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The 2 Dimensions of “Return on Recognition”

March 13, 2018
| ByMike Ryan

Companies looking to justify any of their business expenses need to put forward a compelling return in front of senior management. Employee recognition is no exception.

For HR leaders to justify the organization’s investment in employee recognition, it helps to make a more complete and nuanced argument. Here’s how you can frame yours.    

ROR (vs ROI) is a broader and more comprehensive look at the impact your recognition strategy is having. It assumes that in addition to the financial returns generated, employee recognition should also be advancing the strategic priorities of the organization.    

1/ Financial returns

The cost of excessive employee turnover can hamstring any organization. When top talent leaves, so too do the dollars that would otherwise fall to the bottom line.

Replacing employees has a direct cost to the business. Most companies use recruiters, who can charge 20-30% of the new hire’s first year salary. For a $60,000 a year position that expense can range from $12,000 to $18,000 per worker. And since some studies have pegged the aggregate cost of losing a worker at about 200% of their annual compensation, it’s obvious that any recognition-related reduction in employee turnover can represent a material financial advantage.  

Recognition results in higher retention rates. Over two thirds of all employees say they are more likely to quit when they feel underappreciated. The more employees are recognized, the more likely they are to stay at their jobs, and that simple correlation saves companies real cash. 

When the financial impact of employee turnover is calculated, astute businesses also examine the negative influence it can have on customer values. When employees feel their company takes good care of them, they will, in return, take good care of their customers, and that connection also shows up on the bottom line. 

The connection is clear; when customers are happy they spend more. Increasing customer retention rates by as little as 5% can boost profits anywhere from 25% to 95% depending on the business model. Don’t be shy about working with one of your marketing leaders to apply a retention-driven revenue number that makes sense in your world. 

2/ Strategic advantages

As damaging as turnover expenses and customer departures can be, the real financial burden may be in the “opportunity costs” a departed employee represents. Depending on the complexity of the position in question, new employees can take months, even years to get up to speed. As you structure a more convincing argument for investing in employee recognition programs (the kind that strengthen employee commitment and loyalty) think about the adverse effects that lost employees have on the company’s long-term growth strategy. In fact, when companies calculate the cost of replacing an employee, many fail to factor in the full effect revolving staff has on the business. 

The ability to change and adapt quickly is the key to organizational success. When employees leave their jobs, entire segments of the business can become less prepared to take advantage of the opportunities (and challenges) that await them.

Why is that? When employees leave they take institutional “know-how” with them. When they go, so does their aptitude and experience, not to mention their relationships with co-workers and customers. All of that takes time to rebuild.

Organizational readiness is a product of aligning the employee base to the business’s strategy, developing workers accordingly, deploying them properly, and retaining key players along the way. 

Turnover has a negative effect here. The best way to assure that your company is ready to meet its strategic objectives is to keep your bench strong. Employee recognition does just that.

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