Measuring Up

HR executives are discovering new ways to measure the effectiveness of rewards and incentive programs.

Wednesday, February 1, 2006
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Every year, the 1,281 employees at Scottsdale Insurance Co. have the opportunity to participate in focus groups, some of which address the effectiveness of the company's rewards and incentives programs. In addition, everyone completes an online employee engagement survey, conducted by Lincolnshire, Ill.-based Hewitt Associates, which measures everything from their motivation level at work to how inspired they are to serve within the organization.

HR uses those results along with the company's employee-retention rate to determine the return-on-investment for each of its rewards and incentives programs, says Alesia Martin, vice president of HR at the high-risk insurance company in Scottsdale, Ariz., that focuses on the property and casualty-insurance market. Hewitt also compares the company's survey results against those from other companies in its national database, then assigns a ranking for the company.

"In order for us to be a customer-centric organization, we are going to have to be employee-centric as well," says Martin. "If we expect our associates to be delivering personalized service, then we as an HR organization have to be delivering personalized compensation and rewards to our associates."

Designing personalized reward programs is tough enough, but measuring their impact has some HR executives baffled. Many are struggling to develop ROI strategies that prove the value of such programs to demanding senior executives who may also be their strongest critics.

Employee surveys can be effective measurement tools. In 2006, Martin says her company will roll out an online total-rewards survey that covers pay, benefits, learning opportunities and work environment. The results will identify benefits or perks desired most by the company's employees, which is half the battle for achieving a high ROI.

"We do a lot of surveying of our associates -- that's a big part of our culture," Martin says. "We target our efforts to what our people want. That's how we derive ROI."

But there are many different ways to measure ROI. For example, companies can measure if their pay programs are competitive with the marketplace or the impact of pay programs on employee performance or productivity, says Tom Mirgon, senior vice president of HR and administration at Choice Hotels International in Silver Spring, Md.

With 2,000 employees worldwide, the company recently completed an extensive evaluation of each of its rewards and incentives programs. On a micro level, he says, the company used employee engagement indexes that helped correlate reward and incentive programs with the performance ratings of high achievers. On a macro level, the company compared its pay programs against its competitors as well as the effectiveness of specific pay programs against its overall business performance, then determined what portion of its profits should be steered back to employees.

"We struggle with finding methodologies that work for us," Mirgon says, adding that it began measuring the ROI of its pay programs back in 2001. "So when we talk to our investors, we can say we really do believe our incentive programs are driving companywide performance as well as our reward programs."

According to Mirgon, there are five steps involved in the ROI process:

* Besides HR, involve people from other departments such as the CEO and CFO;

* Hire an independent consultant who can supply competitive industry data and conduct an independent measurement so the metrics are objective and credible;

* Identify what your company is trying to accomplish based on its business strategy. Then ask yourself how the financial strategy ties into the business strategy and how the organization's reward and incentive programs fuel those financial and business strategies;

* Determine what needs to be measured. For example: how rewards and incentives are tied to employee retention or turnover rate, employee loyalty or the company's overall growth and profit; and

* Start measuring. There are a variety of tools that can be used like employee-engagement surveys, which are unlike employee satisfaction surveys since they measure the energy, enthusiasm, affiliation and loyalty that employees develop with the organization or brand.

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Mirgon's department also collects data from other measurement tools such as internal customer satisfaction surveys -- every employee is evaluated twice a year by co-workers they service -- annual performance reviews and those used by external analysts who measure financials to assess a company.

Also consider employee participation. Mirgon points to the company's ACE award program, where employees nominate each other for work excellence or accomplishments. Each winner receives a $250 reward check. Seventy percent of the company's eligible population participates, which is a pretty good benchmark of success, he says.

"Shareholders and others are now holding management much more accountable to making sure these programs work in ways that benefit shareholders," says Mirgon.

Meanwhile, measuring ROI can be very complex, causing some HR executives to make a series of honest mistakes, says Heather Teskey, vice president of marketing and customer relations at Gift Certificate Center, a Minneapolis-based subsidiary of Hallmark that focuses on reward, incentive and recognition programs primarily in the business-to-business market.

Consider those who fail to recognize all of the expenses affiliated with reward and incentive programs. Beside the actual reward, there are other costs, too, such as those related to communication tools or monthly program administration.

Some measure ROI too early -- maybe several months after a rewards program was launched -- and obtain a false reading. Likewise, others don't create an effective communication plan. Without employee awareness, she says, even the best rewards program will yield a low ROI. Then there are the HR executives who don't develop a baseline for whatever they want to measure, making it impossible to accurately gauge a program's impact.

Many of these mistakes can be spotted during annual ROI reviews, which not all companies perform. Each year, she says, HR executives must scrutinize every step of the process to achieve the most accurate measurement.

"Dollars are getting tighter," Teskey says. "People are looking more and more into costs and revenues that companies are making. [Executives] are saying, 'You really need to return to the bottom line, otherwise, we can use those dollars someplace else.'"

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