How to Budget for a Successful Employee Recognition and Rewards Program

Before you know it, it will be that time of year again: budgeting season. Time to start crunching numbers to determine how much budget you need to set aside next year to reward and recognize your employees.

In this blog, we’ll break down what you need to know to plan an employee recognition budget that’s strategic, sustainable and built for lasting impact.

Building a Case for Employee Recognition

But, let’s back up a step. Do you need to make a case for employee rewards and employee recognition programs in order to budget? If so, a Gallup Study proves employee rewards create ROI through increased employee engagement:

• Companies with high employee engagement are 23% more profitable.
• Highly engaged business groups experienced 81% reduction in absenteeism and a 23% increase in productivity.
• Employees who communicate openly and frequently trust each other more, work faster and are more productive.
• Companies with highly engaged employees see 61% less turnover, saving their companies thousands of dollars in turnover and recruitment costs each year.

If you need more help convincing your leadership to establish a rewards and recognition program (and allocate budget accordingly), here’s a great article on making the business case for an employee recognition and engagement program.

Determine Your Employee Recognition Program Components

Assuming you have executive leadership buy-in, the next step is defining what your rewards and recognition program will look like. What moments, special occasions and employee milestones will you celebrate?

You might include recognition for:

• Years of service milestones (e.g., 5, 10, 15 years of service)
• Peer-to-peer recognition programs
• Onboarding and/or retirement recognition
• Performance-based recognition
• Safety awards
• Values-based recognition
• Training and development milestones
• Life event celebrations (e.g., birthdays, weddings, new parents)
• Spot recognition
• Team-based awards

Keep in mind, you’ll likely need to include a different budget line for each type of recognition, all of which rolls up into your total recognition budget.

For example, service anniversary awards may have a set gift value tied to tenure, while spot recognition may be more flexible depending on manager discretion. Planning for all of these elements helps you create a comprehensive, balanced recognition program that fits within your overall budget.

According to SHRM, the most common types of recognition are timely, developed with input from employees, and tied to business outcomes. Use these factors to craft a program that is just right for your organization’s mission, vision and values.

Types of Employee Recognition and Rewards Budgets

Next, you will need to determine what type of budget works best for your organization. There are three main types:

Fixed Budgets

Fixed budgets set a dollar amount (usually the same amount per employee) for the program during a specified period of time, typically one year.

• Pros: Provides easy accounting of program costs
• Cons: Offers less flexibility to reward when dynamic changes occur within your organization

Allocated Budgets

Allocated budgets are also for a specified period of time, but managers are given discretion to deliver when, how and to whom they want.

• Pros: Gives the managers who are most familiar with employees the opportunity to reward them for specific behavior or initiatives
• Cons: May be counter-intuitive to building a positive team culture in that it is de-motivating to employees who receive nothing

Variable Budgets

Variable budgets are a bit more complex and are based on a performance-based system of evaluating employees. In other words, these budgets are usually determined by financially defining the specific goals you want from your employees and setting a value to what they are “worth” to the company.

• Pros: Programs with variable budgets can provide greater business outcomes, creating potential to increase rewards with the additional gains; variable budgets can be allocated, giving managers more or less depending on program performance
• Cons: If goals and objectives are not outlined prior to program start, reporting and metrics may not be available to support your budget

The Society of Human Resources Management (SHRM) suggests that a rewards budget of 1% or more of total payroll is key for a successful program. Of course, this figure varies based on the number of employees you have and the types of recognition you want to implement.

If you don’t know where to start, consider going with the simplest model first and as your program grows, you can evolve your budget model to suit your needs. Or, if you want help finding the best fit for your organization, reach out to an Inspirus recognition specialist — we’re here to help.

Conduct a Quick Enterprise Assessment

Most companies spend more than they realize because the management of their rewards and recognition program is decentralized. Departments or business units that are “doing their own thing” have adhoc activities, different distribution methods, no budget tracking and little alignment with company goals or values.

To get a more complete picture of what your program landscape looks like, poll each department and business unit as to what they are spending and how they are rewarding their workforce, before you begin your budgeting process. Use the ‘what, when, where, why and how’ method to gather information. It will likely shed some light on inefficiencies, redundancies, gaps and wastefulness. By consolidating all your programs, you’ll be armed to budget more effectively.

Understanding Tax Implications

When planning your rewards and recognition budget, it’s important to be mindful of potential tax implications. In many cases, cash, prizes and other awards given to employees can be considered taxable income.

Tax treatment can vary based on how rewards are structured and delivered, so it’s a good idea to consult with your legal, finance or accounting teams to ensure your program remains in compliance. You’ll also want to review the latest IRS guidelines on employee recognition and rewards to understand how different types of rewards and recognition may be taxed.

Taking tax considerations into account early will help you budget more accurately and avoid unexpected costs down the line.

Continuously Review Your Budget

A budget is not a “set-it-and-forget-it” business component. Conducting a semi-annual budget review to make sure your program is on track is a smart business practice. It will give you good sight lines into whether budget spenders are using their budget too soon and are running out (missing opportunities for recognition later in the period), or if they are “sandbagging” their spending until the end of the period, missing earlier critical recognition opportunities.

Want to learn more? Get more tips and a step-by-step guide for building a budget in our eBook.

Work With Inspirus to Design a Recognition Program That Fits Your Budget

Building an impactful employee recognition and rewards program — and budgeting for it effectively — can feel overwhelming. If you’re ready to dive deeper or want expert guidance on setting the right budget for your organization, our Inspirus specialists are here to help.

We’ll work with you to design a program that fits your culture, goals and budget, while helping you maximize the impact of every recognition moment.

Contact us today to learn how to build an employee recognition strategy that drives real results.