Watch What You Cut: The Value of Formal Employee Recognition Programs on Organizational Performance and Profitability

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1 RESEARCH WHITEPAPER March 2011 Watch What You Cut: The Value of Formal Employee Recognition Programs on Organizational Performance and Profitability by Rick Garlick, Ph.D. Senior Director of Consulting and Strategic Implementation, Maritz Research 2011 Maritz All rights reserved MR110303

2 It is not unusual for companies to proclaim their employees are their most valuable asset. It was not long ago, companies were doing all they could to attract and retain talent. However, recent economic challenges have changed that approach. Everyone is painfully aware of how organizations have been forced to lay off valuable employees in order to cut costs in the face of declining profits. Some companies have tried to do all they can to avoid painful layoffs. This has often resulted in scaling back in other areas. Funds that might have been used to sponsor conference attendance, additional training, holiday parties, incentive trips, and other enriching activities, have been used to save jobs, or preserve other necessary operational functions. Even with the recession officially over, employers are still wary of getting back to normal due to uncertainty about higher taxes and the impact of health care reform on their bottom line. One casualty has been formal reward and recognition programs. In addition to the pure dollars saved by eliminating these programs, there have been questions about the appropriateness of retaining these programs from an optics standpoint. Everyone is aware of how negatively some of the high profile incentive trips were represented in the press in the past year or so. There are even examples of companies that had relatively good financial performances last year who eliminated incentive trips because they were afraid retaining them would look bad to the rest of the world. Fortunately, some of the paranoia surrounding incentive trips has subsided. However, it is often the case that, once a company has eliminated something, they are slow to bring it back once they ve learned to live without it. Companies have a wide range of formal recognition programs. They can include such things as giving award points that can be redeemed for merchandise, gift cards, plaques, trophies, paid trips, paid days off, or any number of other awards. In light of this environment, Maritz Research conducted a study to examine the general impact of scaling back, or eliminating formal recognition programs on a variety of outcomes such as job satisfaction, turnover, internal advocacy, and even financial outcomes. Maritz Research conducts an annual online employee engagement survey to assess current workplace issues. This year, Maritz polled 1016 full-time employees, ages 18 years or older who were not self-employed. These individuals were employed across a wide variety of industry sectors. The survey asked these persons about a wide number of workplace attitudes, including recognition practices. Most items were asked on a five-point strongly agree to strongly disagree scale. One of the goals of the research project was to link recognition practices to other employee attitudes that are directly predictive of business outcomes. Even with the recession officially over, employers are still wary of getting back to normal due to uncertainty about higher taxes and the impact of health care reform on their bottom line Maritz All rights reserved MR

3 Scaling Back or Eliminating Formal Recognition Programs Table 1 shows the percentage breakdown of how the survey respondents answered the following question: To your knowledge, has your company eliminated or scaled back its formal recognition programs in the past year? As shown in Table 1, one-third said their company scaled back or eliminated its formal recognition programs, with 6% saying their company eliminated its recognition programs altogether. Approximately one-third (36%) kept its program intact, with the remaining third either saying their company never had a formal recognition program, or they weren t sure. (If they weren t sure, then any program their company may have had in place was a non-factor to them anyway.) The Impact on Business Outcomes Table 2 shows the impact of scaling back or eliminating formal recognition programs. In this table, the impact is shown on several business outcomes. The first is job satisfaction, represented by responses to the statement, Overall, I am completely satisfied with my job. The second outcome is retention as measured by two items, I would be very happy to spend the rest of my career with my current company and I look forward to coming to work every day. (The latter item has consistently been shown to be the strongest predictor of retention in Maritz proprietary employee engagement studies.) The third outcome is the company s employment brand, as measured by employee s willingness to recommend their company to others as an employer and reflected in the item, I would strongly recommend my employer to friends and family as a great place to work Maritz All rights reserved MR

4 The last area is financial performance. An anonymous poll of this nature does not allow us to capture the financial performance of the respondents employers. However, Maritz asks the item, If I could, I would invest money in my company. When Maritz has trended responses on this item among its publicly traded clients, there is a strong direct relationship between how employees respond with actual stock price. Employees have a good idea of how their companies are performing financially, even if their employers are privately held. While it may not be perfect, this item has both strong face and empirical validity as a predictor of financial performance. The data show that, in every area, those that kept their recognition programs intact fare significantly better than those companies that scaled back or eliminated their programs. In each case, the percentages that strongly agreed with the statements were at least twice as great when programs were maintained compared to when they were cut. Furthermore, there was half as many disagreeing when programs were maintained. Those that cut programs looked very similar to those that never had programs to begin with; suggesting that any benefits previously gained from formal recognition programs was lost when the programs were trimmed. It isn t surprising that the affinity one has for his or her job is tied to whether the company recognizes and rewards performance. The financial aspect is more interesting. One could easily argue that poor financial performance is the reason why recognition programs were cut, rather than accepting the premise that recognition programs drive value for organizations. What we can say almost certainly, is that a relationship exists between the quality of formal recognition and financial performance that likely goes both ways. Relationship to Customer Service The relationship to financial outcomes is likely driven through reinforcing excellent customer service. When employees are formally recognized for their job performance, they are more motivated and likely to replicate the service practices for which they were rewarded. Again, a poll such as this has no way to determine the quality of customer satisfaction with the respondents performance, but Maritz asks items that are predictive of customer satisfaction. Just as employee perceptions of financial performance have been demonstrated to be predictive of stock value; employee perceptions of customer satisfaction has been linked in Maritz studies to actual customer service scores. Specifically, Maritz uses two items as proxies for customer satisfaction scores, Our customers would rate the service we deliver as excellent and My company provides the best customer service in the industry. Table 3 demonstrates the relationship between maintaining/cutting recognition programs and customer service perceptions Maritz All rights reserved MR

5 The patterns here look similar to responses on the other items. Customer service perceptions were much more positive among employees whose companies sustained their recognition programs. Once again, it can be argued there is a chicken and egg phenomenon reflected in the data. Companies that could not afford to maintain adequate staffing, training, or other things that contribute to good customer service, also cut their recognition programs. As with financial performance, the relationship between formal recognition and good customer service is likely to be two-way. Conclusions It is understandable that companies are forced to cut back on formal recognition programs during difficult financial circumstances. However, these programs clearly help to attract, engage, and retain employees. What can be done? Here are a few suggestions: Verbally express appreciation. There is still power in saying thank you for a job well done, which costs nothing. While this may not quite substitute for more tangible rewards, employees generally appreciate the gesture. Writing notes, sending s, or using other means of expressing recognition for a job well done are also usually valued. Find other intangible rewards. There are other ways of recognizing and rewarding employees that often benefit both the employee and the company. Offering flexibility in scheduling is becoming more important as employees strive to strike a work-life balance. Because developmental opportunities are so important, particularly for younger employees, offering the opportunity to take on new responsibilities or learn new skills is a way to recognize employees and create value for the company. (Of course, not everyone appreciates being given more responsibility as a reward.) For some employees, offering the opportunity to mentor younger employees is a form of recognition. Similarly, being given the choice to work on projects that are personally interesting can be rewarding. Sometimes providing an employee a choice parking spot is seen as one of the best forms of recognition you can give. Make sure whatever rewards you offer are meaningful to the individual. Sometimes, wellmeaning managers can offer employees forms of recognition that, while sincere, have no value to the individual. For example, a Maritz study showed that offering lunch with management was a frequently used form of recognition, even though employees would much prefer to have lunch with their families. Sometimes, people are praised in public meetings much to their great chagrin. Make sure the means you use to recognize your employees is done in a way that is seen as rewarding by the recipients. Reinstate formal programs as soon as possible. Everyone understands that lean times call for belt-tightening. However, do not underestimate the impact of formal recognition programs and the potential negative impact when they are taken away. For more information, please visit Maritz at or call (877) 4 MARITZ Maritz All rights reserved MR