The only equation you need to determine your reward budget.

How do I work out the right budget to allocate to rewarding my employees in our recognition program?

We get this question a lot from prospects and clients -  and it is a good question. How do you know how much to reward your employees so that you drive engagement but aren’t just giving away money for nothing?

Don’t worry, it’s not as complex as it might seem!

Like with most things recognition, there’s no one size fits all answer to this one but there are some solid guidelines to help you figure out the magic number. These rules of thumb are a good starting place. Filter them with a dose of what is realistic, how you are current rewarding and where you want to get to and you should be able to find the right budget number for year one.

Remember, depending on how your budgets work, you don’t just have to rely on HR budgets to fund a rewards. Typically recognition is seen as a HR tool that everyone benefits from. However rewards may be able to be funded by each division. So before you decide on the final number, open the conversations with heads of other departments around how they will contribute. Afterall, they will enjoy the benefits so it’s only fair they contribute to the cause.

Once your program matures and is having an impact across the board, you can always increase what you spend on rewards. These amounts are not fixed so the greater the ROI of the program, the more you should be able to allocate to making it successful.

And remember, you are better to start small and ask for more budget supported by great results, than to throw everything at a new program and then have to pull it because it’s deemed to be ‘too expensive’ if business conditions change.

#1 Rewards as a % of wage budget (W%).

One way to look at a starting point is as a percent of your overall wage budget. When you correlate engagement with productivity, there is a significant increase in what can be achieved so rather than hiring more people, if you can allocate some of that funding to increasing engagement.

Start with 0.3 – 0.5% of your wage budget and see what that number looks like. Seem realistic? Great, lets run it by the next rule of thumb.

Are you scared to even consider the number you came out with? Move on to the next step.

#2 Averages value of rewards per annum per employee ($PAPE).

On average, companies in Australia issue about $150 worth of rewards per employee. This is the average figure for a company-wide recognition program, excluding service milestones. Service milestones start to skew these averages a little as some companies give large values and others no financial rewards at all. But straight and reward and recognition? The number is about $150 per employee.

If you calculate that out for your employees, how does that number sit?

#3 Three month to earn meaningful rewards (3M MR).

This is not a straightforward one to determine however based on all things being equal, can an employee reasonably earn enough to redeem something meaningful in the first three to four months of the program? There will obviously be some managers who go gung-ho from the outset and gives lots of rewards, and others who lag behind so use your best estimate.

Talk with your recognition provider about their range and pricing to make sure the actual rewards hit the mark in terms of being appealing to your audience and with a good range of low and high priced items. It’s all good to set your budget at $50 per employee but if the cheapest thing they can redeem is $200, it’s like FlyBuys circa 1994 all over again (and none of us are motivated by that!).

Working this one out obviously also relies on the assumption that managers will give rewards equally over a period of time – which is not how it works – but it’s still a good check point to guide your final budget numbers.

Now, looking at these three factors combined, you should be able to filter this with what is actually realistic for you this financial year and what you are doing today. Clearly you don’t want to ask for budget that is totally unrealistic but these guidelines will help build a business case.

You also don’t want to go all OTT from the outset, throwing rewards at everything. If you are doing simple ad-hoc recognition today, start to formalise and introduce a framework for rewarding. Over time, add more to the budget. If employees are not used to getting much, incremental increases will be appreciated and get you to the point where you can use the impact of the program to secure additional funding to improve reward and recognition over time.

Stay up-to-date on Twitter @workpointsplay and LinkedIn workpointsplay.