POWERING RECOGNITION AT XCEL ENERGY. How strategic recognition led to $17 million in bottom-line savings. Feb. 14, 2006

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1 Discovery Case Study No. 4 O.C.Tanner Company/Xcel Energy POWERING RECOGNITION AT XCEL ENERGY How strategic recognition led to $17 million in bottom-line savings By the O.C. Tanner Company Feb. 14, O.C.Tanner Photocopying or electronic storage, transmission, or reproduction of any portion of this publication is prohibited without written consent from O.C.Tanner Co.

2 No. 4 Recognition: Discovery Paper RECOGNITION AT XCEL ENERGY Xcel Energy has enlisted the help of all of its 10,000 employees in improving everything, every day. The result? Thousands of improvements to systems, processes and working conditions that equaled more than $17 million in savings opportunities.the quest of Xcel Energy employees to turn problems into improvements is spurred by the company s Xpress Ideas suggestion recognition program. And, says the program s sponsor, That means our investment in recognition is earning our company at least a 20-times return. A leading energy provider, Xcel Energy has never underestimated the power of targeted, strategic recognition.the company uses several different types of recognition programs to encourage employee engagement, involvement and ownership in the company. USING RECOGNITION TO ELEVATE MANAGERS As Xcel Energy leaders evaluated areas where they could improve employee performance and bottom-line results, they recognized that an important gap existed when people were promoted to managerial positions. People get promoted because of what they do, not necessarily because they are good managers, says Bill Newby, Xcel Energy s managing director of enterprise process management. That means we need to give them the tools, training and encouragement they need to become effective managers, and our recognition programs are an essential part of the toolkit. In an effort to elevate the caliber of managers and, consequently, the performance of all employees, Xcel Energy invested in making its employee suggestion recognition program more strategic.the program was designed to be more than just a way of rewarding effort; instead Xcel Energy created recognition systems that become a way for managers to begin conversations about improvement with employees tools that inspire thought, action and results. Like many other companies, Xcel Energy had a hunch its employees had great ideas for making improvements they just needed to be encouraged to share them in a forum where they knew they would be heard and their ideas acted upon. We re amazed at the great ideas that are out there, says John Torres, manager of corporate rewards and recognition at Xcel Energy. With more than 10,000 employees working in 10 states, we needed a vehicle to gather the ideas and recognize them. Xpress Ideas has proven to be an effective way to generate ideas and recognize them appropriately. Volume 2 2

3 No. 4 Recognition: Discovery Paper But gathering those ideas wasn t a simple matter. Xcel Energy began with a manual program that required managers to collect and evaluate suggestions and award various levels of recognition appropriate to each idea. Managers actually had to write out a paper certificate to employees, and then write out one for each suggestion program investigator and keep a paper record for themselves, says Torres. That ended up being a paperwork nightmare for managers. All the research indicates that the recognition needs to be as immediate as possible, continues Torres. We had people who deserved recognition for ideas that sometimes had the potential to generate thousands, even hundreds of thousands of dollars to the company, but the recognition would have to wait until a manager had time to fill out a certificate and, in some cases, mail that certificate to the employee. It just wasn t timely. Of even greater concern to management was the need to ensure that the program provided a mechanism for linking recognition to Xcel Energy s corporate values and mission statement. We are far past the time when recognition and rewards were merely corporate niceties, says Chester Elton, co-author of A Carrot a Day, a best-selling business book. Recognition has to be strategic. It has to deliver bottom-line results.today, recognition must be consistent, focused and timely to be effective. FOSTERING BUY-IN The first step to improving the effectiveness of recognition at Xcel Energy was to get managers behind the program, and that meant streamlining processes. We knew we needed to simplify things and make it easier for managers to participate, says Torres. Now we have an online application that allows managers to put all the information into a report that we capture electronically.this makes the recognition immediately visible to us, and immediate notification goes out to recipients. I can t tell you how many compliments we ve received our managers love it now. In addition to providing the systems, technology and processes to make recognition simple and more easily measured, Xcel Energy offers managers recognition consulting services through its Corporate Rewards and Recognition team. 3

4 No. 4 Recognition: Discovery Paper Keeping recognition targeted and participation high is hard work, says Newby. By consulting with the business units we can discover what specific problems they hope to solve and target the recognition promotions to meet those goals. For example, if it s a cash crunch, they want to recognize those who find ways to save money. If they are having safety issues, they want to promote recognition for those who improve safety conditions.the managers welcome our help because they see results. It s no wonder managers get on board, adds Torres. They re not just looking at the program as, I have to write another thank-you note. They re looking at it as, This helps me encourage employees to improve business results, and that s something I get to report to my boss. It motivates everyone in the process. Newby and his team also improved the company s recognition by implementing an On-the-Spot program, revamping their service award program to a strategic Years of Contribution program and introducing a new Above & Beyond program designed around the company s core values. The Web tool we ve designed for the Above & Beyond recognition program ensures that people must recognize the behavior for what it is, says Bill Newby. It won t let you just say, Thank you for doing a great job. The nomination for the behavior has to be related to a corporate value. That stops people in their tracks. They re forced to ask themselves, What is it is it teamwork? Is it accountability? Is it developing new ways to do business? As a result, the nomination itself becomes another way for us to communicate and promote corporate values, says Newby. Xcel Energy employee and recognition recipient Harryette Johnson agrees that targeted, strategic recognition makes a powerful tool. Recognition is important at Xcel Energy, and that makes a big difference. Once you realize that your contribution is being noticed and someone is going to recognize you for it, you can move the earth for the company, says Johnson. It energizes you to do more; it raises the bar, and you want to go higher next time. CHANGING A CULTURE Recognition at Xcel Energy has as much to do with creating a culture as it does with making sure employees feel recognized. Says Torres, I have managers who tell me their employees used to come to work asking, How do I do a good job today? Now they ask, How do I do it better? 4

5 No. 4 Recognition: Discovery Paper I see my people take away a sense of ownership in the company, says Ruben Roman, a supervisor at Xcel Energy s Comanche Generating Station in Pueblo, Colo. And when you own something you take care of it differently; you treat it differently because you take pride in it.the attitude becomes, This company is part mine, and I want to make sure it runs the best or the safest it can. Bottom line? Recognition programs can do wonderful things. Indeed, across Xcel Energy, managers are turning every opportunity for recognition into a reflection on the employees contributions. Recognition is not typically an expected or standard part of the employee life cycle, says Newby, but we re trying to change that at Xcel Energy.We re even changing expectations in our service recognition program.we no longer call it Years of Service, but Years of Contribution. By integrating recognition with culture and by demonstrating the effect recognition can have on business results, we re building a new recognition mentality among Xcel Energy managers and employees. SUMMARY: RECOGNITION GENERATES RESULTS AT XCEL ENERGY The success of Xcel Energy s Xpress Ideas program continues to grow. The company received 7,662 suggestions last year and implemented about two-thirds of them.the program has identified savings opportunities in the tens of millions of dollars over the past five years. The Ragan Report, a weekly newsletter for communication professionals, recently published an article about Xpress Ideas titled, An employee suggestion system that actually works. Key reasons cited include: Small, meaningful rewards that add up and keep employees focused on identifying real solutions to real problems. Xpress Ideas is deeply integrated into the organization, with promotions at the business unit level. Xpress Ideas is elegant and simple ; it doesn t make work for employees or managers. The program enjoys the support of top management. 5

6 No. 4 Recognition: Discovery Paper The payout of Xpress Ideas is a small percentage of what the company gets in return as far as employees being involved, engaged in their jobs, improving safety, processes, whatever it may be, says Roman. Suddenly, things people have been tolerating for years because that s the way it s always been are now being taken care of and made better. We ve seen a correlation in the reduction of safety incidents. Our number of reportable accidents is consistently down, especially in the operations department, where our people use the Xpress Ideas program most. As our participation goes up our safety incidents go down. Roman s experience agrees with the findings of a recent study by The Public Agenda Forum, a non-profit public policy research organization. It reports that fewer than one in four American workers is working at full potential; half of all workers do no more than directly asked; and 75% of employees say they could be more effective in their jobs. Recognition is a part of everything we do at Xcel Energy, says Newby. It s a way to reinforce our corporate values, our business priorities and the behaviors that benefit the company. Xcel Energy has proved recognition done right is much more than an employee benefit; it drives business results, says Adrian Gostick, co-author of the Carrot series of management books. Strategic programs consider both the manager s and employee s needs, and they encourage loyalty, engagement, voluntary effort and enthusiasm. Before you know it, recognition has changed employee culture and business results. 6

7 No. 4 Recognition: Discovery Paper Adrian Gostick, Director O.C.Tanner Company 1930 S. State Street Salt Lake City, UT Toll Free: Phone adrian.gostick@octanner.com Bill Newby, Managing Director - Enterprise Process Management Xcel Energy th Street, Suite 1000 Denver, CO Phone: bill.newby@xcelenergy.com 7

8 Discovery White Paper O.C.Tanner Company The Jackson Organization Recognition Pays Looking for proof that recognizing excellent associate performance leads to better business outcomes? By the O.C. Tanner Company With Research Data from The Jackson Organization May 25, O.C.Tanner and The Jackson Organization. Photocopying or electronic storage, transmission, or reproduction of any portion of this publication is prohibited without written consent from O.C.Tanner Co. or The Jackson Organization.

9 2 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization Employee Recognition AND Company Profitability: MAKING THE CONNECTION Your gut instinct told you employee recognition impacts the bottom line. Now, the data proves it. Recent research commissioned by the O.C.Tanner Company and conducted by noted research firm The Jackson Organization of Columbia, Maryland, shows that from every angle, every financial metric, every way of looking at it, investing in recognizing excellence is strongly associated with the best financial performance. The study included 26,000 employees at all levels in 31 organizations of varying sizes and profitability. In addition to answering general questions about their level of engagement with their firms, respondents were asked to state their level of agreement on a scale to the question: My organization recognizes excellence. The responses by organization were averaged and grouped into four quartiles.those organizational results were then compared with these profitability measures: Return on Equity Return on Assets Operating Margin Even leaders who have acknowledged a link between employee recognition and financial success will be surprised by the strength and breadth of the connection. For example, in the analysis of Return on Equity to the question, My organization recognizes excellence, the lowest quartile of companies saw a 2.4% return, but the numbers grow in each quartile up to an 8.7% return from the top quartile. In other words, companies that effectively recognize excellence enjoy a return that is more than triple the return of companies that don t. For leaders, this dramatically illustrates a strong (but often unrecognized) link between strategic employee recognition and profitability. This is a major study with scientifically valid data from more than 26,000 employees in health care organizations, with an error range of ±0.6%, said Karen Endresen, Ph.D., President of The Endresen Institute, a research division of The Jackson Organization. Up until this study, the link between recognition and financial performance was largely anecdotal. Recognition was considered by some to be an emotional afterthought, while those who believed that effective recognition would drive results had no hard data to prove it.this study takes recognition results from myth to reality from the soft side of business to a proven business essential.

10 3 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization Recognition and Return on Equity Return on Equity (ROE) is a critical measure that encompasses profitability, asset management and financial leverage. A very strong connection is shown between recognition and ROE. According to the data, companies that effectively recognize excellence enjoyed an ROE more than three times higher than the return experienced by firms that don t. Return on Equity Return on Equity is calculated by taking the fiscal year s earnings and dividing them by the average shareholder's equity for that year. It is used as a general indication of how much profit a company is able to generate given the investment provided by its shareholders. Percentage Return on Equity

11 4 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization RecognItion and return on assets An equivalent connection is shown between recognition and Return on Assets (ROA). According to the data, companies that effectively recognize excellence enjoyed an ROA more than three times higher than the return experienced by firms that don t. Since ROA is a measure of a firm s effectiveness in using the assets at hand to generate earnings, organizations that recognize employees can do a lot more with existing assets than those that neglect this important tool. Return on Assets Return on Assets is equal to a fiscal year's earnings divided by total assets.this number tells you how much profit a company has achieved for each dollar of assets utilized. Percentage Return on Assets

12 5 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization Recognition and operating margin Operating Margin is another measurement of an organization s efficiency. In general, businesses with higher Operating Margins tend to have lower fixed costs and better gross margins.that gives them more pricing flexibility and an added measure of safety during tough economic times. Of all the financial measurements, employee recognition impacts Operating Margin the most significantly. According to the data, companies in the highest quartile of agreement with the statement, My organization recognizes excellence, reported an Operating Margin of 6.6 percent, while those in the lowest quartile reported 1 percent. Operating Margin Operating Margin is the ratio of operating income to sales. Operating Margin shows how much a company makes from each dollar of sales (before interest and taxes). Percentage Operating Margin

13 6 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization SUMMARY EMPLOYEE RECOGNITION AND COMPANY PROFITABILITY: MAKING THE CONNECTION These results illustrate two important truths: 1) An organization s ability to recognize appropriate performance in its workforce can dramatically impact its profitability; and 2) An organization wishing to improve its bottom line may look toward employee recognition typically an untapped business strategy. In those companies that have developed an effective recognition culture, O.C.Tanner expects to find an organization with a strategic, simple and measured way to recognize and reward the right employee behaviors. In this type of culture, employees understand that their above-and-beyond actions especially when aligned with corporate goals or values will be noticed by someone in management, will be acknowledged and recognized with an appropriate award, and will be celebrated with the presentation of that award in front of their peers. In such a culture, employees are more engaged in their work, suggest new ideas and processes more frequently, are focused closely on client satisfaction, and simply care more about the success of their team and their enterprise. And that kind of attitude, that culture, that commitment from employees, shows up in the organization s bottom line. In short, invest in recognition and you will be rewarded with more than happier associates.you ll have a stronger bottom line, improved strategic position, and more freedom to dominate your market. What this data shows us, in a very dramatic way, is that recognition is one of the key characteristics of a great organization. Recognition, often thought of as the softer side of business, is now proved to be a core attribute of great managers and companies. It is a simple truth: we work harder at places where we feel recognized and valued for our unique contributions. And valued and engaged employees bring great value and profit to their organizations. Chester Elton, Wall Street Journal best-selling author of the Carrot series of management books

14 7 Recognition Pays: Discovery White Paper 2005 O.C.Tanner/The Jackson Organization O.C.Tanner is the world s leading provider of employee recognition solutions including performance awards, service awards and other incentives. O.C.Tanner offers strategic solutions for employee motivation; the latest in recognition ideas; and high-tech, online recognition tools. Learn more at Adrian Gostick, Director O.C. Tanner Company 1930 S. State Street Salt Lake City, UT Toll Free: Phone adrian.gostick@octanner.com The Jackson Organization is a full-service market research firm that offers a unique combination of customized research and market expertise.we work with each client to deliver research solutions that will result in positive business outcomes higher profitability, improved productivity, greater market share and lower turnover. Learn more at Allan H. Acton, Senior Vice President The Jackson Organization 6996 Columbia Gateway Dr., Suite 202 Columbia, MD Toll-free: Phone: aacton@jacksonorganization.com