Calculating the ROI of Employee Recognition

This is part 2 of our 3-part “Making the Case” series, dedicated to helping you make a business case for employee recognition in your organization. Read part 1 (Budgeting for Recognition) and part 3 (8 Steps for Pitching Employee Recognition to Your Executive Team).

HR leaders carry a lot of responsibility on their shoulders.

They manage their organization's most valuable (and most expensive) asset – their people. Luckily, many tools in the market are designed to help HR leaders.These tools include HRISs (Human Resources Information Systems), recruitment tools, and, more recently – modern employee engagement solutions, like employee recognition platforms.

While relatively new to the market in the last ten years, employee recognition platforms bring a host of benefits that align an organization's historical employee engagement practices with the expectations and needs of today's workforce. These platforms take traditional recognition practices, like years of service programs or annual top-performer programs to a place that benefits all employees – everyday. This increases the impact, reach, and equity of the programs by ensuring that no one is left out or left behind.  

Unfortunately, because social employee recognition platforms are a new concept for many leaders, demonstrating the impact and business case to executives can be a challenge for HR teams.  

The good news is that the bottom-line impact of employee engagement and recognition is undeniable with the right metrics.

Recently, Kudos®’ Founder and Chief Customer Officer Tom Short, and Kudos®' Director of Sales, Cheryl Smith, hosted a workshop to help walk HR professionals through demonstrating the ROI of employee recognition. We encourage you to watch a recording of the webinar here or read on to learn from the simple ROI example Tom and Cheryl shared.

Demonstrating the Need

The first step in understanding the value of your recognition program is to demonstrate it as an urgent need to your leadership team.

When we consider recognition, the key benefit is increased employee engagement. But why is employee engagement so critical?

Employee engagement is quite possibly the most critical factor to a successful business. Gallup has done countless studies on the benefits of employee engagement, including increased profitability, more customer engagement (higher Net Promoter Scores), and improved productivity. Gallup has also found that enhanced employee engagement reduces costly trends such as absenteeism, turnover, production defects, and safety incidents.

But to make the case for investment in employee engagement, you need to be able to explain what disengagement is costing your organization today.  

As the famous saying by author and management guru Peter Drucker puts it, “if you can’t measure it, you can’t improve it.”

To present a compelling business case, you need to quantify your existing state when it comes to metrics you want to improve. These are called Key Performance Indicators, and the three examples that we’ll explore more in-depth are:

1. Absenteeism

2. Turnover Rate

3. Disengagement

1. Cost of Absenteeism

Absenteeism is any failure to report for or remain at work as scheduled. Absenteeism does not include scheduled vacation, PTO, or sickness, but rather an unexpected absence. The absenteeism rate is calculated by taking the number of absent days and dividing it by the number of available workdays in a given period. The average absenteeism rate in the US is approximately 3.1%, which translates to 64 hours per employee per year. For reference, a healthy rate is 1.5%. Absenteeism is caused by many factors like stress, lack of motivation, disengagement, workplace conflict, and more.

According to workforce specialist Circadian, unscheduled absenteeism costs roughly $3,600 per year for each hourly worker and $2,660 each year for salaried employees.The costs can be attributed to many factors, including:  

• Wages paid to absent employees
• High-cost replacement workers (overtime pay for other employees and temporary workers)
• Administrative costs of managing absenteeism

2. Cost of Turnover

Turnover can be both voluntary (leaving for another job) and involuntary (being let go). Both have a significant financial impact on organizations.

We are now experiencing the Great Resignation, a staggering trend of post-pandemic resignations. The Economist reported that a record 3% of the U.S. workforce quit their jobs in September 2021.  

According to a study released in August 2021 from the National Business Research Institute, employees' average annual turnover rate across industries in the United States is 15%. The cost of turnover can range from 20% for a mid-level manager to 200% for a C-Suite Executive.

3. Cost of Disengagement

Gallup found that 74% of people looking for a new job today are disengaged. “It's not an industry, role, or pay issue,” Gallup’s team says, “it's a workplace issue.” So, let's look at engagement and the specific costs of disengaged employees.

According to Gallup, disengaged employees have 37% higher absenteeism, 18% lower productivity, and 15% lower profitability.

In their book, Follow this Path, authors Curt Coffman and Gabriel Gonzalez Molina estimate that a disengaged employee costs a company 34% of their annual salary, or $3,400 for every $10,000 they make.  

Recognition as a Solution

The cost of disengagement as well as two of the most common by-products of disengagement, turnover and absenteeism, are substantial. But, there are many ways employers can address these challenges. Presenting recognition as a solution and demonstrating the ROI is a great way to show your leadership team the value of your proposal.

While there are many ways to increase employee engagement, research by Cicero found that recognition is a highly effective solution.

Calculating the ROI

Using the three costs described above, (Absenteeism, Turnover, and Disengagement) simple plug-and-play equations can lead you to a powerful ROI presentation. 

As illustrated below, we use a hypothetical situation that reflects many organizations.

ROI Formula

To calculate the ROI using the formula above, we need two numbers, Total Savings (based on the achievement of the goals above, and Total Investment based on the number of employees (1000).

Calculating Total Savings

Absenteeism Savings = $41,230

Based on the costs we discussed previously, we can calculate the absenteeism cost savings based on 1000 employees. The savings reflect a shift from a 3.1%absenteeism rate (today’s standard) to a 1.55% absenteeism rate attributed to increased employee engagement through the recognition program.  

Turnover Savings = $500,619

The turnover cost reflects the average cost of turnover for a mid-manager making $60,000/year (20% of $60,000 = $12,000) + the cost of onboarding a new employee, which ADP estimates are about $4,129. In this example, we used a modest turnover improvement year over year of 3%.(15.9% decreased to 13.9%).

Disengagement Savings = $408,000

Finally, the cost of disengagement was calculated as 34% of the same average salary of $60,000. The Future state represents a modest 2% improvement in employee engagement.

Now, we add Absenteeism Savings + Turnover Savings + Disengagement Savings to get our total savings.  

Total Savings= $949,849

Calculating Total Investment

A Conference Board of Canada study, “Making it Meaningful: Recognizing and Rewarding Employees in Canadian Organizations,” suggests that the average annual amount spent on recognition is $175 per employee.  

So, using that average figure, we can estimate our investment for a company of 1000 people:
Recognition & Reward Investment = $175.00 per person x 1000 employees =$175,000

Total Investment = $175,000

Final ROI Formula

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The results of this calculation are undeniable.

A 443% return on investment is fantastic and hard to ignore as a business leader. The best thing about the ROI of employee recognition is that with regular, meaningful recognition, the returns will continue to grow as a strong culture of recognition develops.

Key Takeaways

Calculating the ROI to help support the case for a significant investment can be a daunting task, but following the steps presented in this article should demystify the process and blow your leaders away with the hard numbers.

As a recap, the steps are:

1. Identifying Desired Outcomes (e.g., lower turnover)

2. Identifying Relevant Metrics (e.g., turnover rate)

3. Quantify Costs and Set improvement goals (e.g., turnover costs 20% of the employee's salary, we want to reduce by 5%)

4. Demonstrate the impact on the bottom line (e.g., a recognition and rewards program will cost us $175 per employee per year but reduce our turnover by 5% saving us XYZ amount)

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Need some help? Reach out for support building your plan – we are here to help!