FOR YEARS, incentive return on investment was judged by a simple formula: Deduct the costs of the award from the increase in profits the incentive program generated. Some fairly new research on ROI has improved upon this basic approach. At Carlson Marketing Group, Tom Lacki, PhD, has developed Success Metrics as a measurement tool. This approach looks at a program's operational effectiveness, promotional success, and overall results, giving a more detailed assessment of its ROI. The SITE Foundation's “Determining the Return on Investment of Incentive Travel Programs,” conducted by Marion Joppe, PhD, and David Martin, PhD, from Ryerson University in Toronto, Canada, deals with how companies measure ROI, the reasons for measuring ROI, and the inclusion of soft costs. Most important, it provides a Program ROI Measures Template that can be used as a framework for ROI calculation in most programs.
These approaches are a vast improvement over the “I just know it works” approach of the past. But even they fall short of true ROI measurement. What is needed is an approach that considers the effect of an incentive program on every part of the company.
Let's assume that a company wants to increase its overall sales by 15 percent and designs an incentive program to achieve that goal. In all likelihood, that program will have a ripple effect on costs in many areas of the company. If the program is running successfully, it may call for increased production. If costs are increased in manufacturing to meet that demand (by hiring additional production workers, paying more overtime hours, purchasing materials at a premium price outside normal channels, etc.), shouldn't those costs be included in calculating the ROI of the program?
Similarly, financial departments in a company can be affected. If accounts receivable generally run 45 days but suddenly jump to 60 days or more because dealers or distributors are stocking up on merchandise, shouldn't the cost of borrowing be included in ROI determination?
Graduating from a sales-based to a companywide approach is the next level of incentive measurement. Such programs reassess the efficiency of various departments in the company and achieve the most accurate results.
Bob Vitagliano, CITE, is president of V Associates LLC, a consultancy headquartered in Wilmington, N.C. He can be reached at vassociates@ec.rr.com.