Unlike compensation and incentive-based However, as this report emphasizes, those programs, recognition programs potentially are only two parts of an organization’s “Total can create a positive cycle of ever-increasing Reward” package. In fact, organizations can employee engagement and motivation, with reward their workers in many ways, including resulting improvements in job performance- with pay, benefits, work-life improvements, related behaviors to optimum levels with a and incentives for pre-determined job limited investment. performance—as well as with various forms of In addition, we present three case studies— recognition. WorldatWork defines recognition Scotiabank, Delta Airlines and MGM as practices that: Grand—that illustrate how some organizations are restructuring their recognition programs to Acknowledge[s] or give[s] special attention better align them with employee engagement to employee actions, efforts, behavior or and business strategy. A key finding, exemplified performance. It meets an intrinsic psychological by these case studies, is that recognition need for appreciation for one’s efforts and can programs need to include multiple forms support business strategy by reinforcing certain of awards—e.g., what is recognition for one behaviors (e.g., extraordinary accomplishments) worker will not necessarily work with all. Also, that contribute to organizational success. recognition programs need not be expensive. Whether formal or informal, recognition In fact, many of the studies we discuss show programs acknowledge employee contributions that non-cash awards, including simple verbal immediately after the fact, usually without recognition, usually work best. What matters is predetermined goals or performance levels that the recognition is valuable to the worker that the employee is expected to achieve. and is awarded for behaviors linked to specific Awards can be cash or non-cash (e.g., verbal job performance goals. recognition, trophies, certificates, plaques, dinners, tickets, etc.). This report closes with a discussion of the (www.worldatwork.org/totalrewards) need for further studies of recognition in the workplace—namely we call for: This report highlights recognition’s role by demonstrating that: n New, rigorous empirical studies that accurately measure the gains achieved by implementing n Recent studies by Gallup, the Corporate specific types of recognition programs. Leadership Council, Towers Perrin and others show that recognition is highly correlated to n More effective use of Return on Investment improved employee engagement with both (ROI) and other methods that can better the employee’s work and organization. measure the long-term gains in business value that are the hallmarks of successful recognition programs. 1 The Value and ROI in Employee Recognition Copyright © 2009 Human Capital Institute. All rights reserved. Introduction Bonuses, incentives, rewards and recognition n The effect or non-effect of various types of are making headlines today—for all the wrong rewards (e.g., tangible and non-tangible) upon reasons. Pulled into the current emotional work motivation. environment, these proven organizational n Evidence of how increased levels of worker performance tools have become the focus of motivation can result in increased employee a one-sided media critique that overshadows engagement and improved job performance. or ignores their value. While any tool can be n Available methods for measuring the effects misused, these approaches have an evidence- of various types of rewards on job perfor- based history of providing value to organizations mance and division/business performance and their employees. (e.g., Return on Investment (ROI), Value on Several reasons drive individuals—employees, Investment (VOI), and Lifetime Employee employers, taxpayers, politicians and reporters Value1) as well as possible reasons for why they among them—to question the value or are seldom used. appropriateness of incentives or recognition: n Examples of effective real-world reward programs—what are the common “best prin- n Definitions. Most people do not understand ciples” that define them? what incentives or recognition plans are, or recognize the differences between the two In today’s global workforce environment, there is (see Defining the Landscape: Key Terms). competition for: 1) quantity of workers—the Baby Boomers are retiring and the generation behind n Ineffective use. Some managers and them is smaller; 2) quality of workers (e.g., work- organizations do a poor job designing, ers possessing the skills for today’s economy) and implementing and managing these tools. 3) value from workers—the organizational value n Lack of value reporting. Generally, the media obtained from the workforce and individual work- report on only ineffective plans or those with ers. Recognition programs can help organizations inappropriate outcomes. in all three areas—by creating a culture of recog- These reasons, as well as the need for a nition that helps attract and retain top performers comprehensive review of the available data on and, more importantly, by improving perfor- recognition program effectiveness, inspired this mance by increasing an individual’s engagement research and report. with his/her job and employer. Indeed, recognition has been shown to be particularly effective What is the value of employee recognition? for increasing productivity, profit and customer What are key elements of effective employee satisfaction (Coffman and Harter, 1999). Further, recognition programs? How does one determine the value of recognition programs to an organiza- the ROI of employee recognition? It is our tion, like other parts of the rewards package (e.g., purpose to address these critical and timely compensation, benefits, and incentives), can be questions by reviewing: measured despite their more qualitative nature. n Key theories of motivation (e.g., intrinsic and In fact, a key finding that emerges from our extrinsic) which are most applicable to the review is that recognition is among the best (and workplace and have been shown to provide certainly most cost-effective) methods of improv- the most linkage with job performance. ing work motivation and employee engagement (See Appendix 1.) (see the Kanungo and Mendonca, Gallup, and Corporate Leadership Council studies discussed on the following pages). 1 Employee Lifetime Value (ELTV) is a long-term metric of the financial value of an employee to an organization. 2 The Value and ROI in Employee Recognition Copyright © 2009 Human Capital Institute. All rights reserved. Of course, recognition is but one method of n Recognize workers frequently—sporadic rewarding workers. Others include pay, ben- recognition may, in some cases, be worse than efits, incentives, development and career no recognition. opportunities and various forms of life-work n Reward activities that are linked to specific arrangements. Each reward is part of a total business objectives and/or desired cultural incentive program that should, for optimum values. results, be integrated with an organization’s n Measure the cost of the recognition reward talent management and business strategies. system and the benefits gained –whether (see Figure 1 and Figure 2, and accompanying through ROI or other methods. text for two related “Total Reward” models). Recent studies show that the different aspects The best way to implement a recognition pro- of a total reward package may affect individual gram is as a rational, carefully formulated program performance, retention and business success in that is based on sound theory and well integrated different ways (see, e.g., Harter et. al, 2002 and

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