Discover insights on employee recognition and engagement, workplace culture, performance management, people analytics, and more.
This is part 2 of our 3-part “Making the Case” series, dedicated to helping you make a business case for employee recognition in your organization. Read part 1 (Budgeting for Recognition) and part 3 (8 Steps for Pitching Employee Recognition to Your Executive Team).
HR leaders carry a lot of responsibility on their shoulders.
They manage their organization's most valuable (and most expensive) asset – their people. Luckily, many tools in the market are designed to help HR leaders.These tools include HRISs (Human Resources Information Systems), recruitment tools, and, more recently – modern employee engagement solutions, like employee recognition platforms.
While relatively new to the market in the last ten years, employee recognition platforms bring a host of benefits that align an organization's historical employee engagement practices with the expectations and needs of today's workforce. These platforms take traditional recognition practices, like years of service programs or annual top-performer programs to a place that benefits all employees – everyday. This increases the impact, reach, and equity of the programs by ensuring that no one is left out or left behind.
Unfortunately, because social employee recognition platforms are a new concept for many leaders, demonstrating the impact and business case to executives can be a challenge for HR teams.
The good news is that the bottom-line impact of employee engagement and recognition is undeniable with the right metrics.
Recently, Kudos®’ Founder and Chief Customer Officer Tom Short, and Kudos®' Director of Sales, Cheryl Smith, hosted a workshop to help walk HR professionals through demonstrating the ROI of employee recognition. We encourage you to watch a recording of the webinar here or read on to learn from the simple ROI example Tom and Cheryl shared.
The first step in understanding the value of your recognition program is to demonstrate it as an urgent need to your leadership team.
When we consider recognition, the key benefit is increased employee engagement. But why is employee engagement so critical?
Employee engagement is quite possibly the most critical factor to a successful business. Gallup has done countless studies on the benefits of employee engagement, including increased profitability, more customer engagement (higher Net Promoter Scores), and improved productivity. Gallup has also found that enhanced employee engagement reduces costly trends such as absenteeism, turnover, production defects, and safety incidents.
But to make the case for investment in employee engagement, you need to be able to explain what disengagement is costing your organization today.
As the famous saying by author and management guru Peter Drucker puts it, “if you can’t measure it, you can’t improve it.”
To present a compelling business case, you need to quantify your existing state when it comes to metrics you want to improve. These are called Key Performance Indicators, and the three examples that we’ll explore more in-depth are:
2. Turnover Rate
1. Cost of Absenteeism
Absenteeism is any failure to report for or remain at work as scheduled. Absenteeism does not include scheduled vacation, PTO, or sickness, but rather an unexpected absence. The absenteeism rate is calculated by taking the number of absent days and dividing it by the number of available workdays in a given period. The average absenteeism rate in the US is approximately 3.1%, which translates to 64 hours per employee per year. For reference, a healthy rate is 1.5%. Absenteeism is caused by many factors like stress, lack of motivation, disengagement, workplace conflict, and more.
According to workforce specialist Circadian, unscheduled absenteeism costs roughly $3,600 per year for each hourly worker and $2,660 each year for salaried employees.The costs can be attributed to many factors, including:
2. Cost of Turnover
Turnover can be both voluntary (leaving for another job) and involuntary (being let go). Both have a significant financial impact on organizations.
According to a study released in August 2021 from the National Business Research Institute, employees' average annual turnover rate across industries in the United States is 15%. The cost of turnover can range from 20% for a mid-level manager to 200% for a C-Suite Executive.
3. Cost of Disengagement
Gallup found that 74% of people looking for a new job today are disengaged. “It's not an industry, role, or pay issue,” Gallup’s team says, “it's a workplace issue.” So, let's look at engagement and the specific costs of disengaged employees.
According to Gallup, disengaged employees have 37% higher absenteeism, 18% lower productivity, and 15% lower profitability.
In their book, Follow this Path, authors Curt Coffman and Gabriel Gonzalez Molina estimate that a disengaged employee costs a company 34% of their annual salary, or $3,400 for every $10,000 they make.
The cost of disengagement as well as two of the most common by-products of disengagement, turnover and absenteeism, are substantial. But, there are many ways employers can address these challenges. Presenting recognition as a solution and demonstrating the ROI is a great way to show your leadership team the value of your proposal.
While there are many ways to increase employee engagement, research by Cicero found that recognition is a highly effective solution.
Using the three costs described above, (Absenteeism, Turnover, and Disengagement) simple plug-and-play equations can lead you to a powerful ROI presentation.
As illustrated below, we use a hypothetical situation that reflects many organizations. This example is described in more detail in the webinar recording.
To calculate the ROI using the formula above, we need two numbers, Total Savings (based on the achievement of the goals above, and Total Investment based on the number of employees (1000).
Calculating Total Savings
Absenteeism Savings = $41,230
Based on the costs we discussed previously, we can calculate the absenteeism cost savings based on 1000 employees. The savings reflect a shift from a 3.1%absenteeism rate (today’s standard) to a 1.55% absenteeism rate attributed to increased employee engagement through the recognition program.
Turnover Savings = $500,619
The turnover cost reflects the average cost of turnover for a mid-manager making $60,000/year (20% of $60,000 = $12,000) + the cost of onboarding a new employee, which ADP estimates are about $4,129. In this example, we used a modest turnover improvement year over year of 3%.(15.9% decreased to 13.9%).
Disengagement Savings = $408,000
Finally, the cost of disengagement was calculated as 34% of the same average salary of $60,000. The Future state represents a modest 2% improvement in employee engagement.
Now, we add Absenteeism Savings + Turnover Savings + Disengagement Savings to get our total savings.
Total Savings= $949,849
A Conference Board of Canada study, “Making it Meaningful: Recognizing and Rewarding Employees in Canadian Organizations,” suggests that the average annual amount spent on recognition is $175 per employee.
So, using that average figure, we can estimate our investment for a company of 1000 people:
Recognition & Reward Investment = $175.00 per person x 1000 employees =$175,000
Total Investment = $175,000
Final ROI Formula
The results of this calculation are undeniable.
A 443% return on investment is fantastic and hard to ignore as a business leader. The best thing about the ROI of employee recognition is that with regular, meaningful recognition, the returns will continue to grow as a strong culture of recognition develops.
Once again, if you would like a walkthrough of these calculations, we strongly encourage you to watch this helpful webinar, where you can download the slides to reference when creating your own ROI estimation.
Calculating the ROI to help support the case for a significant investment can be a daunting task, but following the steps presented in this article should demystify the process and blow your leaders away with the hard numbers.
As a recap, the steps are:
1. Identifying Desired Outcomes (e.g., lower turnover)
2. Identifying Relevant Metrics (e.g., turnover rate)
3. Quantify Costs and Set improvement goals (e.g., turnover costs 20% of the employee's salary, we want to reduce by 5%)
4. Demonstrate the impact on the bottom line (e.g., a recognition and rewards program will cost us $175 per employee per year but reduce our turnover by 5% saving us XYZ amount)
Need some help? Reach out for support building your plan – we are here to help!
This is part 1 of our 3-part “Making the Case” series, dedicated to helping you make a business case for recognition in your organization. Read part 2 (Calculating the ROI of Recognition) here and part 3 (8 Steps for Pitching Employee Recognition to Your Executive Team).
Organizations are overwhelmingly finding that to take part in today’s competitive labor market and retain great employees, they must strengthen their employee experience holistically through unique benefits, flexibility, and proactive employee engagement initiatives. One proven way to enhance employee engagement is through regular, meaningful recognition. The benefits of employee recognition programs are undeniable and plentiful.
When proposing employee recognition solutions, HR leaders are often tasked with building a budget for an enhanced program to get executive buy-in.
So how do you build a comprehensive budget for a new program from scratch?
How do you make sure you're comparing different solutions “apples to apples” to get a clear picture of which solution is best for your needs?
Recently, Kudos’ CFO, Karim Punja, and Kudos’ Director of Sales, Cheryl Smith, hosted a workshop to help HR professionals answer the questions above and more. We encourage you to watch the webinar here, or read on to learn all the insider tips and tricks shared.
Before digging into the actual budgeting exercise, it’s important to level-set on why you’re considering bringing in an employee recognition platform so you can contextualize your budget with a legitimate need and urgency.
“Doing what’s best for your employees does not contradict doing what’s best for your company,” Cheryl Smith, Director of Sales at Kudos, explains. The Gallup Q12 Meta-Analysis is a fantastic resource to reference when building your case for the importance and impact of recognition. Here are some highlights:
With all of the value that employee recognition and engagement provides in mind, it’s now time to build your budget.
“The key number from the CFO’s perspective is the total cost of ownership,” says Karim Punja, CFO at Kudos. The following is designed to help you understand what key inputs and cost drivers make up that total cost so you can build an accurate and comprehensive budget.
Starting with benchmarks of how much today’s organizations invest in recognition and rewards provides your decision-makers with something to compare your proposal to. The benchmarks provided in this overview are for comprehensive recognition programs, like Kudos.
Beyond helping with your proposal, these benchmarks can help you assess how your current recognition budget compares to others and give you a place to start if this is a net new program and initiative. Keep in mind that many organizations migrate legacy “years-of-service” awards and annual recognition programs to their modern recognition system, so those costs are included in these benchmarks.
Current Benchmarks (per employee recognition budget benchmarks):
✓ Employee count: Because you’re building your budget on a per-employee basis, this number is critical to an accurate proposal. Consider the exact size of your organization, whether it spans multiple regions, and whether there are various kinds of employees to consider (contract, field, temporary, interns). Larger organizations with multiple departments and regions might opt for a sequential implementation where, for example, a specific geography or division would start, then other groups would join in over a year or two. The timing of a staggered launch would have to be considered to make sure the budget is attributed at the right time.
✓ Rewards or no rewards? Some vendors will give you the option of running your recognition program platform with or without monetary rewards and points. Some costs to consider are whether points need to be purchased in advance, if rewards are marked up, and the fulfillment costs of physical rewards. Hint: With Kudos, rewards are optional. Kudos also never marks up points and rewards. You are in complete control of your budget!
✓ Expected recognition and rewards budget per employee/year: Determine what you intend to spend on your program using the benchmarks above. You can also use the amount you’re spending on your current recognition/years of service program. For example, if you’ve recently moved to a remote work format, you could reallocate the budget from the expensive parties and receptions you’re no longer hosting.
✓ Budget timeframe: Budgets are usually based on one fiscal year. Your CFO will likely want to know, beyond the fiscal year budget, what the total cost of ownership is for the program and the total cost of the agreement. For example, if you’ve committed to three years, fees for all three years would be included in your total cost of ownership. The total cost of ownership also consists of any additional resources required to run the program, such as staff time.
✓ Hidden fees: It’s essential to work directly with vendors to understand all fees and costs regarding rewards, markups, or fulfillment costs and any other resources you require. Your budget proposal should include a plan for who will manage this program (including one or two alternates.)
✓ Implementation & support: Ensure you understand the onboarding and launch process, including any information technology (IT) support needed. Your CFO needs to consider the opportunity cost of using IT resources for this project rather than another, so providing that information upfront is extremely helpful.
While all of this may seem overwhelming, the right vendor will be able to walk you through this process, making it painless and straightforward. To help, Kudos has a prebuilt Employee Recognition & Rewards Budget Planner that you can download here.
The webinar recording previously mentioned walks through how to use the budget planner workbook.
The workbook contains three helpful sheets:
Here is a preview:
Budgeting is a tedious but extremely valuable business process that allows you to make significant strides in your work. Launching a formal recognition program is often a career-defining move for many HR professionals – it requires work and dedication, but the results are undeniable.
Finally, remember that this is the starting point. Depending on your organization's structure, policies, and needs, there can be nuances. This overview captures the baseline budgeting information needed for an employee engagement and recognition system.
Once again, we strongly encourage you to watch Kudos’ CFO, Karim Punja, and Kudos’ Director of Sales, Cheryl Smith’s budgeting workshop here. If you need any assistance building your recognition program budget or learning more about the value of recognition and employee engagement systems, please reach out to the Kudos team.
When comparing vendors in the HR and Worktech space, one critical factor should be the security and privacy of employee data within the system.
So, what should you look for to ensure your data is safe and secure?
One way is to seek out a vendor with SOC 2 accreditation or what's more commonly referred to as a "SOC 2 compliant company". Kudos understands the importance of your data and information, and is proud to have this accreditation.
To explain the impact and importance of SOC 2 compliance, Henry Maphosa, an information security expert, answered some common questions about this important certification.
SOC 2, developed by the American Institute of CPAs (AICPA), is a voluntary compliance standard which specifies how service organizations should manage customer data. The standard is based on the following Trust Services Criteria: security, availability, processing integrity, confidentiality, and privacy.
Being SOC 2 compliant assures customers and clients that a vendor or partner has the infrastructure, tools, and processes to protect their information from unauthorized access within and outside the firm.
“If a company does not issue a SOC 2 report, it could raise questions regarding the controls they have in place or their commitment to security and compliance as an organization,” said Maphosa. “It also means more time spent investigating their security practices.”
For Kudos clients, SOC 2 compliance indicates they’re partnering with a provider who meets rigorous standards. Since the report is an independent validation, the client feels more assured that the company follows through on security, privacy, and compliance promises.
Software and vendors in the HR and Worktech space often store personally identifiable information (PII) like names, phone numbers, or even SSN numbers. Some platforms also hold confidential business information like HR budgets or company goals which are especially vulnerable and critical to protect.
For Kudos, SOC 2 compliance assures HR leaders that any information stored in the Kudos platform, including individual personal profile information and the contents of recognition messages, is all secure and private.
Given the sensitivity of personal data involved in all aspects of Human Resources Management, Kudos views SOC 2 compliance as a necessary demonstration of client support.
Kudos is committed to providing clients with the highest level of security assurance, and has officially completed its SOC 2 Type 1 Compliance and Certification. Kudos completed the independent platform and systems compliance audit with zero exceptions, meaning all controls were designed effectively.
If you’re currently evaluating employee recognition systems and would like to learn more about the importance of security and privacy, please do not hesitate to reach out.
You’ve put in weeks of research, reading, learning, getting to know vendors, and experiencing demos - you’re ready to present a proposal to your executive team. This can feel like a big hurdle to overcome. We sat down with Karim Punja, CFO at Kudos, to demystify what executives need to do to help make those conversations less nerve-racking. While the tips presented here center around making a case for an employee engagement and recognition platform like Kudos, they can also translate to any initiative or investment you’d like to move ahead.
Why now is the right time to implement an employee engagement platform:
According to Deloitte’s Q1 2021 CFO Signals Report, 66% of CFOs think this is a good time to take on greater risks, up from 49% in Q4 2020. Activities related to talent retention were cited as an example of risks CFOs are willing to take right now. Evidently, there’s no better time to make your case for the benefits of an employee engagement and recognition platform – and we’re here to help.
When asked what he and his team want to know when evaluating a proposal for a new enterprise investment, Karim explained that he is always trying to answer two critical questions:
Karim walked us through what it takes to answer those questions in a way that will make your proposal hard to refuse. As a CFA with over 15 years of experience in corporate financial management and planning, this guy knows his stuff - we’re confident these trade secrets will help you move the needle forward on your project.
Let’s dive in so you can start building your plan:
Before approaching your C-Suite and especially your CFO to propose investing in an employee engagement and recognition platform, make sure you’ve considered the total cost.
First, Karim emphasized the importance of presenting transparent pricing, including an accurate quote or contract that outlines all costs, including any implementation fees, additional support costs, and the total length of commitment. Sometimes options can be helpful too, like a discount on a 3-year commitment, for example. Finance experts deal with specific, measurable things; your finance team will not be able to sign off on approximate numbers. When it comes to employee recognition and engagement platforms specifically, your CFO may ask about reward markups. At Kudos, rewards are optional and extra (we never markup rewards or sell points), but that’s not always the case.
It’s also important to outline a budget for the program going forward. When budgeting for recognition, a good rule of thumb for casual rewards, team events, and milestones is to allocate between $125 to $250 per year per person, for example, some clients use the equivalent of 1% of payroll. You may already have a budget set aside for many of these things like your monthly birthday celebrations, years of service awards, company picnic, etc. Make sure to show your budgeting plan moving forward to make everything easy to assess.
Finally, most CFOs will want to take a close look at the Total Cost of Ownership. "Total Cost of Ownership is one of the most important things I look at,” says Karim. This goes beyond just the budget and contract. Some questions you should be prepared to answer include: Who will manage this new platform? How many hours per week will that person devote to it? Is another full-time employee required? How much change management will be necessary during implementation? Try to include answers to those questions in your formal proposal. Another important aspect to consider with enterprise software is how long it will take to implement and be fully operational. With Kudos, for example, implementation is quick and straightforward so that clients can get up and running quickly. Lengthy implementation cycles delay the benefits of the system, which is an important consideration. Providers should be available to help you build out a plan to present an accurate total cost of ownership to make the analysis simpler for your finance team.
"Who will manage this new platform? How many hours per week will that person devote to it? Is another full-time employee required? How much change management will be necessary during implementation?"
Why are you proposing this system or solution? While this is a simple question, your finance team will be looking for specific answers.
First, you need to be prepared to explain the specific need or problem. Why are you proposing the employee engagement and recognition platform? Be specific! Are you switching from an existing provider to another due to poor customer service or markups? If this is a new initiative – have your employees recently reported low levels of engagement in a survey? Or are you experiencing higher-than-normal levels of turnover or burnout?
You should address this question by focusing on your organization’s unique needs. It is critical in getting your CFO on board and open to considering your proposal.
A second important metric to touch on is ROI. “I need to know how we can measure results. What does success look like?” asks Karim. Work with your provider for specific examples of ROI that you can share with your CFO. For instance, Kudos can improve employee engagement which in turn can reduce turnover employee turnover. On average, 50-60% of Fortune 500 companies' business spending is allocated to labor, including turnover, which is costing US companies 1 trillion dollars per year. The cost of replacing an individual employee alone can range from one-half to two times that employee's annual salary. The ultimate cost of disengagement is an employee leaving. Demonstrating that an employee engagement and recognition system addresses that is great for your case.
“When evaluating internal proposals, I always look for the tangible and intangible benefits,” says Karim. Tangible benefits have a more direct dollar value associated with them, such as reducing the cost of one system versus another; Intangible benefits are items that are not as simple to associate a direct dollar amount to but still can provide an incredible amount of value to the organization.
For example, beyond turnover, investing in employee engagement and recognition platforms has many benefits, including higher productivity, fewer safety incidents, lower absenteeism, higher sales, and higher profitability.
Finally, your CFO will inevitably have to weigh the Opportunity Cost of moving ahead with your proposal. Karim explains, “as a CFO, I’m constantly weighing where I need to allocate capital, and when. I need to determine the priorities today vs. six months from now.” What that means is you’ll have to be able to explain why you’re recommending that your organization move forward with an employee recognition platform now vs. in 6 months. When it comes to employee engagement, the disruption of 2020 was undeniable and has created unique challenges for organizations regarding culture, morale, and turnover. What’s more, the job market is hotter than ever; businesses that don’t find new, better ways to engage and retain their employees will become less and less competitive. These are both excellent arguments for an immediate need for a system like Kudos.
"The job market is hotter than ever; businesses that don’t find new, better ways to engage and retain their employees will become less and less competitive."
CFOs have a lot of responsibility on their shoulders. They typically work directly with CEOs and board members to make the best recommendations possible on how an organization can best use its capital to achieve its business goals. Executive buy-in is critical to launching a successful employee engagement initiative. Beyond approval, if you can include an executive like your CFO in the demos and negotiations, they will feel connected to the project and help sponsor the program internally, a key indicator of success. Following the framework presented above will be an effective way to build the case for your recognition and engagement platform proposal.
About Karim Punja
Karim is a CFA Charterholder with over 15 years of experience in corporate financial management and planning. He has done extensive work in investment analysis pertaining to growth strategies, capital investments, restructuring and supporting new venture planning. Karim has also worked on multiple debt and equity financing initiatives, raising over $100M.
Employee engagement is the emotional commitment your people have to your organization.You can achieve high engagement if you pursue a people-first strategy.
Employee expectations shifted significantly in the last decade. The best companies in the world adjusted to this shift through the power of people-first cultures — work environments where employee happiness matters as much as the bottom line.
Here's why becoming a people-first organization makes good business sense:
The business benefits are clear if your team is engaged.
Kudos® is designed to take your engagement to the next level. With over 300 clients globally, we see organizations of all types achieve high-performance cultures:
Organizations that pursue, and win, “Best Place to Work” (BPTW) awards consistently outperform their peers and the market. Here is the proof:
The business outcomes and cost savings associated with high employee engagement paint a clear picture of why forward-thinking organizations are implementing employee engagement programs.
The difference between winners of Fortune 100’s Best Places to Work and Glassdoor's Best Place to Work comes down to four common best practices:
Leading organizations reinforce what they stand for by maintaining daily communication with their people. Frequently recognizing, celebrating, and encouraging teams to maximize their potential wins hearts and minds.
Beyond greater emotional investment with your company, higher employee engagement results in best-in-class corporate performance.
As showcased, activating a highly positive culture generates high-performance outcomes. At Kudos, we measure our achievements in seven different areas:
You can easily measure return on investment (ROI) in the last two areas: Time savings for HR, reductions in turnover and related costs. Below, we'll focus on the largest and most visible impact on the bottom line — reduced turnover costs.
Calculate the ROI using the following equations:
ROI = [Savings from Reduced Employee Turnover – Cost of Program] /Cost of Program
Savings from Reduced Employee Turnover = [Cost to Replace Employee+ Cost to Onboard New Employee] * # of employee exits that were avoided
If these numbers aren’t available to you, feel free to use these benchmarks in your calculations:
Did you know? Kudos clients typically see an ROI between 2.5 - 7x (in other words, between 250% to 700%).
Not only is Kudos one of the first organizations to bring social recognition to the market, but also the first company to take peer-to-peer recognition to a more strategic and effective level.
We help organizations drive individual and corporate performance in over 80 countries around the world and look forward to supporting you develop a high-performance culture.