Someone had to ask the question.
It could be a senior leader asking you about the ROI (return on investment) of the proposed recognition program before they sign off on the approval.
Or maybe your CFO asks the question before he’ll issue the cheque.
Whether for fiscal responsibility or validation of the value of employee recognition programs, calculating the ROI can be a helpful tool to communicate the success of your recognition programs.
How do you calculate the Return on Investment of your recognition programs?
Here are a few things to keep in mind.
What is ROI?
ROI is simply a measure of the return on an investment relative to the investment’s cost. Leaders want to know what the expected benefits will be on a recognition program compared against the costs being paid out to a vendor or, if an in-house program, for internal resources.
It’s a useful measure because it is easy to understand and calculate.
To calculate the actual ROI you simply subtract the cost of the investment from the gain from the investment, and then divide that sum by the cost of the investment, and then multiply by 100. The end result is mostly shown as a percentage or it could be given as a ratio.
Your goal is to ensure that the end result is a positive one.
Quick Pain Point Scenario
You have to start with a problem or pain point you want to see improved.
This helps because you have to get a baseline of some metric to know if your recognition program impacted it or not. You turn whatever numbers you can into a dollar sign so you can compare spend before using the recognition program and afterwards.
Let’s take a look at a healthcare example and turnover costs of nursing staff. I will use round numbers to make figuring out things easier.
You have 10,000 employees in this sector and your annual turnover levels are at 10 percent, which means you lose 1,000 people out the door each year.
We will put the average salary for this sector at around $70,000 per employee.
Estimated replacement costs (recruitment, orientation and training costs, etc.) are a minimum of 20 percent of salary costs or $14,000.00 per employee. Multiply that by the 1,000 employees who leave each year and you get a whopping $14,000,000.
Yes, that’s $14 million!
The Recognition Investment
One reason nurses exit, and I emphasize it’s only one of the many reasons people leave organizations, is not feeling valued and appreciated for the contributions they make on the job.
This healthcare organization decides to pilot two recognition programs in one region of 2,000 nurses.
One program is a social recognition program where nurses can thank and acknowledge one another for the great 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 is $150,000 for the first year in this one region.
Cost of replacement in this region would be estimated at $2,800,000 (2,000 nurses x 10% turnover = 200 nurses x $14,000 per employee replacement costs).
We will arbitrarily say the impact these two recognition programs had on the nurses in this region 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.
Now For The ROI of Your Recognition Programs
You saved $280,000 and the costs for these two programs for this first year were $150,000.
($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 by 100 and this equals an 86.6 percent Return on Investment.
The ROI will increase in subsequent years because initial design and development costs will have already been paid out and so only administration costs are payable in future years.
ROI Points To Recognition Impact
Remember the key to successful ROI on recognition programs is:
- Identify a pain point or strategic goals to improve upon that recognition programs could impact.
- Collect all the relevant metrics for the goal and wherever possible monetize those numbers.
- Test out the recognition programs against a control group without any of the programs.
- Use a fair amount of time (3 to 6 months) so you can collect the various metrics to compare against pre-testing.
- Do the ROI math!!
Having a positive ROI on your recognition programs will give you a feather in your cap and create strong credibility at the senior leadership team.
Question: How has using ROI calculations with your recognition programs gained the attention of the C-suite?
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.