The Financial Upside of Employee Recognition

Across the U.S., employers are struggling with soaring turnover rates. According to new figures from Gartner, 37.4 million people will voluntarily quit their jobs this year, a quite staggering 20% increase on pre-pandemic levels. 

The pernicious effects of employees leaving permeate throughout an organization, slashing productivity, damaging the corporate culture, and incurring significant replacement expenses. Studies suggest that on average, it costs a company six to nine months of an employee’s salary to replace them and costs U.S. companies more than half a trillion dollars annually. For enterprises currently hemorrhaging staff, the dollars quickly mount up. Given the financial impact of employee turnover, the Great Resignation is clearly a matter for the office of the CFO.

The Cost of ‘Thanks’ in the Workplace

The good news is there is a simple solution at hand. By recognizing employees — both for their achievements at work and for important life events outside of work — businesses can address the two-headed beast of low productivity and high turnover. Recognition ensures people feel engaged, connected, and respected, even in the most difficult of times. These are all factors that play a huge part in turnover rates. Additionally, it builds loyalty and breeds productivity, which is good for both the company’s morale and bottom line. 

And, the financial implications of employee recognition are indeed profound. Recent research from Gallup and Workhuman looking at the impact of employee recognition in the workplace suggests that a company of around 10,000 people can save an estimated $16.1 million in turnover annually when they make recognition an important part of their culture. This is because such workers are more strongly bound to their companies and inspired to put in their best work. 

The numbers speak for themselves. People who feel recognized at work are four times more likely to be engaged than those who don’t. Put simply, when employees feel like their organization is invested in them, they are more invested in their organization. 

In fact, that same data shows that people who have positive recognition experiences are three times more likely to strongly agree they feel a sense of loyalty to their company, and this loyalty translates into staying power. 

The Role of the CFO

Research suggests, despite the cost benefits of employee recognition, many organizations are not fully investing in recognition nor truly integrating it into their culture. Nor are they adequately budgeting for it.

Nearly two-thirds of leaders (64%) [surveyed] say there is no budget allocated to recognition at all. – Gallup-Workhuman Report

This is largely a reflection of the priorities of business leaders and the fears that hold them back from investing in these programs. Leadership struggles to understand the impact of employee recognition, what it actually looks like, and how they can implement it without driving costs up. In fact, 81% of leaders surveyed for the Gallup-Workhuman report say recognition is not a major strategic priority for their organization. Clearly, given the cost implications, it should be the CFO’s role as the financial steward of the enterprise to work alongside the chief human resources officer (CHRO) in championing recognition as a value driver. 

More specifically, asking employees what they need from management and leadership can help glean insight into what drives employees to succeed professionally and emotionally in the workplace. It’s also never a bad idea to ask employees how they feel about recognition to show your company is committed to focusing on appreciation and mental wellbeing. From here, the CFO and CHRO can work together to decide what is the best plan of action for implementing recognition programs. 

In addition to providing the C-level sponsorship needed for effective recognition programs, CFOs will also need to step up to the plate by allocating sufficient funds to such programs. Despite the fact that recognition can improve business outcomes, almost half (46%) of senior leaders interviewed for the aforementioned research do not know what percent of their payroll budget is allocated to recognition, and more than one in 10 do not know if their organization has an allocated budget for it. Not knowing isn’t even the biggest problem: Nearly two-thirds of leaders (64%) say there is no budget allocated to recognition at all. 

What’s Next?

Contrary to popular belief, integrating a recognition program is not nearly as difficult as it may seem. It can be as simple as celebrating an employee’s birthday, new baby, or other major life milestones. It can also be as sophisticated as necessary, bringing in employee recognition companies to help develop a personalized plan for every individual workplace. The important part is starting somewhere. 

As for a formal budget for these programs, the exact number depends on the size of the company and industry. However, a good rule of thumb is for CFOs to start by budgeting 1% of their employee payroll for recognition programs and go up from there. However, data has shown that more frequent recognition has a greater positive effect on engagement and retention than salary increases alone.

A good rule of thumb is for CFOs to start by budgeting 1% of their employee payroll for recognition programs and go up from there. 

Although implementing an effective recognition plan has to be a company-wide effort, there are things the CFO can do specifically to champion this effort. For example, offering more regular bonuses can help show appreciation to employees on a consistent basis. This shift to variable compensation helps safeguard the company in the event of an economic downturn and promotes an environment in which everyone feels appreciated. 

The CFO Remit Expands Again

At a time when most businesses face increased costs and ever tighter margins, doubling down on appreciation for your employees is a simple route to saving significant sums through reduced turnover and improving profitability with a more engaged and productive workforce. There is a clear opportunity for CFOs to take the lead in promoting and resourcing a recognition culture working across the business with the HR function and managers. Organizations that take this approach will soon find they are better at retaining existing talent and attracting new people to the company. That will prove an important lever for growth that ties directly into the bottom line. 

The remit of the CFO continues to expand. In the era of the Great Resignation, my view is that financial oversight must include a strong focus on creating the right workplace culture and investing in ensuring that employees are formally recognized for all they do.

Scott Dussault is chief financial officer at Workhuman.