Measure & Improve
ROI Analysis Necessary for Successful Incentives
By Deborah L. Vence
Experts agree that measuring ROI is essential for companies in order to find out the true value and importance of their incentive programs.
An April 2018 study titled "Award Program Value & Evidence White Paper" by the Incentive Research Foundation (IRF) indicated that "Most leaders expect their investments in incentive, reward and recognition (IRR) programs to drive more sales, increase revenue, result in a larger share of the market, or produce some other return on investment."
The study pointed out that "When organizations measure the success of their IRR programs, they tend to focus on the financial benefits." A 2017 survey by the IRF of more than 350 U.S.-based large firms discovered that "more than three-quarters of top performing companies analyze performance data from their employee incentive programs against sales data and use that information to improve decisions."
The Importance of Measuring ROI
Incentive programs typically are established to meet a predetermined need within a business, whether it's "motivating staff, increasing sales, engagement or understanding, or to motivate a partner team or organization to favor your brand," said David Gould, CEO, CR Worldwide Inc., a company in Boston that specializes in creating recognition, incentive and event programs.
Without having a way of tracking the impact of a program, you have no means with which to gauge whether it's had the desired effect on your business need.
"You could 'get a feel' for the impact a program has had, and enjoy an increase in sales or morale, but without defining your KPIs (key performance indicators) and ultimately mapping them to ROI, you have no way of reporting or knowing that your investment was worthwhile," said Gould, who also is vice president of the Incentive & Engagement Solution Providers (IESP), a Strategic Industry Group of the Incentive Marketing Association (IMA).
Chris Galloway, CPIM, owner, Animate Growth Partners, a strategy and design agency based in St. Louis., and an IESP board member, said that in his opinion, "the very definition of 'incentive' suggests that ROI should be built in.
"This assumes a well-designed rules structure," he said. "Incentive design accounts for the incremental profit the program will generate and assigns some percent of those profit dollars to pay out rewards," he said. "As such, a very basic measure of ROI is included, again, if the program has been thoughtfully designed.
"If your program is paying out more than the incremental profit dollars it brings in, that's not just a red flag—it's bad design," he added. "Incentive programs come with an expectation of ROI and, thus, must be measured."
Lincoln Smith, executive vice president, sales and marketing at HMI Performance Incentives, a company in Norwood, Mass., that designs and operates effective incentive solutions, said "ROI is critical to business decision-makers for channel initiatives as they are evaluating strategies to accelerate sales performance, influence product launches, affect their (and their channel's) sales forces and more."
Companies need to make decisions on where to invest their money, and an ROI analysis can help.
"It helps affirm that the recommended strategy will impact their bottom line," Smith said. "Additionally, a pre-program ROI analysis holds the team accountable. With program performance goals now set, everyone on the team, including the incentive company, knows what is needed, and adjustments can be made to the program on an ongoing basis. This ensures that the strategy is performance-oriented."
Bob Dawson, co-founder of Travyrs, a digital marketing technology company in Winnetka, Calif., said that "Incentive programs are designed to change behaviors, hopefully with a positive result. No matter what industry or business you are in, the result of any incentive initiative must show it creates a financial measure of success in order to be maintained.
"Cash is king. Incentive programs are viewed as 'nice to have' and consequently when economic times become tight," he noted, "these are the first places companies look to cut or eliminate."
Besides poor economic conditions, incentive programs also can be subject to budget reductions when they get on the radar of a CFO or financial analyst.
"This has been proven to be very true over the years as incentive programs are now being directed through a purchasing manager," Dawson said. "That is a profession that wants to be sure they are getting the best deal. The best deal may not be an award that would motivate your audience to change behavior. ROI measurement is hard to contest. If you show your incentive program is creating a 'positive net ROI,' there is little or no chance your budget will be subject to cut or elimination."
Dawson also shared a list of changes that can increase the ROI of incentive and recognition programs. A few of them include:
- Create a baseline set of measures from historical data of both revenue and expense, from the same time period as the proposed incentive program dates, with any one time instance removed.
- Determine the incentive year baseline measures, for both revenue and expense, without consideration of the incentive program.
- Determine the incremental revenue and expense projections as a result of the incentive program, without consideration of the incentive program costs.