Do Employee Recognition Programs Improve Loyalty?

Ismael Groves & Zachary Parnell

Thunderbird School of Global Management

Executive Summary

There is no doubt that employee recognition programs have had both positive and negative effects on employee loyalty.  It is also obvious that programs are a staple for most human resource department – all Fortune 500 companies have formal recognition programs.  What is less evident:  if loyalty is the main objective, the definition of loyalty, and if programs truly improve loyalty in the workplace?

Two measures of loyalty are established: employee retention and employee satisfaction.  It is proven that retention and satisfaction are increased with effective recognition programs.  A recommendation for research includes the application of differing employee recognition programs within a single organization to measure what type of programs are more effective than others.

Introduction

There is no doubt that employee recognition programs (“programs”) have had both positive and negative effects on employee loyalty.  It is also obvious that programs are a staple for most human resource department – all Fortune 500 companies have formal recognition programs (Soomro).  What is less evident:  if loyalty is the main objective, the definition of loyalty, and if programs truly improve loyalty in the workplace?

Prior to reviewing known research on this subject, it is important to understand the definition of employee loyalty, also, how it is measured.  At a fundamental point, Brian Schrag explains loyalty as a devotion to an object in his work “The Moral Significance of Employee Loyalty” (Schrag 43).  In general, people can be very loyal to other people; and a devotion to one’s team, school, political party, or company is manifested in cultures around the world.  Loyalty in the workplace, like other organizations, is expressed as a desire to identify with that organization, to represent it and sacrifice for it.  People are devoted for many reasons, most importantly due to reciprocity – the hope that the organization reciprocates the loyalty, hard work, financial gain, or any other elements of these relationships (Schrag 46).  The elements of human loyalty are very intrinsic and thus, difficult to measure.  However, most researchers have chosen to study a few key rudiments of human resources to better understand loyalty, making the intrinsic value much more measureable.

In Martha Peak’s “The Bottom Line is Retention”, Frederick Reichheld explains that a company’s success is significantly tied to employee retention, which he callsemployee loyalty (Peak 7).  So Reichheld has effectively married employee loyalty to employee retention.  Retention, easily measureable in every organization, can help identify the effects of programs on loyalty.

Employee satisfaction is a second measure that has been linked to loyalty.  Matzler and Renzl’s study, “The Relationship between Interpersonal Trust, Employee Satisfaction, and Employee Loyalty”, has confirmed “that trust in colleagues and trust in management are strong predictors of employee satisfaction, and employee satisfaction, in turn, influences employee loyalty” (Matzler 1267).  Matzler and Renzl go on to explain that because the link is so strong between satisfaction and loyalty, “many companies monitor employee satisfaction systematically and continuously using standardized questionnaires that capture many facets of satisfaction” (Matzler 1268).

Thus, two measureable elements of loyalty have emerged: retention and satisfaction.  After considering employee loyalty and its measurability, research has been collected to better understand if employee recognition programs actually improve employee loyalty.

Facts & Findings

The research in this area collectively communicate that programs can be effective as long as they provide employees with a true sense of recognition, are designed to be flexible, and meet individual employee expectations. According to a survey of 3,000 employees by Watson and Associates in 2006, the three key drivers of employee loyalty are: “management’s ability to demonstrate leadership and strategic direction that demonstrates confidence in the prospects for long term corporate success, effective rewards programs and clear two-way employee communication” (Faria 16).  This same survey notes that companies with highly engaged and motivated employees have higher profits and returns for shareholders. Furthermore, money, job security and advancement opportunities, which have traditionally been regarded as the “panacea” for employee loyalty, have little bearing on an employee’s satisfaction. Lastly, the research also made clear that the simple act of having a manager recognize an employee publicly for a job well done is a positive driver of employee loyalty.

Now that we have determined the type of employee programs which are most successful in increasing employee retention, we will determine the components an employee loyalty program should have to be successful. According to Jeremy Faria (Edward J. O’Connor), the four key components an employee loyalty program should have are: “a wide selection of awards to meet today’s diverse population, gifts that display the corporate symbol to ensure the employer’s message is long lasting, administrative burdens taken care of by the provider, and online programs for both the recipient to select and human resources to track” (Faria 16).

According to Danielle Harder in “Employers still showing loyalty to service award programs”:  62.5% of employees chose a form of jewelry as a recognition item, and coincidentally this is the type of item companies are most likely to give employees on their own. However, after jewelry, there is a disconnect between the items employees want and what they receive. As an example of this trend, engraved gifts are the second most offered item by companies, yet this item ranks in sixth place on the list of most desirable items by employees (Hader 17).  As this trend illustrates, it is not enough for a company to offer recognition awards – it must offer the right type of recognition items. Through these findings it is also evident that employee recognition efforts should be flexible and built to meet the individual employee needs. Companies will not be successful it they adopt a “one size fits all approach” to employee loyalty programs.

Discussion & Analysis

While it is extremely important for companies to have a well established employee recognition program, programs do not exist in a vacuum and depend on other factors to be successful. A great deal of research contends that employee retention is often determined in the hiring and selection process. According to O’Connor and Fiol, “Not telling the truth about who you are as a leader and the way things will be done in your organization is another sure recipe for generating additional employee mismatches, dissatisfaction and desertion” (O’Connor 40).  This article goes on to cite companies such as Harley-Davidson and Southwest Airlines despite not offering the most competitive wages in their industry manage to attract and retain top performance due to their open communication and distinctive culture. O’Connor and Fiol also state that there is a direct correlation between “lower turnover, reduced training costs, increased efficiency, improved customer satisfaction, recruiting, and retention, increased customer and employee referrals, increases productivity, and enhanced financial outcomes” (O’Connor 42) and an attractive corporate culture.  Elements most closely tied to building an attractive culture are, “supporting development, implementing incentives, providing recognition, communicating information, collecting information, reducing performance barriers, providing lifestyle support and creating new venture opportunities.” (O’Connor 41)

As this research illustrates, companies which have been successful in building an attractive culture have embraced open communication, employee development and have built recognition programs which account for individual employee preferences.

Another challenging area is how to adequately measure the impact employee loyalty programs have on employee retention. This correlation has become increasingly hard to determine considering the tight labor markets being experienced today. Since employees have less job opportunities to choose from, they are changing positions less frequently. Simply considering increased retention in isolation could be attributed to the effectiveness of employee retention programs, but a closer analysis would dispel this notion, as the labor market has undoubtedly played a role in increased retention. Also, as  Leo Jakobson notes in his article “Loyalty vs. Engagement”, despite a rise in employee retention, “three-quarters of HR executives reported being ‘concerned’ or ‘very concerned’ about retaining high performing mid-level managers once the recession ends and the war for talent resumes” (Jakobson 6).  This concern adds credence to the need to maintain adequate employee recognition programs and practices to ensure employees are satisfied and engaged and not merely waiting to change companies once the job market improves.

Conclusions & Recommendations

As previously mentioned, little research has been completed regarding direct cause and effect correlations between programs and retention or satisfaction.  This paper has argued that retention and satisfaction are the two greatest measureables employers have to gauge employee loyalty.  We recommend the following research model.

A researcher should implement employee recognition program (A) at multiple locations (regions) in a large multinational corporation.  This program should be paired with an employee satisfaction survey given to employees semi-annually.  Lastly, retention should also be measured during a 5 year time-span.  During the same span, employee recognition program (B) should be launched within the same corporation, at different locations than program (A).  All of the same statistics will be gathered at both program locations.  Researchers will be able to 1) Measure the retention rates in both locations, 2) Measure the satisfaction rates in both program regions, and 3) Measure the difference between the two programs – which should indicate the loyalty between the two regions.

Researchers should be aware that the company’s locations employees have a similar mix of job roles, number of employees, similar education levels of employees.  All in all, the sample of the two regions should appear very similar.

This type of research would help manager identify the effort that should be involved in developing effective programs in their organization.  It may also indicate, over the next few decades, any shifts in power in the labor market – employer versus employee.  Concluding, more research will also help managers understand what type of programs are the most effective as more companies grow with programs in mind.

Works Cited

Edward J. O’Connor, C. Marlena Fiol. “Spinning A Winning Web: Attracting and Retaining Top Performers.” THE PHYSICIANEXECUTIVE SEPTEMBER 2004: 40-42.

Faria, Jeremy. “Recognize me, motivate me, retain me.” Canadian HR Reporter April 2007: 18.

Hader, Danielle. “Employers still showing loyalty to service award programs: Survey.”Canadian HR Reporter April 2010: pg. 17.

Jakobson, Leo. “Loyalty vs Engagement.” Incentive May 2010: 6.

Matzler, Kurt, and Birgit Renzl. “The Relationship between Interpersonal Trust, Employee Satisfaction, and Employee Loyalty.” Total Quality Management & Business Excellence 17.10 (2006): 1261-1271. Business Source Complete. EBSCO. Web. 16 Oct. 2010.

Peak, Martha H. “The bottom line is retention.” Management Review 85.8 (1996): 7. Business Source Complete. EBSCO. Web. 16 Oct. 2010.

Schrag, Brian. “THE MORAL SIGNIFICANCE OF EMPLOYEE LOYALTY.” Business Ethics Quarterly 11.1 (2001): 41-66. Business Source Complete. EBSCO. Web. 16 Oct. 2010.

Soomro, Samreen.  Employee Recognition Programs.  Ezine Articles. Web. 12 Oct. 2010. <http://ezinearticles.com/?Employee-Recognition-Programs&id=1325943>