Just as you want to keep your customers pleased with your product or service, the happiness of your workforce should be an organizational priority. It makes good business sense because, as with customers, the bottom-line impact of happy employees can be measured in dollars. Lots of dollars
This article looks at how job satisfaction and happiness, driven by a robust employee recognition strategy, pays for itself in ROI (return on investment).
The Cost of Employee Recognition
The outlay and ongoing expense of implementing an employee recognition program at your company can vary widely depending on several factors, including the size of your organization, the scope and complexity of the program, and the specific rewards and incentives you plan to offer. While recognition does not necessarily entail employee rewards, it is often connected with gift cards, monetary bonuses, extra paid time off, plaques, or other tangible items you’ll have to purchase.
The initial cost will also involve designing and developing the program. This might include planning sessions with consultants to create guidelines and criteria for recognition. You also need an operationally sound system to track and manage the program. This could cost anywhere from a few hundred to several thousand dollars in terms of time and expertise.
If you choose to use specialized employee recognition software to automate and streamline the process, you may save on reinventing the wheel. However, there will be costs associated with purchasing and maintaining this software. You may also have some outlay in training your staff to use it and internal marketing of the recognition program.
These costs may increase as your company grows. Naturally, your recognition and rewards program will scale to cover more employees or departments.
Although the cost of a recognition and rewards program might be considerable, it is far less than the cost of neglecting recognition. Employee recognition programs can positively impact morale, engagement, and retention, potentially resulting in long-term benefits that outweigh the initial costs.
The Benefits of Employee Recognition Programs
To offset the outlay we discussed above, let’s look at the gains and benefits of running an employee recognition program.
Increased Employee Retention
When employees are recognized and appreciated, they are less likely to seek employment elsewhere. High turnover can be costly in terms of recruitment, training, and lost productivity, so retaining valuable employees can result in significant cost savings.
Case in point, just onboarding a new staff member can be costly — averaging around $4,700. If you factor in the cost of recruitment and the loss of productivity while the role is vacant, you’re talking about big money saved just by keeping your current employees happy.
Improved Employee Productivity
Engaged employees (i.e., ones who feel valued) are more likely to go above and beyond in their roles, leading to increased innovation, improved customer service, and better overall job performance. Engaged employees require less supervision and are more self-motivated, reducing the need for micromanagement and additional managerial oversight.
In other words, when employees feel appreciated, they tend to be more productive and committed to their jobs. This increased productivity can lead to higher output without additional hiring or overtime, ultimately saving the company money.
Reduced Absenteeism
Employees who feel appreciated are more likely to come to work consistently, reducing the need for temporary replacements and the associated costs, like lost productivity.
Enhanced Safety and Reduced Accidents
Employers often make the mistake of assuming safety is its own incentive. Workers neglect safety protocols when they either make no difference to the outcome of their efforts or take away from their recorded output.
In industries where safety is a concern, recognizing employees for adhering to safety protocols and reporting hazards can lead to a safer work environment. Fewer accidents mean lower workers' compensation costs and decreased insurance premiums.
In aggregate, the costs saved by fewer accidents, higher engagement, and higher employee retention can quickly outweigh the money you spend on an employee recognition program. Let’s look at how exactly you would determine this figure.
How to Measure ROI of Your Recognition and Engagement Programs
Calculating the return on investment (ROI) of an employee recognition program involves offsetting the costs of the program against the financial benefits it generates.
Here's a step-by-step guide to calculating ROI for such a program:
Determine Exactly What You Will Measure
What are the specific objectives and goals of your recognition program? What do you hope to achieve? If the primary OKR would be an increase in retention, success would be an improvement in employee turnover. The ROI would be a dollar amount you gain from this improvement.
Define Key Metrics
Key performance indicators (KPIs) that align with your objectives are necessary to quantify your situation before and after implementing a recognition program. These could include turnover rates, productivity metrics, customer satisfaction scores, or any other relevant measures.
While it would be tempting to track every employee engagement metric, your definition of success will be clearer when you stick to one or two. Using our previous example of retention, the HR metrics we’ll want to track are turnover rate, retention rate, new employee attrition, or a combination of these.
Data Collection
Gather data on these metrics before and after implementing the recognition program. You'll need baseline data to compare with post-implementation results— your before and after pictures.
You’ll also need a “before picture” of costs. In our example, the cost of turnover would include recruitment costs for replacing employees, as well as the cost of lost productivity while the role is vacant or a new hire is still training.
Calculate Program Costs
List all the costs associated with your recognition program, including software, rewards, administrative expenses, and any other related costs. Be sure to include both one-time setup costs and ongoing operational costs.
If you are doing the ROI calculation as a projection, you can set yourself a recognition budget. How much do you want to spend? How much do you think would be an effective spend?
Some companies spend as much as 10% of their payroll on employee recognition, but the average is around 2%. You also need to decide how you will spend your budget and what incentives or rewards you will offer. Here are some common types of employee rewards to consider.
Employee Anniversary (Tenure) Recognition or Rewards
This can be an important reward for fostering employee retention. Recognize how long an employee has been with you and set milestones such as two, five, and ten years.
Research has found that one in four employees quit within the first year of employment. You should make a point of recognizing people who reach their first work anniversary. Other new hires will see it and feel more motivated to stick around.
Contribution-Based Recognition or Rewards
There will be times when employees make a significant contribution. This could be within a project or a suggestion they make that improves efficiency and productivity. For example, Bob might have helped integrate Monday with Google Sheets for your business, which deserves recognition.
Performance-Based Recognition or Rewards
This sort of program can vary in nature and can recognize consistently good performance or even attendance. Perhaps a staff member has helped increase sales by going the extra mile; if so, you can recognize and reward that performance with a bonus or a gift.
Performance bonuses should ideally be well-formulated and based on a transparent performance plan so that employees know precisely what achievements trigger a bonus. As long as bonuses are fair and attainable, they can be an excellent incentive for performance.
Calculate Yield from Benefits
This might be the trickiest part, depending on your metrics. You'll need to attribute the changes in the KPIs (such as a reduced turnover rate or increased productivity) to the recognition program. This can be done through surveys, employee interviews, or statistical analysis.
Once you’ve quantified a difference between the “before” and “after,” assign a monetary value to each improvement in the KPIs.
For example, if you found that you’ve reduced employee turnover post-implementation, you’ll need to give that improvement a dollar value. You can do this by tallying up your overall recruitment and onboarding costs over a period before and after implementation. Alternatively, you can work on industry averages.
The consensus is that the cost of replacing an employee equates to at least six months and up to 9 months of their salary. If you work on the average salary in your company, you can get a rough estimate of what each replacement costs you— we'll call this your Average Cost of Replacement, or ACR. If you had to replace five fewer employees in the year after implementing your recognition program than before, your yield is 5 X ACR = Employee Replacement Outlay (ERO).
Naturally, if your workforce grew significantly over the period you're looking at, you may have more people leaving than before, but your employee turnover rate may still be better. In that case, consider your employee replacement outlay as a percentage of your total wage bill to make sure you compare apples with apples.
Subtract Costs from Benefits
Once you have a cost tied to the recognition program and a monetary number linked to the benefit, you can subtract the outlay from the gain to get your dollar ROI.
To calculate the percentage return on your investment, the formula for ROI is:
ROI = Net gain / Cost of investment x 100.
The result will be a percentage that represents the rate of return. If the result is over 100, the program has generated a positive return on investment.
Take into account the timeframe over which you're calculating ROI. Short-term ROI includes initial outlay and may be different from long-term ROI. For long-term benefits, consider the program's impact over several years.
While calculating the financial ROI is important, it's also essential to consider the program's non-financial benefits, such as improved workplace morale and culture. These aspects of recognition may not be consciously captured in the ROI calculation but contribute to overall organizational success.
There are three core questions you should consider when looking at your ROI calculator's outcome:
- Does your calculation look like an accurate reflection of your return on investment?
- Was there a return on investing in a recognition and rewards program?
- Is it possible that the ROI will increase if my investment in the program increases?
The Takeaway
In conclusion, the importance of prioritizing employee happiness and job satisfaction cannot be overstated in the modern workplace. Just as businesses invest resources into satisfying their customers, investing in employee recognition programs yields significant returns in terms of both financial and non-financial benefits.
As outlined in this article, while there are initial costs associated with implementing and maintaining such programs, the long-term benefits far outweigh the expenses. Employee recognition programs contribute to increased retention rates, thereby saving on recruitment and training costs and fostering a more productive and engaged workforce.
