How a “Carrot Culture” Helps Build Strong Organizations

As Adrian Gostick, my co-author, and I have traveled the world talking to leaders of every imaginable company, we have found a few key issues that are universal when it comes to managing people to drive business results. Most leaders are very good at preparing a strategic plan, mission and vision of where they want their organizations to go. The hard part is engaging their managers and employees to execute that plan. That is where an intelligent recognition strategy can help.

The people issues we hear leaders talk about the most are, without surprise, the basics of finding, retaining and engaging the right people to impact the bottom line. Can a recognition and incentive plan help? The answer is a resounding yes. Leaders next ask for a basic plan for recognition in their organization.

Let’s start with the research and then get to the plan.

The research

The latest research in our book The Carrot Principle (Simon & Schuster, 2007) proved some remarkable benefits of a thoughtful recognition strategy. These discoveries are based on over 230,000 employee engagement surveys, round-table discussions, focus groups, interviews and by studying some of best-in-class companies. It was the most comprehensive research ever conducted into recognition effectiveness, and provided valuable insights into the impact of recognition in retention, engagement and the bottom line. The PhD researchers found that recognition accelerated results in all of these areas.

How does recognition affect retention in the workplace?

Turnover is far and away the most significant uncalculated expense in the corporate world. Estimates to replace a departing employee range from a few thousand dollars up to a stunning 250 percent of that person’s annual salary. In this case, a little prevention is definitely worth a pound of cure. You can see why author Fred Reichheld found that just a five percent increase in employee loyalty can increase profits by as much as 50 percent.

Why does turnover cost organizations so much? Because of the type of people that are leaving. If poor performers were streaming out your door, turnover would be a good thing. But bad employees rarely if ever leave. Organizations are typically losing the very people they need to meet their goals, and all because of a lack of effective recognition. In fact, the US Department of Labor cites the number one reason people leave a job is a lack of appreciation.

Turnover is an estimated $5 trillion annual drain on the US economy, making it the most significant cost to its economy and one of the most ignored economic factors in business history. Compounding the problem is the fact that, with the global economy heating up, the shortage of skilled, talented workers is growing even more severe. By 2008, the US Bureau of Labor Statistics predicts a shortfall of 10 million workers in America. That means we are all in a race for talent, and the best place to find talent is under our noses. We must retain our solid and our outstanding performers by keeping them engaged. And yet our research found that half of the US workforce is not engaged on the job.

It is becoming increasingly difficult for leaders to ignore the destructive impact of turnover. In fact, a majority of the CEOs and senior leaders we work with cite retention of key employees as the most important factor to their success. Not one of, but the key factor.

So what is working? Overwhelming research points the finger at recognition. A Watson-Wyatt Reward Plan Survey of 3.5 million employees showed that the average turnover rate of employers with a clear reward strategy is 13 percent lower than that of organizations without one. In addition, a recent Gallup study revealed that an increase in recognition and praise in an organization can lead to lower turnover, higher customer loyalty and satisfaction scores, and increases in overall productivity.

KPMG LLP, the US audit, tax and advisory firm, discovered when it implemented its national recognition program, Encore. By providing managers with a formal way to recognize their employees and teams, the firm has improved overall employee survey scores.

On their annual work environment survey, KPMG asks the question, “Taking everything into account, this a great place to work.” In the three years since the introduction of an effective recognition system, positive employee scores on that question have increased more than 20 points. Now, it’s important to note that the three years in question were also a time of tremendous scrutiny and pressure for the accounting industry, with employee satisfaction in most of these firms nearing all-time lows.

Sylvia Brandes, director, compensation for KPMG’s 19,000 US employees says, “Recognition has become a fever.” She adds that KPMG has done their homework through analysis of the effectiveness of their recognition efforts. “What we found is that groups that do not present a lot of Encores [awards] in their organizations tend to have greater turnover. We also found turnover among people who received an award was half that of those who hadn’t received an award. And we found a correlation between functions or organizations that had higher scores for recognition and the amount of Encore awards that were given within that group.”

Bruce Pfau, Vice Chair of KPMG, stated that “Each point of turnover is worth $10-15 million to the bottom-line … recognition is the cheapest thing we can do to keep employees.” Those are pretty big numbers when you talk about impacting the bottom line of your organization through the use of targeted recognition.

We found similar results in organizations around the world. When employees are recognized they are more likely to stay on the job longer. The survey data from The Carrot Principle showed that when employees receive little to no recognition they rate their likeliness of staying another year at only 24.7 percent. When recognition is given often and done well, 70.0 percent say there’s a great chance they will stay. This is an enormous difference that any organization would do well to take note. When employees feel appreciated they are more likely to stay, period.

Percent with “very high” desire to work for their employer “one year” from now by level of recognition

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Does recognition affect employee engagement?

While retention scores uniformly increase as more recognition is given, engagement scores do not rise in the same pattern.

True engagement only occurs when employees feel highly recognized. The numbers tell the story. There is a statistically significant difference between employees receiving “good” recognition, where 16.7 percent feel engaged, as opposed to employees who receive “great” recognition, where 73.0 percent feel engaged in the company’s success. It showed us that great managers don’t recognize when it is convenient or affordable, but are consistent. The message is clear: if you want engagement you need to know how to do recognition right.

Percent of employees who are “highly engaged” by level of recognition

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What does a basic plan look like?

The building blocks of recognition create what we call a Carrot Culture. Great organizations and effective managers create a Carrot Culture one person at a time, by using a variety of inclusive and meaningful recognition experiences. Fortunately, you don’t have to re-invent the wheel every time you recognize. Here are four of the most common forms of recognition that make up the backbone of a healthy recognition culture:

• Day-to-day recognition: These are the pats on the back, the handwritten notes, the team lunches, on the spot award certificates, the gifts of thanks, and other day-to-day ways you praise and express gratitude to employees. This is often low-cost, but always high-touch recognition.
• Above-and-beyond recognition: When your people go above-and-beyond, they deserve a more formal response from the organization. These awards provide a structured way to reward significant achievements that support the company’s core values and business goals—whether the achievement of a sales goal, the implementation of an innovative idea, providing exceptional customer service, and so on.
• Career recognition: Most organizations provide a formal program to recognize their people on the anniversary of their hire date, giving managers a prime opportunity to highlight cumulative contributions. In most organizations, this is the most underutilized vehicle for rewarding and engaging employees.
• Celebration events: These celebrations reinforce your brand and thank everyone in a team, division, or an entire organization. Events to celebrate include successfully completing a key project, achievement of record results, company anniversaries, or new product launches.

These four recognition types are the essential tools of a Carrot Culture, a culture of recognition. Applied properly and they help to solve some of the most pressing questions business leaders have when it comes to retaining good employees, engaging them and impacting the organizations bottom line.

Does recognition impact the bottom line?

Return on Equity (ROE) is a critical measure that encompasses profitability, asset management and financial leverage. Calculated by taking the fiscal year’s earnings and dividing them by the average shareholder's equity for that year, it is used as a general indication of how much profit a company is able to generate given the investment provided by its shareholders.

According to the data, companies that effectively recognize excellence enjoy an ROE more than three times higher than the return experienced by firms that don’t.

Of this research, Karen Endresen, PhD of The Jackson Organization, said, “Up until this study, the link between recognition and financial performance was largely anecdotal. Recognition was considered by some to be an emotional afterthought, while those who believed that effective recognition would drive results had no hard data to prove it. This study took recognition results from myth to reality—from the soft side of business to a proven business essential.”

It is a simple truth: We work harder at places where we feel recognized and valued for our unique contributions. And valued and engaged employees bring great value and profit to their organizations.

BIO: Chester Elton – O.C. Tanner

Called “refreshing” by the Wall Street Journal and the “apostle of appreciation,” by the Globe and Mail, Canada’s largest newspaper, Chester is the SVP for the O. C. Tanner Recognition Company. He is the co-author of the wildly successful Carrot leadership books. The Carrot Principle by Simon & Schuster has been a New York Times and Wall Street Journal bestseller. His books have been translated into over 20 languages and are fast approaching one million copies sold. Chester lives in New Jersey with his lovely wife Heidi, their four exceptional children and a dog. For more information on Carrots go to www.carrots.com.