Everyone wants a positive Return on Investment (ROI) for any new project or program. Employee recognition is no different.
Leaders and program owners alike want to know and compare the monetary benefits from their recognition program. One client recently asked me, what do you consider the estimated return on investment for implementing employee recognition program?
Unfortunately, the quick and easy answer to that broad question is, “that depends.”
But to bring some peace of mind to any of you who might have the same question, I will now give a more detailed answer.
Setting Up An ROI Project
First up is identifying a specific pain point or strategic goal you want to improve upon that your recognition programs could affect.
Next is collecting all relevant metrics for the pain point or goal you want to improve upon, and wherever possible, monetizing those numbers so you can produce a financial comparison before and after introducing the program.
You then test out the recognition programs following an appropriate launch with leaders, communication and educational support. The aim with your recognition programs is to move the dial on the problem situation or achieve your strategic goal. You might compare this against a control group that does not have access to the programs or simply with baseline data before introducing the recognition programs.
Have enough patience to see the process through. You are going to need a fair amount of time (approximately 3 to 6 months) to collect sufficient data of the various metrics to compare against baseline pre-testing.
Finally, you can calculate the business impact or ROI gained from your recognition programs. Some metrics, such as units of increased employee attitude or units of increase customer impression, give a business impact but no ROI. The ROI may only happen when you see how these measures drive factors like return on assets or revenue growth.
Case Study on Recognition Program ROI
I am going to share a healthcare example and look at the turnover costs for nursing staff. I will use round figured numbers to make things easier to calculate.
As a large, urban, healthcare centre in the United States, you have 10,000 nursing staff. They show the annual turnover levels at 10 percent. This means 1,000 people leave your organization each year.
The average salary for this sector is around $70,000 per employee. We will not consider overtime that happens often for nurses.
I found nursing studies that showed the estimated replacement costs (which includes recruitment, orientation and training costs, etc.) are at a minimum 20 percent of salary costs or $14,000.00 per employee. Now you can multiply that amount by the 1,000 employees who leave each year, and you get an enormous cost of $14,000,000.
The Recognition Investment
One of the many reasons that nurses leave an organization is not being valued or feeling appreciated for the contributions they make on the job.
This healthcare organization pilots two recognition programs in one regional centre of 2,000 nurses.
One program is a social recognition program where nurses can thank and acknowledge one another for the significant actions staff do for peers and for their patients. The second program is a new online program where patients and family can go to recognize excellent care they’ve received from staff.
The design, development and annual administration fees for these two programs are $150,000 for the first year in this one regional centre.
I would estimate cost of replacement in this region at $2,800,000 (2,000 nurses x 10% turnover = 200 nurses x $14,000 per employee replacement costs). We can find actual numbers to project costs out better, but we will operate by this estimation.
Let’s project that the impact of these two recognition programs on nurses’ retention in this regional centre resulted in a 1 percent reduction in turnover. This means the recognition program helped prevent 20 nurses from leaving, which is a savings of approximately $280,000 in replacement costs.
Figuring Out The ROI of Your Recognition Programs
You saved $280,000 and the costs for these two programs for this first year were $150,000.
Here’s the math for you in calculating the ROI.
($280,000 [Gain from the Investment] – $150,000 [Cost of the Investment]) = $130,000 [Net Benefit]
Divide the net benefit of $130,000 by the cost of the investment of $150,000 and then multiply this figure by 100, and this equals an 86.6 percent return on investment (ROI).
The ROI will increase in subsequent years because it has already paid out the initial design and development costs and so only administration costs are payable in future years. Plus, expect further gains in retention in the years ahead.
Keep in mind that intangible factors can make a significant business impact, albeit not always with financial figures attached. For example, outcomes from leadership development can improve a leader’s skills, which improves their work unit’s performance outputs. Some of these measures may, or may not, be able to turn into a monetary figure. We can observe a change in metrics that produces a value that is meaningful to the organization.
Consider looking at the areas you need to improve in your organization. Can your recognition programs be a driver to change things? How will you prove to your leaders that recognition programs produce a positive ROI?
Recognition Reflection: What can you do to better measure your recognition programs ROI?
Roy is no longer writing new content for this site (he has retired!), but you can subscribe to Engage2Excel’s blog as Engage2Excel will be taking Roy’s place writing about similar topics on employee recognition and retention, leadership and strategy.