Measuring Up--How To Track ROI On Employee Incentives

One of the biggest mistakes companies make when it comes to measuring the return on investment (ROI) on incentives is not measuring it at all. If your version of ROI is that employees tell you they think the program is great, you're not being a responsible manager. The only way to know if your incentive program is working is to quantify what you get for your investment.

Impossible? Not necessarily. Below, a few tips to track the effectiveness and ultimately prove the worth of incentives.



What needs to be tracked?

Start by determining what you want your program to achieve and establish a baseline. Don't look at the whole company. Focus on a particular business group and look at its historical performance, then figure out what you want to change. The more specific you are in choosing what part of the business to measure, the more accurate your ROI will be, says Brian Anderson, practice leader in organizational effectiveness at the San Francisco office of human resource consulting firm Watson Wyatt.

A true baseline incorporates adjustments for all the factors that affect business: economic conditions, new competitors, and new products, says Stillman St. Clair, director of the workforce performance group at Maritz Incentives in Fenton, Missouri. "After figuring in all those variables, you come up with where you are starting and where you want to be at the end of the incentive program," he says.



Make it measurable

Once you know your objectives, choose ROI metrics that are measurable, moveable, and meaningful, says Jay Bandi, director of business analysis at Maritz.

"If you paint a cubicle blue, it might make people feel better about work, but there's no financial return on that which you can measure," he says. A moveable metric is one that an employee feels he can control and influence.

Dwayne Clark, president and CEO of Aegis Assisted Living in Redmond, Washington, wanted to stop rapid turnover at his company. Clark measured ROI by how much he saved from not having to replace employees. Aegis is a high-end senior housing company in a low-paying, high-burnout industry where average turnover is 120 percent. When Clark took over Aegis, turnover was 100 percent. Today it's 22 percent, largely because of incentives for staying on, such as higher wages for long-term employees and rewards like sports tickets, massages, haircuts, and vacations.

Choosing what to measure was obvious to Clark. "Replacing an employee can be one hundred fifty percent of that person's annual wage. I just looked at what we were spending to replace one hundred percent of our employees versus twenty-two percent," he says. The difference—minus the cost of the rewards he has in place—was Aegis' ROI on the program, a savings of more than $465,000 per assisted living home.



Deepen the measurement's value

In murkier situations, what you choose to measure should also include how the desired result will impact all parts of the business. If you're incentivizing salespeople to sell more widgets, go down the line—accounting, production, operations, marketing—and ask how increased sales will affect each department, advises Bob Dawson, head of The Business Group in Rocklin, California, an incentive marketing consultancy that gets paid solely on ROI results.

Michelle Smith, vice president of strategic sales for incentive solutions company Bravanta in San Francisco, says expenses should be looked at in "granular form." If you're trying to drive increased customer service look at metrics associated with customer service. "But remember," Smith says, "to include the price, for example, of doing a customer satisfaction survey or the expense of overtime." Without all the program costs, ROI won't be accurate.

Sometimes, of course, the line from investment to ROI is very straightforward. Scott Testa, COO of Mindbridge, an intranet software company in Phila-delphia, inspires his sales force—the majority of whom are on the phone all day—with cash. Once a quarter when call volume is down, Testa tacks three $100 bills up where the sales staff can see them. "I say, 'Whoever makes the most calls today gets these three hundred bucks." He also gives out leather jackets and gift certificates for Ama-zon.com and local restaurants, and offers them to reps with the second-, third-, and fourth-highest call volumes.

ROI is simple to calculate. The average sale at Mindbridge is between $15,000 to $20,000 and for every thousand calls, says Testa, the company makes one sale. "We wind up putting out about five hundred dollars worth of rewards and, without fail, increase our calls by a third and close an additional sale. That's $15,000 for a $500 investment." Testa doesn't have to take into account softer "costs," such as the toll added stress takes on each salesperson. "These guys are triple Type A kind of people," he says. "They love pressure."

—Eilene Zimmerman