In a recent research of WorldatWork members (i.e. the world’s largest professional rewards association), we found that only 11% of organizations conduct a formal ROI assessment of their reward programs.
However, 48% of respondents said they plan to assess their reward programs more rigorously and more frequently over the next two to three years. We find that many organizations generally execute partial or indirect analyses of reward effectiveness, but most do this in a somewhat disjointed manner.
Some benefits of assessing the effectiveness of reward programs include:
- Identifying problems early so that corrections can be made before resources are wasted or other damage is done
- Providing necessary feedback to improve program effectiveness in a constantly changing business environment
- Holding management responsible for implementing the reward program
- Building employees’ and management’s commitment to the reward program by engaging them in the evaluation process, and using their input to correct problems
- Reinforcing pay values, policies and programs
We also found that business leaders tend to show more interest than HR and compensation professionals when it comes to assessing the Return on Investment (ROI) of reward programs. They are usually most interested in how labor costs compare to competitors, as well as how reward programs affect employee effort and engagement, align with business strategy and culture of the organization, and link to individual performance.
Measuring effectiveness of reward program
There are several methods to measure reward effectiveness. Some common ones include:
- Exit interviews or surveys of departed employees (used by 92% of respondents)
- Informal manager feedback regarding reward program effectiveness (91%)
- Purchased compensation surveys from compensation survey providers to compare compensation levels (89%)
- Informal employee feedback regarding reward program effectiveness (88%)
- Formal feedback from employee engagement surveys (85%)
However, not all of the above methods were highly effective. We found that purchased compensation surveys (78%) was ranked as the most effective method. It is also noteworthy that formal feedback from engagement surveys was rated as reasonably effective (62%), though these surveys generally ask relatively few questions about rewards.
There are many challenges to measuring the effectiveness of reward programs. The respondents (C-Suite, HR professionals and compensation professionals) agreed that lack of budget, time and/or resources was the primary challenge (75%). Lack of methodology or expertise (e.g. not sure how to get valid and reliable information) was seen as the second biggest challenge (53%), while lack of senior management interest or commitment (44%) and not convinced enough value will be achieved to justify the investment (38%) were also concerns. However, it is quite telling that a third of respondents are unconvinced that adequate value will be achieved to justify the investment in assessment of reward programs.
Additionally, you can view reward as a ‘hardware’ and a ‘software’. ‘Hardware’ refers to reward mechanism, including system, process, procedure, tool, concept and principle. However, you should not assume that organizations with little tools and no fixed steps to make reward decision would have a less effective reward program than those with a complicated system, clear authority, full of written rules and procedures in place. The reward ‘hardware’ should be the priority for every organization, as it addresses the concept of equity not equality.
On the other hand, ‘software’ refers to having people as a medium. They are both formally and informally involved in reward processes, and there are distinct criteria for them to make decisions. Though they know what the organization expects from them in reward management, they may swing in a different direction and deviate from the organization’s intention.
I believe reward effectiveness should not be considered without performance management. Though business leaders understand the principles of reward and performance and how they relate to each other, they often do not align both principles. Most business leaders choose to keep it ambiguous and let the others (e.g. HR function, next leadership level up or down, etc.) draw the definitions. Most of the time, leaders tend to avoid giving feedback to their team as it may be perceived negatively, causing an ambiguous linkage between reward and performance.
Improving your reward program
The findings from our WorldatWork research indicate a substantial opportunity to improve the assessment of reward programs. Though the business leaders have considerable interest in assessing reward program effectiveness, they must also understand that assessment has multiple dimensions – i.e. measuring perceptions as well as results.
Organizations should follow a systematic and rigorous approach, and use multiple methods when assessing the effectiveness of the reward program. In addition, they need to ascertain if the reward programs are linked to the desired results. Lastly, employees should perceive the program as competitive, relevant and fair, and that the managers and employees understand the program goals and how to participate in the reward program effectively.
Unfortunately, most organizations do not formally involve their employees (80%) or managers (60%) in the ongoing assessment of reward program effectiveness. A good place to start would be to engage these employees and managers, as opposed to designing and implementing these programs solely from the corporate functions ivory tower.
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