Feature Article - May/June 2010

Measure for Measure

Maximize Value Form Your Incentive Program

By Rick Dandes

Proving Value to the Boardroom

Too many businesses view incentive programs as fuel for the corporate furnace when they should be looking at them as a tool to shape a better workforce and, more importantly, optimize performance, Smith said.

The best executives understand this, but not always the people who sit in the boardroom.

The boardroom obviously looks for hard benefits, in terms of dollars saved or gained, but is there a way to communicate soft benefits to them in a language they can understand?

Essentially, there are two types of programs, measurable or immeasurable. Once you determine which type of program you'll be implementing, you can calculate the ROI.

Measurable programs are funded from bottom-line cost savings or incremental sales that are generated by the incentive award program.

On average, most companies strive to invest 5 percent to10 percent of incremental sales, or bottom line cost savings, to cover the total cost of the incentive award program. Total costs include communication, administration, and of course, the awards. The key is to allocate a large portion of this budget on the awards (75 percent to 80 percent, then divide the remaining portion for administration and communication).

With an immeasurable program, the ROI is a little more difficult to determine with concrete numbers. Good examples of immeasurable programs include a "years of service" award, as well as any program not involving sales. And since you won't be generating revenue or measurable cost savings through a program like this, the mathematics become a little more ambiguous.

Soft benefits are becoming really important, Stotz said.

"A CEO I've been working with said soft incentives were increasingly a critical part of their corporate culture. These kinds of incentives have become an integral part of their employee environment and motivation, in a way that is almost equal to the financial impact they get from a program," he said.

What Stotz, and others, are talking about is employee engagement.

As workplaces continue to change in this new economy, employees are being asked to adapt, learn, re-adapt and relearn in order to ensure that companies themselves retain a competitive edge. Recognizing and appreciating these employees is very important to corporate survival. In this way, there is a linkage between employee engagement, customer engagement and financial performance. As a result, many organizations are measuring employee engagement and seeing how recognition is increasing employee engagement and how the use of incentives has affected engagement.

People within a corporation, at all levels, are increasingly being recognized as the "means" with which companies can gain a competitive edge over their competitors. People also are increasingly identified as the "method" to achieving those results.

With more and more leaders making the shift to a strategic view of incentives, the powerful dynamics around incenting, and recognizing those individuals who can directly contribute to the success (or failure) of the organization, the gap will widen between the companies who thrive and those that don't.