Business headlines declare that for many sectors the recession is nearly over. Maybe so, but that doesn’t mean the purse strings have loosened up any. In fact, for many organizations it means doing more with less and scrutinizing every line on the budget sheet. Employee engagement programs, although not a large expense, have been an easy target to trim as they often lack specific tracking metrics and are hard to measure in terms of Return on Investment (ROI) and Value on Investment (VOI).
Measuring (and then consequently increasing) the ROI and VOI of employee engagement programs can be achieved when the proper metrics are in place and more so when tied to measurable business drivers or outcomes. A few examples of business outcomes can be: reduced employee turnover, better customer satisfaction scores, or a higher share price for public companies.
Where can your company expect to see benefits and returns from your investments in engagement programs? What types of benefits are achievable and measurable? Can you translate the metrics in to financial terms?
The ROI and VOI available to companies will really depend on what type of program is implemented and what the goals are for the program. For example, a program to improve communication and team spirit will have very different ROI than a sales-driven incentive plan.
As with any investment, it is important to be able to measure the results. If the investment proves to be worthwhile, it makes good sense to increase that investment to the maximum point, or just shy of diminishing returns. Yet some companies who do invest in incentive plans or other motivational strategies still under utilize them; the programs are marginalized as ‘feel good’ exercises. Others – the better business leaders who understand the value of employee engagement programs – see things a lot differently.
Data from Watson Wyatt research calculated Human Capital Index (HCI) scores for more than 2000 companies.* The results support the notion that a higher HCI score translates into better business (measurable) business outcomes. The study found:
- Low HCI scores showed a 21 per cent return on shareholder value;
- Medium HCI scores showed a 39 per cent return on shareholder value; and
- High HCI scores showed a 64 per cent return on shareholder value.
While things like recognition and engagement were not specific talent management strategies highlighted, the study did show that improvements in practices relating to “Total Rewards and Accountability” produced the largest gains in financial performance. The study also explained that most companies don’t even measure program ROI.
There are really three areas that you should consider when looking at ROI and VOI of more advanced programs to understand company benefits.
Are you measuring the right area?
1. Financial Metrics – The first ROI is the overall success of the company in terms of financial metrics. Sometimes, incentives are targeted to just one division or department, for example sales incentives. How this is defined can vary, but common metrics such as Profit per full time employee (FTE), Revenue per FTE or Human Capital (Revenue-(Operating Cost- Labour Cost)/Labour Cost, should be used.
2. Primary Drivers – These are directly related to assigned goals and performance measured against those goals. Once department or individual goals are assigned, management must not only get a clear understanding on what roles employees will play in realizing these goals but what financial gains and benefits are available to the company when the goals are realized.
3. Secondary Drivers – These can be benefits related to turnover, absenteeism and other factors such as enthusiasm, team spirit and morale. The first two factors (turnover and absenteeism) can be assessed and evaluated as metrics can be put into place that measure the costs and gains of these types of programs. More and more companies are starting to look closely at the costs associated with these two challenges and implementing programs specifically to address and improve these areas.
As your business moves forward and you seek to take advantage of various motivational and engagement strategies, it is very important to know which ones are working and which ones are not. Knowing the ROI and VOI measurements will play an important role in these decisions.
* “The Value and ROI in Employee Recognition” a joint study by The Forum for People Performance, Incentive Research Foundation and Human Capital Institute.
Doug Brown is President of DBC Marketing Inc. DBC Marketing provides strategies and solutions to companies that engage with employees and increase productivity. To learn more and to contact Doug, visit www.dbcmarketing.ca.