Incentive return on investment

Peter Gray, an independent Motivation Consultant, presents a regular Business Events News feature on current issues in the Conference and Incentive industries.

HOW is return on investment (ROI) measured in relation to incentive programs? It’s a question I’m asked fairly frequently and I wish there was a simple answer, but it depends very much on what the questioner regards as the investment; how the outcome is defined and whether the measurement is objective or subjective. There are often other conditions to be taken into consideration but those are the main ones.

Return on Investment (ROI) is easier to measure for incentive programs because the results are generally in advance of the measurement unlike conferences where the ROI is usually based on a results obtained after the event. However it is too easy to be over-simplistic.

The predominantly accepted definition of ROI is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year in question. The basic formula is: ROI = Net Profit divided by total investment multiplied by 100.

Simple! Or is it? As I mentioned earlier it depends upon whether the measurement is quantitative (i.e. based on cash values) or qualitative (based on psychological or perceived values).

For incentives the quantitative calculation may be relatively straightforward. A UK client some years ago would ‘invest’ - i.e. what it cost to design, administer, promote, measure, communicate with the participants, provide the reward and analyse the program results - £1million each year in incentive programs. By doing so the expected (and achieved) incremental sales resulted in an additional profit over each previous year of £6million - an overall net profit of £5million - an ROI of 500%. Now that’s not bad in anyone’s books and as the sales force in this case were all self-employed there were few, if any, other costs.

But incentive programs also have a psychological effect on the participants, creating a momentum which will see an improvement in behaviour even of those who did not achieve any reward. This is driven by the realisation that a reward could have been achieved with extra effort. This is harder to measure unless a list of overall objectives is established beforehand.

The example above of a 500% ROI was achieved in the finance sector where production costs are minimal, margins are generally constant and where discounting is almost unheard of. A sales incentive in almost any other industry has to take all these into consideration, particularly when setting targets.

Incentive rewards are earned, not won. They are not gifts. Therefore, a base must first be established that outlines objectives to be met and how those objectives will affect the rest of the company.