Can you imagine any scenario in which an organisation wouldn’t conduct a return on investment (ROI) analysis before investing more in a product, line of business or emerging market? Most investors would likely view such inaction as negligent. Yet, the vast majority of companies do not conduct a formal ROI on one of their biggest expenses: the total compensation of their employees.
In a recent research of WorldatWork members (i.e., the world’s largest professional rewards association), we found that only 11% of organisations conduct a formal ROI assessment of their reward programs. However, 48% of respondents said they planned to more rigorously assess their reward programs and do this more frequently over the next two to three years. We find that many organisations generally do execute partial or indirect analyses of reward effectiveness, but most do this in a somewhat disjointed manner.
There are a number of benefits to more comprehensively assess the effectiveness of rewards programs. These include:
- Identifying problems early in a rewards program’s rollout so corrections can be made before resources are wasted or other damage is done
- Providing necessary feedback for improving program effectiveness in a constantly changing business environment
- Holding management responsible for implementing the rewards program
- Building employee and management commitment to the rewards program by engaging them in the evaluation and using their input to correct problems
- Reinforcing pay values, policies and programs to employees and managers
We’ve also found that interest from senior executives is typically slightly greater than HR and compensation professionals in assessing the ROI of the organisation’s rewards programs. Executives are usually most interested in how labor costs compare to competitors and how rewards programs affect employee effort and engagement, align with the business strategy and culture of the organisation and link to individual performance.
Organisations utilise a number of methods to measure aspects of reward effectiveness. The most common included:
- Exit interviews or surveys of departed employees (92%)
- Informal manager feedback regarding rewards program effectiveness (91%)
- Purchased compensation surveys from compensation survey providers to compare compensation levels (89%)
- Informal employee feedback regarding rewards program effectiveness (88%)
- Formal feedback from employee engagement surveys (85%)
Not all of those methods were rated as highly effective, however. Purchased compensation surveys (78%) ranked as the most effective method. It is also noteworthy that formal feedback from engagement surveys were also rated as reasonably effective (at 62%) even though these surveys generally ask relatively few questions about rewards.
There are many challenges in measuring the effectiveness of rewards programs. All surveyed (C-Suite, HR professionals and compensation professionals) agreed that lack of budget, time and/or resources was the primary challenge (at 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.
All of these findings indicate substantial opportunity for improving the assessment of reward programs. Senior management has considerable interest in assessing rewards program effectiveness, and they also understand that assessment has multiple dimension – i.e., measuring perceptions as well as results.
Organisations should use multiple methods for assessing rewards program effectiveness. A systematic and rigorous approach should be followed. To assess the program’s effectiveness, one not only needs to know if reward programs are linked to desired results but that employees perceive the program as competitive, relevant and fair and that managers and employees understand the program goals and how to effectively participate in the rewards program.
A vast majority of organisations do NOT formally engage their employees (80%) or managers (60%) in ongoing assessment of reward program effectiveness. Perhaps a place to start would be to engage these employees and managers as opposed to designing and implementing these programs solely from the ivory tower corporate functions.
Does your organisation measure the effectiveness of rewards programs? Share your insights below, it will be great to learn your views.
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