Trending Up, 2016
The Stunning Post-Recession Rise of the Reward & Recognition Industry
Since the economic downturn in 2008, when the Great Recession crippled American markets, leading to widespread corporate budget tightening, including cutbacks in funds allocated to reward and recognition programs, growth in the non-cash incentive market has been on a remarkable comeback—with trend lines showing a strong upward growth trajectory, according to an Incentive Marketplace Estimate Research study recently released by the Incentive Federation. With 84 percent of U.S. businesses spending $90 billion annually on award points, gift cards, trips and travel, and merchandise, the Incentive Federation study also found that overall the businesses spend $14.4 billion annually on incentive travel and $75.6 billion on award points, merchandise and gift cards to reward sales staff, employees, channel partners and customers.
In addition, the Incentive Research Foundation (IRF) Fall Pulse Survey 2015 "… confirmed that the non-cash incentives market grew a remarkable 17 percent since our last market estimate study in 2013," said IRF president Melissa Van Dyke.
The purpose of the 2015 Incentive Federation survey was to collect data from a national sample of nearly 1,400 business executives in order to estimate the current size and characteristics of the non-cash incentives marketplace. Some of the results even surprised Van Dyke and IRF Chief Researcher Rodger Stotz.
"When the economy dipped in 2008-2009," Van Dyke said, "the net number of individuals who were decreasing their budget was much stronger for incentive travel than it was for merchandise and gift cards. It was fascinating. Incentive travel was very responsive to the economy. Gift cards and merchandise are less responsive to the economy. They certainly rise and fall with GDP and expectations of GDP, but not as much as incentive travel. So, when the economy began to rebound, and we started to have growth in 2010 (2 percent growth in GDP) that same year, with gift cards we had more positives than negatives, in terms of people increasing rather than decreasing their budget." It took travel longer to come back from the recession.
It also appears, Stotz added, that a third of this marketplace is driven by smaller businesses ($1 to $10 million in annual revenue), whose budgets may be tighter, but whose total volume generates $29 billion a year, and firms with up to $100 million in revenue accounting for 84 percent of the total spent on non-cash incentives. (See Figure 1.)
The bottom line, Stotz said, "… is we're seeing an increase in the percentage of companies that are using non-cash merchandise. What was once an alternative reward is now becoming more mainstream. The employee market and the focus on engagement and recognition has really increased with the number of companies and the volume of awards being used."
The increase, he added, is also a reflection of the economy. "Sure, a lot of things go together," Stotz said. "There is interconnection. But the increase appears to be greater than even before the recession, so that is what is exciting."
Incentive Federation Managing Director Steve Slagle made some other observations:
Gift cards are the most prevalent reward type in all programs except customer loyalty, Slagle said, which has a similarly high incidence of award points. Trips and travel is highest within sales programs and lowest within customer loyalty. Merchandise use is highest in channel programs. Gift card growth over the past 10 years has been pretty phenomenal, and that is reflected by the number of companies that are currently providing some type of gift card product or programs for clients.
Some of the reasons that gift cards are becoming more prolific, said Ira Ozer, president, Engagement Partners, of Chappaqua, N.Y., are:
The impact of this trend, Ozer said, is that incentive companies are now being routinely asked to add gift cards to their catalogs, even though industry research indicates that the motivational impact of tangible merchandise items can be greater than dollar-denominated gift cards. This is a huge economic shift from the way many incentive companies have been run for decades, which especially affects incentive agencies and distributors with their own warehouses and the associated overhead, since incentive companies must now charge sponsoring companies fees for gift card fulfillment and program administration.
"All of this," Ozer said, "is pushing incentive companies to charge for their incentive program management platforms at higher rates than before, especially incentive companies that historically would give away the incentive platform for free because they were earning their margins on the merchandise. Leading incentive agencies and technology companies are now charging clients on a per-user, per-month basis, just as other SaaS (software as a service) companies, which is helping increase the profits they have lost from the shift to gift cards. And leading incentive distributors are providing faster fulfillment rates along with personalized customer service and client-branded award packaging, which adds value to the program that retailers cannot provide."
Tracking Trends: What Are the Rewards?
A trend noted by both Ozer and the IRF is a return to luxury awards. "We have watches and electronics much higher as desired awards," Van Dyke said. "But now we've seen a return to luxury on the merchandise front, and a relative stability for merchandise and gift cards, with non-cash awards becoming more and more a part of an organization's portfolio."
Another trend is an increase in per-person spending, Van Dyke said. "The growth in the overall industry is evident in our research, but we are also seeing per-person spending in gift cards, and that curve has been trending up in the past couple of years."
Last year, Van Dyke explained, IRF did a participant experience study, "… and that is where we did some sophisticated marketing research. We went out to individuals and asked them about their entire reward experience and made them make trade-offs in what they wanted. We showed them different scenarios and asked which ones do you like, more or less? And through that series of questions, we learned what really mattered most to them. They were able to trade off who was being recognized, how they were being recognized and what awards they received and what rewards were meaningful to them. What was interesting is it got us closer to what people really value."
The results were surprising.
"When we looked to see whether there was a difference in what millennials wanted vs. everyone else, we could not find any break by age group that was statistically significant," Van Dyke said. "We could not find any data that concluded, yes, millennials like gift cards more, or yes, millennials wanted a certain type of merchandise. What did change in how people wanted to be rewarded and recognized is when we started to look at the people's work location, preferences about working at home vs. office."
For generational differences research showed nothing statistically significant at the 95 percent level. For example, millennials have slightly more interest in clothing than gen X or baby boomers. Boomers were a bit more interested in watches and clocks than gen X or millennials, Van Dyke said. Everyone had a strong interest in gift cards.
No doubt, there are great and numerous opportunities for growth in the incentive industry. But there are serious challenges as well, Van Dyke said. Tracking where items are purchased is an issue facing program designers and product buyers.
"For example," Stotz said, "as we see gift cards and point systems growing in volume, the challenge is, where are the end-user buyers, the corporate buyers, purchasing them? Or, how are those points being redeemed? Are they being redeemed through a retail store? Online? A special online catalog? It is challenging to figure out exactly where that volume is going. It is becoming more difficult than it used to be to track where items are being purchased."
"That gives special markets a major challenge in terms of promoting products for their brand," Stotz said. Sales, which used to be tracked through specific channels, are being distributed through many channels.
In recent years, there has also been a shift in how human capital is viewed. Now, within corporate executive boards, the number-one issue for CEOs is human capital. "It has been that way for the last three years," Van Dyke noted, "far exceeding their interest in cost reduction or operational efficiency. There is a huge portion of the U.S. market that sees the value of their business not in their factories they own or products they produce, but in their intellectual and human capital property."
Now is the time for everyone to get much deeper into program design, she said. "Our challenge at IRF is to help those individuals who run those programs day in and day out to create stronger programs, know what types of design patterns work and don't work, since now we have such a large portion of the U.S. market using these tools."
There is a movement away from "do this, get that" programs to a more holistic approach regarding the entire performance journey. The journey doesn't stop with the end of the program and issuance of awards. For the designer, the end point is used as a launching pad, in terms of what is coming next, as well as the impact on the overall business or certain parts of the business, "… and how it has created what I would call intangible results," Van Dyke said "Program design has changed quite a bit."
Understanding Program Design and Planning
Melissa Van Dyke is right, noted Mike Ryan, senior vice president, Client Strategy, Madison Performance, New York. Things have changed. As a trend, "The generational strategy is something that just about every organization is focused on these days, and it will continue," he said. "What is important for companies to understand is there certainly are differences in what different generations expect when it comes to being recognized and when it comes to the perception of opportunity within the organization. Many people are focused on younger workers, as they should be. They are rapidly becoming the majority of the workforce."
What's interesting about younger workers, however, is they like to be recognized more often than older employees. "We all suspected that," Ryan said. "One of the reasons is not that they are insecure; it's that they have a definitive need to know that they are on the right path, in terms of where they wanted to be. Many organizations are reinventing their programs that are normally designed to reward for service longevity. They are keeping them for older employees that have already eclipsed the five-, 10-, 15-year barriers, and there is good reason for that. Those employees are outstanding role models and illustrate what success looks like over time, but for younger employees they are creating programs that provide more ongoing feedback in terms of relevant skills, new certification and new skills being acquired."
It's important to have many different disciplines within organizations. Call this trend horizontal leadership, which basically means that you can step in as an individual and provide leadership, even when you are not technically in charge. That is important because when employees work on ad hoc project groups or they work across different disciplines trying to solve a problem, it is important for people to step up, Ryan said.
"Millennials not only want those types of opportunities to be heard and to be influential, but they seize them. And they know that leadership isn't just about being in charge, it's about charging up others," he added. "Those are some of the things organizations are sensitive to, and some things that organizations are planning for when it comes to structuring their recognition programs."
Then there is the issue of talent poaching, Ryan said. "You see it in a lot of key industries—especially in technical, but it is really rampant in every industry that needs a good portion of the best talent-driven professionals out there. Companies won't say they have talent poaching strategies, but with tools that are available in the marketplace today, such as social networking sites, it is easy to recruit via the internet.
"When you look at what companies are doing to prevent their best from being poached, they are making sure they have social recognition tools in place, where employees who are positive apostles of the organizations are able to speak internally with other employees. They are able to give recognition, they are able to do good work. They are able to chime in when others have gotten rewards. They're trying to raise the bar on the culture of appreciation within the company. The object is to keep it an environment where people don't feel that they are being ignored, or don't know how their contributions contribute to the organization's efforts. Therefore, they don't feel restless and are not susceptible to poaching."
Inside the C-suite, executives know that recognition is a viable part of the compensation, but there is a trend now that has marketing and HR partnering on what marketing needs to get out of recognition. "They need to improve their brand's authenticity in the marketplace," Ryan said. "They need to improve customer satisfaction scores—positive word-of-mouth. The pivot point on all that is people."