It isn’t another buzzword. Not in this Great Recession. It’s more like a buzz saw and all businesses had better know how to handle it.
The call for return on investment is being shouted from the C-level suite. What you are hearing are variations of “Show us the ROI … then we’ll talk about investing in your incentive program.”
What’s more, recent surveys indicate purchasing and procurement managers are increasingly involved in company incentive programs. Such interests shouldn’t be a surprise in this economy.
But not all marketing and sales executives are using a full definition of ROI as they plan their incentive programs because, and here’s the catch: the incentive industry needs a fuller understanding of what ROI means for travel and non-travel awards programs.
Shouldn’t everyone define ROI the same way?
Embrace your CFO
Many incentive programs define ROI too simplistically. ROI means an incremental gain over incremental cost. With most program objectives focused on sales—it’s the easiest to measure—any sales bump is compared to the cost of the incentive program.
That’s a good start. But only the direct costs of awards, program communication and administration are considered, again due to ease of measurement.
Why is this ROI definition too simplistic? Say you are at the races. You bet $2.00. The horse finishes first. You win $3.00. Your ROI is 50%. But that accounts for only the direct cost of your investment. What about gasoline? Public transportation? Parking?
Most investment costs in a business occur early on. Desired returns on investments may drag out three to five years. Realistic companies are now viewing incentive program costs in this same light.
Incentive program planners should collaborate with their anxious CFOs on how incentive ROI will be measured. Incentive planners may balk, but they should view the collaboration as a great opportunity to justify their program and perhaps enhance its budget.
Realistic ROI factors
Regardless of your business, your ROI estimate will be based upon assumptions. This process is no different than other investments your company makes.
Forecasting your incentive program ROI may take you beyond your comfort zone as you begin to realize the true downstream impact of your incentive program—and what has to be included to see the full impact.
Areas realistically included in a true assessment of incentive ROI include:
Sales volume
Operating expenses
Materials cost
Productivity improvements
Incentive program costs
The awards trap—first things first
Each of those critical business metrics comes with a degree of uncertainty, some higher than others. It’s tempting to just lump all of them together. It’s more tempting to ignore some factors to avoid slowing down the incentive program process.
Why? It’s more fun to talk about the awards. Avoid this temptation.
Incentive awards are earned, not won. They are not gifts. Therefore, a foundation must first be built that outlines objectives to be met and how those objectives will affect the rest of the company.
Plan first; outline awards later. Poor ROI planning can result in a loss, both short and long-term, of profit and, more importantly, cash flow in your company.
Examine your incentive program to determine where your investment risks and rewards will come from. Rate each assumption on a scale of 1-5 to determine which of these will carry the weight of driving your results
Prepare for the best case, most likely case, and worst case ROI scenario. Design your incentive rules structure to mitigate any potential barrier to your ROI success.
The costs trap—saving versus investing
Incentive programs should be considered as investments. As such, you need to put your focus more on the “R” in ROI. While it is true that many investments your company makes do have cost savings as an objective, your firm probably makes twice as many investments for other purposes.
With an incentive program aimed at your best assets—your people—do you really think that trimming the cost is a solution?
Art and common sense
The basic logic behind incentive ROI is to calculate returns before spending anything on an incentive program. That’s were the common sense is added to the art and science of incentive ROI.
And that is the true art of incentive ROI.
Robert S. Dawson, CITE, the founder of The Business Group and member of the Incentive Federation at www.incentivecentral.org, is the author of the just-published “The Secret to Incentive Program Success: Incentive ROI that makes bean counters smile!” He can be reached at [email protected].
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