Measuring Results of Incentive Programs and Meetings in a Down Economy
Historically, incentive programs and meetings have been the early victims of economic downturns. Although the current economy does not seem to have seriously impacted the industry so far, there are scattered reports of cancellations, delayed plans, and general cutbacks. With that as background, it is wise to restate the need for continued use of incentives and meetings even if on a somewhat contained basis.
Some managers react to these situations by immediately cutting all “unnecessary” expenses without looking at bottom line impact. “Unnecessary” becomes a very subjective evaluation. Others assess the value of each program before deciding the reasonable course of action.
There are now numerous studies that show a very definite relationship between motivation, the work environment, and bottom line profits. Satisfied workers produce at a higher, more efficient rate. The management dictum that employees are satisfied just to have a job in difficult times has long been disproven. Keeping employees and customers satisfied especially in difficult times is the basis of reaping healthy profits.
In their book, Contented Cows Give Better Milk, Bill Catlette and Richard Hadden compared business results of companies considered employers of choice with a comparable group of Fortune 500 companies. (An employer of choice is a company that is primarily people-driven.) Although the Employers of Choice had about 1/3 of the revenue of the others at the start of the study, over a 10-year period (one that included a recession), they:
Outperformed the latter
about four to one in revenues,
Increased net income 202% vs. 139%,
Roughly doubled the net income of the latter group,
And added 79,000 jobs while the latter LOST 61,000 jobs.
The point: simply that a motivated, committed work force --- one that continues to be recognized by incentive programs that reward excellent performance --- continues to achieve growth while others stagnate.
Using these programs correctly is a competitive advantage, especially under difficult economic conditions.
Measuring the success of incentive programs and meetings --- whether return on investment (ROI) or return on objectives (ROO) or anything else --- is the best way to show their value. Measurement as a tool for planners and business leaders is essential at all times. It addresses requirements of the Sarbanes-Oxley Act, the need to demonstrate results to management, and, often, the justification for one’s job.
Both incentive suppliers and corporate planners say that they are increasingly asked for data related to measuring program results. ROI analysis also helps a company determine the impact of an incentive program across the entire operation, something that is crucial to avoiding long-term problems.
According to the MPI Foundation, “…ROI is THE single most important tool for a meeting professional. In today’s economy, with more and more meeting professionals answering to their Procurement office, the emphasis on ROI has never been more important.”
Other trade organizations have also highlighted the need for measurement and have taken steps to make the process easier for their members.
Measuring ROI
There are various approaches to measuring ROI for incentive programs and meetings.
They can be as different as night and day with some approaches being very basic
(perhaps too much so) and others very complex. Still, every approach has merit
and some are more applicable in one situation than another. What follows is
a brief overview of some of these varied approaches and related research studies.
However, a disclaimer is
needed: this is not intended to serve as an instruction guide for measuring
ROI. Its purpose is to provide a synopsis of different approaches. The appendix
to this article cites sources for finding detailed information.
Prerequisites for ROI Measurement
There are elements that are common to all approaches for measuring ROI. The first is identifying objectives --- what the program is meant to accomplish --- whether for a meeting or an incentive program. It’s impossible to truly measure the success of a program unless there is a clear understanding of the desired outcome.
Next, a measurement strategy has to be determined. This may simply mean that hard numbers will be evaluated: projected sales vs. actual sales, bottom line impact of a program, etc. The strategy may deal with less tangible factors: the increase in knowledge resulting from a training meeting, improvements in morale among the targeted audience, or the like. Whatever the approach, the measurement device must relate directly to the program’s objective.
Finally, the means to gather the data for measurement must be in place before the program can begin. In some cases, this is more obvious --- and easier --- than in others. Nonetheless, there has to be an agreed upon method of measuring performance against the objective.
1. The Basic Approach to ROI Measurement
Probably the simplest and most common measurement of ROI is to simply compare performance against the objective set for the program.
Let’s assume, for example, that a company expects to achieve $50 million in sales without an incentive program. However, an incentive program is launched with the expectation that it will generate a 15% increase in sales. That would bring in an additional $7.5 million in incremental volume for a total of $57.5 million in sales.
$50 million base sales x 15% increase = $7.5 million in incremental sales.
Assume further that this company enjoys a 30% gross margin on sales, their incremental profit --- the profit generated from the extra sales --- would be $2,250,000.
$7.5 million in incremental
sales x 30% gross margin = $2,250,000 incremental profit.
If the cost of the incentive program were equal to 20% of the incremental sales,
that means the cost of the program would be $1.5 million.
$7.5 million in incremental
sales x 20% as the cost of the program =
$1.5 million actual cost of the incentive program.
If we reduce the incremental
profit by the cost of the program, we have a net incremental profit of $750,000.
That would be considered the return on investment from this incentive program.
It is earnings the company would not have realized without the program.
$2,250,000 incremental profit - $1,500,000 cost of program = $750,000 net incremental
profit.
This is a good basic approach to ROI measurement but it falls short in not considering other factors that might have impacted the sales increase. Similarly, it really doesn’t recognize any extraneous costs that might have been incurred as a result of implementing the program. Even so, this approach might be all that is required to accomplish measurement in certain situations.
2. Determining the Return on Investment of Incentive Travel Programs
This study, which was conducted
by researchers from Ryerson University in Toronto, is at the opposite end of
the spectrum from the Basic Approach. It is a more complex approach that calls
for thorough preparation and analysis. The full research paper includes templates
that can be used for implementing the procedures described by the researchers.
It begins with the construction of an Attribute Evaluation Tool --- a means
of deciding which elements of a program to evaluate. The planner can then determine
the attributes that are critical in achieving specific goals by:
1) reviewing the attributes,
2) reviewing corporate goals,
3) identifying potential program goals,
4) dividing potential attributes into short-term or long-term goals,
5) and prioritizing the short-term goals.
Using the Program ROI Measures template, the procedure is completed by:
6) creating a Program Measures
list,
7) identifying specific pre-program objectives in real terms,
8) calculating the results vs. company goals,
9) calculating the Program Impact,
10) and calculating the ROI.
Yes, these steps ARE complicated and require a major commitment of time, but remember that the full study contains the templates that are needed together with instructions for accomplishing this procedure.
3. The Business Group Approach
Bob Dawson, CITE, of The Business Group has developed a comprehensive ROI-based approach that, unlike traditional incentive programs, does not focus on one or two objectives but, instead, evaluates the performance of the entire company. Incentives are used, as needed, to stimulate activity in various functions within the company. In that respect, it is unique. Its approach is to evaluate and involve every aspect of a business. It considers the impact of an incentive program on every department, not just the one to which the program is targeted.
If, for example, increased sales cause accounts receivable to increase in age, that impact is deemed to be a cost of the incentive program. Similarly, if the collections department has increased costs in order to collect past due accounts, that too is considered a cost of the program.
Another unique aspect of this approach is that it requires an on-going relationship with the client. It cannot readily be accomplished in a short period like incentive programs with one or two specific objectives. This approach has only one objective --- to improve bottom line results by examining and adjusting performance throughout the company.
4. The Phillips Model
Measuring the ROI from meetings and similar programs can be more challenging in that their objectives are frequently intangible. Dr. Jack Phillips, founder of the ROI Institute, has formulated a model that has definite application in that connection. The article, The New ROI: Too Tough To Tackle?, tells us that this model looks at what was learned at a meeting and later applied on the job. It quantifies the results into dollars and cents. Once that’s done, measuring ROI is simply a case of dividing benefits by program costs.
This model considers six
factors:
1. Reaction, satisfaction, and planned action: How was the meeting received
and what will happen as a result?
2. Learning: What did they learn from it and will it change their perceptions?
3. Application implementation: How will they apply what they learned to their
jobs?
4. Business impact: How will implementation affect the organization?
5. ROI: What is the monetary value of that impact?
6. Intangibles: If the impact cannot be converted to a monetary value, what
are the intangible benefits?
Analyzing each of these points and determining their value in the most tangible
terms --- translating them to dollar measurables --- achieves ROI measurement.
5. ROI Measurement of Intangible Objectives
ROI measurement is not limited to incentive programs and meetings. Obviously, every business investment warrants such analysis. The metrics used to measure other applications can be useful in evaluating the results of activities in our industry.
Marcia Connor, in an article
that appears on Learnativity.com, deals with measuring the ROI of learning programs.
At first glance, her formula appears similar to the basic approach described
above but, when applied, is far more complete.
Total Benefits – Total Costs = xxx X 100 = ROI
Total Costs
Total Benefits are defined as savings or anything else that adds to the bottom
line. Similarly, Total Costs includes all costs related to the program making
it more inclusive than the Basic Approach. If it were applied to an incentive
program, one would have to include costs beyond those that are directly associated
with the program. They would have to look at the “hidden” costs
that result from it. For example, if additional production hours were required
to meet the demand for more product generated by the incentive program, the
cost of those labor-hours would be included in total costs. This more comprehensive
approach underscores the need for a system to readily gather all related data
for measurement.
Ed Jones also identifies areas of savings generated by a program even if they
are not immediately obvious. In Finding the ROI Payoff he is quoted as saying
that he “…counts dollars in three categories: the ability to generate
revenue; the ability to decrease costs; and ‘the one that no one suspects’,
the value of promotion.” That “value of promotion” might be
the value that comes from promoting a meeting. Otherwise, expenditures would
have been incurred for advertising, public relations, or the like.
These examples underscore the need and the possibility for establishing measurement strategies for meetings and other events whose outcomes are not readily quantifiable.
Summary
The programs described above are only a sampling of approaches that are being used today. The purpose of this paper has been to show that there is a need for measurement and that the approaches vary from very simple to highly complex. Finding and choosing the best method for your needs becomes an individual choice.
Applying these approaches
requires different degrees of knowledge and skill. Some motivation programs
deserve the closest scrutiny if they are to be proven effective but others don’t
warrant a full-blown approach to measuring ROI. The desire to reduce results
to a quantifiable measure is often elusive at best. In reality, the success
of some programs should be evaluated in intangible ways --- reaction from attendees,
focus groups, questionnaires, testing, etc. Knowing when to measure ROI as opposed
to focusing on measuring the soft results is often driven by the corporate environment.
The one true fact about all programs is that if they are worthy of implementation,
they deserve measurement to insure that program goals have been accomplished.
References
- Catlette, Bill and Hadden, Richard, Contented Cows Give Better Milk, Saltillo Press, www.contentedcows.com.
- Conner, Marcia L., How Do I Measure Return on Investment (ROI) for My Learning Program? – Training & Learning FAQs, www.Learnativity.com.
- Corporate and Incentive Travel, Finding the ROI Payoff, www.corporate-inc-travel.com.
- Corporate Meetings & Incentives Magazine, The New ROI: Too Tough to Tackle?, www.MeetingsNet.com/CorporateMeetingsIncentives.
- Gopalakrishna, Srinath, University of Missouri-Columbia, Measuring the ROI of Sales Incentive Programs, Incentive Research Foundation, www.theirf.org.
- Incentive Magazine, Measure for Measure and For Some, Incentives Are a Leap of Faith, www.IncentiveMag.com.
- Incentive Marketing Association, The Art of Motivation – An Incentive Industry Primer and ROI Incentive Programs: Driving People, Driving Profits, www.IncentiveMarketing.org.
- Jeffrey Ph.D., Scott, University of Waterloo, The Benefits of Tangible NonMonetary Incentives and Right Answer, Wrong Question, www.mansci.uwaterloo.ca/~sajeffre.
- ROI Institute, Inc., www.ROIInstitute,net.
- The Business Group, www.BusinessGroupInc.com.
Resources
- Forum for People Performance Management and Measurement, www.PerformanceForum.org.
- Incentive Federation, www.IncentiveFederation.org.
- Incentive Marketing Association, www.IncentiveMarketing.org.
- Incentive Research Foundation, www.theirf.org.
- International SITE Foundation, www.InternationalSITEFoundation.org.
- Meeting Professionals International, www.MPIWeb.org.
- Society of Incentive
& Travel Executives, www.SITE-Intl.org.
