The Value and ROI of Employee Recognition

Linking Recognition to Improved Job Performance and Increased Business Value—The Current State and Future Needs

• Executive Summary
• Critical and Timely Questions
• The Role of Recognition
• Case Studies
• Best Principles
• The Value of an Integrated Recognition Program
• Future Study of Recognition in the Workplace

Executive Summary

Today’s economic challenges require organizations to find new ways to both reward top performers and to motivate all workers to improve performance and maintain or increase business value—and they need to do both as cost-effectively as possible. The traditional method of keeping and motivating workers to excel is through compensation and benefits. However, those are only two parts of an organization’s “Total Rewards” package. In fact, organizations can reward their workers in many ways, including pay, benefits, improvements in work-life, incentives for pre-determined job performances—as well as various forms of recognition. According to WorldatWork, recognition can include both formal and informal programs and support business strategy by reinforcing certain behaviors (e.g., extraordinary accomplishments) that contribute to organizational success. Recognition should acknowledge employee contributions immediately after the fact and can be cash or noncash (e.g., verbal recognition, trophies, certificates, plaques, dinners, tickets, etc.).

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Critical and Timely Questions

There are several reasons that drive individuals—whether employee, employer, tax payer, politician or reporter—to question the value or appropriateness of incentives or recognition:

• Definitions: Most people do not have a clear definition and/or understanding of an incentive or a recognition plan—or the difference between the two.
• Ineffective use of these organizational tools. Some organizations, and the responsible individual managers, do a poor job designing, implementing and managing these tools.
• The lack of reporting the value of these plans. Generally, only ineffective plans or those with inappropriate outcomes are reported by the media.

It is for these reasons, as well as the need for a comprehensive review of the available data on the effectiveness of recognition programs, that this report was produced. What is the value of employee recognition? Which types of awards are best used when providing recognition? How does one determine the ROI of employee recognition? This paper addresses these critical and timely questions by reviewing:

• Key theories of motivation (e.g., intrinsic and extrinsic) which are most applicable to the workplace and have been shown to provide the most linkage with job performance.
• The effect or non-effect of various types of rewards (e.g., tangible and non-tangible) upon work motivation.
• Evidence of how elevated levels of worker motivation can result in increased employee engagement and improved job performance.
• Available methods for measuring the effects of various types of rewards on job performance and division/business performance—e.g., ROI, VOI, Lifetime Employee Value—as well as possible reasons for why they are seldom used.
• Examples of effective real-world reward programs. What are the common “best principles” that define them?

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The Role of Recognition

This report highlights the role of recognition by showing that:

1. Recent studies by Gallup, the Corporate Leadership Council, Towers Perrin and others illustrate that recognition is highly correlated to improved employee engagement with both the employee’s work and organization.

• For example, in a large-scale 2004 study of employee engagement, the Corporate Leadership Council (CLC) found that only 11% of today’s workforce demonstrate a very strong commitment to their organization, while 13% are actively non-engaged –poor performers who put in the minimal amount of effort. In the middle lies the 76% of the workforce that is “up for grabs.” Elevating the engagement of both this great middle and the low performers increases discretionary effort and retention by as much as 20% and 87% respectively.
• In addition, as in their 2004 survey, Gallup has found that only 29% of workers were “engaged,” while 54% were “not engaged” and 17% were “actively disengaged.” Gallup estimates the cost of this disengagement to the national economy at $300 billion a year. In contrast, business units within organizations with higher-than-average levels of engagement find success at four distinct types of business outcomes:
  • Productivity—Business units in the top quartile of all engagement responses have 50% higher productivity than those in the bottom 25%. (Please see page 31 of the full report for more details)
  • Employee Turnover—Business units in the top quartile have a 13% higher success rate (lower turnover) in comparison to those in the bottom 25%.
  • Profit—Business units in the top quartile have 44% higher profitability than those in the bottom 25%. (Please see page 31 of the full report for more details)
  • Customer Satisfaction—Business units in the top quartile have 50% higher customer satisfaction than those in the bottom 25%.
    (For a detailed explanation of how the analysis comparing employee engagement levels with business success was determined, (see Harter et. al. 2002).

2. Increased employee engagement has a dramatic positive effect on improving job performance and capturing business value. This point was confirmed in Towers Perrin’s 2007-2008 Global Workforce Study, which surveyed 90,000 employees in 18 countries about a range of topics, including the factors that drive engagement with their work. When survey results were compared with financial data of the surveyed organizations, they found that companies with high employee engagement had a 19% increase in operating income and a 28% increase in earnings per share over a 12-month period. [In contrast, companies with poor employee engagement scores had declining operating incomes and an 11% drop in earning per share over the same 12-month period. (Please see page 37 of the full report for more details)

3. Those organizations actively seeking to improve employee engagement, including through the use of formal and informal recognition, financially outperform their competitors. The results of Watson Wyatt’s Human Capital Index Study clearly shows that better Human Capital Management (as measured by a composite HCI Score) is correlated to improved financial performance:

• Low-HCI companies 21% total return on shareholder value
• Medium-HCI companies 39% total return on shareholder value
• High-HCI companies 64% total return on shareholder value.

4. Recognition programs have the potential, unlike compensation and incentive-based programs, to create a positive cycle of ever-increasing employee engagement and motivation. Resulting improvements are job performance-related behaviors at optimum levels with a limited investment.

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Case Studies

Additionally, in this report, three cases studies—Scotiabank, Delta Airlines and MGM Grand—illustrate how some organizations are currently restructuring their recognition programs to better align them with employee engagement and business strategy. A key finding of these case studies, as well as previous studies, is that recognition programs need to include multiple forms of awards—e.g., what is recognition for one worker may not be for another. The recognition should be in a form that is of actual value to the worker—not what the recognition committee thinks the worker should value. A choice could be provided to the worker on what is received to further increase the value to the individual. Also, the awards need not be expensive; in fact, many of the studies discussed show that non-cash awards, including simple verbal recognition, are an important component of recognition strategy. What matters is that the recognition is valuable to the worker and is awarded for behavior linked to specific job performance behavior or goals. The recognition should be presented in a way that also has value to the employee.

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Best Principles

A key to the success of the recognition component of the Total Rewards package is whether it motivates workers in ways that increase the level of engagement with their job and their employer. It is the engaged worker who will increase his/her level of discretionary effort—if the goal is performance—or desire to stay on the job when the goal is increased retention. Building on this point, we highlight throughout this report several commonly agreed upon “best principles” for the application of recognition programs that should result in the behavioral changes most often linked to employee engagement, improved job performance and, ultimately, increased business value. These include:

• Develop a “recognition strategy” that rewards activities linked to specific business objectives and/or desired cultural values.
• Use both formal and informal recognition to build a “culture of recognition” in the organization.
• Provide a wide variety of recognition rewards—realizing that what is a reward for one person may not be for another.
• Emphasize the recognition of increased quality in performance, instead of simply quantity of effort.
• Recognize workers frequently—sporadic recognition may, in some cases, be worse than no recognition.
• Measure the cost of the recognition reward system and the benefits gained –whether through ROI or other methods.

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The Value of an Integrated Recognition Program

The best way to implement a recognition program is with a rational, carefully formulated approach that is based on sound theory and that is well integrated with an organization’s business strategy—one that recognizes behaviors that are likely to positively affect an organization’s value. (See Daniel, 2005.) Most current recognition programs may have been established for good reasons—e.g., improving the “culture of recognition” within an organization. However, current studies find that many organizations do not fully integrate the various aspects of the program with each other or with business strategy and/or desired culture. The result is a failure to capture the full value of worker recognition programs. (See Huff, 2006; WorldatWork, 2008.) A major goal of this report is to show the available evidence for the value of an integrated recognition program and examples of how organizations are achieving this value in practice.

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Future Study of Recognition in the Workplace

Finally, the report concludes with a discussion of the future needs for the study of recognition in the workplace—and calls for:

• New, rigorous empirical studies that accurately measure the gains achieved from the implementation of specific types of recognition programs.
• The better use of ROI and other methods that can effectively measure the long-term gains in business value that are the hallmark of the successful recognition program.

It is important to note that, while Recognition Programs demonstrably increase employee engagement, these programs are also important for two main reasons:

1. There is mounting evidence and are examples of organizational impact, and
2. They are much more cost effective than most other elements of a Total Rewards Strategy—e.g., base compensation.

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