Measure & Improve
ROI Analysis Necessary for Successful Incentives
By Deborah L. Vence
How to Measure ROI
Gould explained that the "Return on investment for sales incentive programs is classically calculated by dividing the bottom-line return by the amount of investment.
"If an incentive program is put in place to help increase sales in a quarter," he said, "the program manager would track incremental sales within that period and divide it by the investment to calculate the percentage ROI."
For those incentive programs with non-monetary targets, the ROI might be less tangible to calculate, but levels of engagement can be used to gauge how effective the incentive has been.
"If the program is looking to educate participants and reward them for completing certain trainings, reports can look at log-in frequency, time spent on the platform and the amount of points awarded or rewards earned," he said.
If the objective of the incentive program is to help retain staff, "the ROI can be measured across a set period, looking at duration of employment, engagement, performance and, ultimately, a reduction in labor force attrition and the need for investment in recruitment," Gould added.
What's more, Galloway explained that "Incremental gross or operating profits (depending on client accounting) less all program expenses. The key word there is 'incremental.' If you were forecasting 5 percent growth YOY, and with the incentive you achieved 12 percent growth, your incremental growth is the 7 percent delta, not 12 percent. When you count all 12 percent, you cause sales leaders and the C-suite to ask, 'How do I know I'm not paying rewards for growth I would have achieved anyway!'"
In addition, he said that it's important to note that "measuring profits can be a shell game—incremental growth could cause additional expenses to the company in inventory, headcount, infrastructure, etc. In an ideal world that would be included in your assessment of incremental operating profit Ö but alas, most clients who invest in the incentive program [do not need] to get to that level of detail for their own purposes."
In measuring ROI, it "depends upon the initiative and the desired impact," Smith noted, "but it starts with understanding goals, reviewing historical information and understanding sales/buying processes. From that, we then determine necessary participation levels or activities that need to be achieved, project a percentage of performance, and then quantify the efforts from a sales viewpoint.
"Whenever possible, we solicit profitability information from the client to add this next level of granularity to the financial projections. We then account for the performance incentive program costs: communications, administration, training, rewards, technology, etc., to get to a net profit for the program; hence, a true ROI for the client," he explained. "Some clients are satisfied with return on investment defined as 'return on sales,' 'percent of program sales,' 'percent of sales,' 'percent sales increase,' etc. The metric changes based upon the client, the initiative and the objective."
Meanwhile, Dawson said "There is only one true way to measure ROI." That is, "You must calculate the added incremental revenue that your incentive program investment generated. Incremental revenue is all revenues attributed to your incentive program. You then must account for all incremental expenses. Incremental expenses include all operating costs, cost of goods sold and, of course, direct incentive program costs (awards, communication and management expenses)," he explained.
"To gain complete attribution your ROI measurement must include both internal and external environments. By creating a baseline for all key financial metrics and the internal and external factors for your program, you can then track, much like you would your own financial investments, how your program is performing month by month," he explained. "As you would with any investment, you should be flexible with how you operate your program to adjust if needed as the internal and external environment changes over time. The simple math at the conclusion of your program provides you with a measured ROI."
Using the Results
Once you've measured ROI, the next question is: How can you use the results to improve existing programs or future programs?
"This is the question that I love most," Galloway said. "As an incentive program designer, I use this exact topic to illustrate that incentives must not be exclusively about ROI. If they are, then any mathematician can improve your program—reduce payouts and increase objectives, right? In a designer's world, ROI is really an indicator of engagement or excitement level about your brand/message, because it takes active participation to achieve maximum ROI.
"How do you achieve maximum participation? You need to balance the 'system'—the WIIFM for your audience needs to not only be significant enough to get attention, it needs to feel somewhat balanced with the upside they all know you are earning as well," Galloway said. "Motivation science tells us that people assess fairness, authenticity, autonomy and alignment with brand values (among other things) to determine the amount of effort they will put toward a goal.
"And if your program does a good job of addressing those elements alongside the ROI metric, it is—only then by the way—sustainable," he added. "These are complex topics that many incentive program owners (those that are paying for the program) aren't as versed in, and it's why we recommend investing in a very well-researched design assessment and plan produced by experts in this field."
If ROI can be measured on an ongoing basis, tactical actions exist that can be put in place to tweak existing or future programs.
"You could find that users aren't as engaged as you'd like them to be. Therefore, better marketing and [communications] are needed to give the program better visibility," Gould said. "You might see that you've allocated an overly generous amount of reward per activity, or conversely that users aren't motivated to complete activities because the effort isn't worth the return. Ongoing KPI tracking and reporting is an intrinsic part to the success of any incentive program. It is, however, crucial not to underestimate the importance of communications coupled with senior leadership buy-in for program success."
Smith's company uses ROI as a "litmus test to determine if a client's strategy is successful, which is why we seek to develop a standard for each client initiative.
"It is an integral component of our Excellence Approach," he said. "The pre-program development of an ROI blueprint provides a roadmap for a program that we manage regularly. We conduct quarterly analyses, and more often if necessary, to ensure on-track performance and to educate the client's management team and sales network. Information is critical."
His company's internal team views the performance and then brainstorms ideas to ensure that they've exceeded the client expectations as well as the ROI projections that were originally set for the client.
"Our goal is to make our key contact and the owner of the strategy 'look good,' which is defined as 'exceeding their goals.' For future programs, the ROI analysis for the prior program provides historical insights to reset goals, review strategies, enhance as needed and recalibrate to achieve new goals," he said. "The worst thing, in our opinion, is for future programs to deliver less. The definition of a performance incentive program is to always strive higher."
As a result of creating a financial measure of ROI, you will, in turn, be expanding your incentive program to other departments that might not be directly involved in your awards.
"Incentive programs do cause a ripple effect inside and outside your business," Dawson said. "Measuring ROI will involve consideration of how that behavior change impacts all departments in your business and it will also take into consideration the outside environment of your business. Companies do not operate in a vacuum and your incentive program cannot be effective if you create it in a silo.
"Measuring ROI means asking departments, 'We are thinking of implementing an incentive program to increase/improve these objectives. If we achieve these objectives, how might that impact your department?' Existing programs will soon see how that sales incentive program that is set to drive a 10 percent increase in top line sales may at the same time create an additional cost to the company of 15 percent in excess costs," Dawson said. "Revenue and expenses are key in the initial ROI measurement phases. Future programs can add measures of cash flow by incorporating both better turns on inventory and collections of accounts receivable.
"An ROI program that shows a business our incentive program generated incremental net profits, lower inventory carrying costs and a faster collection of cash is an extremely valuable management tool and the person(s) who implement them create a valued career for themselves," he said.