Effective Rewards and Recognition Strategy: Enhancing Employee
Engagement, Customer Retention and Company Performance
Pankaj M. Madhani , Associate Dean and Professor,
ICFAI Business School
Introduction
Organizations across the world seek to retain their talent. The loss of an employee has been
proven to incur exorbitant costs in the recruitment, selection, and training of a replacement,
costs amounting to a full year’s compensation or more. Moreover, an organization’s human
resources are among its most precious; skilled and competent employees - and thus their
retention - are acknowledged as being imperative for business success. Rewards and
recognition are important resources offered by the organization that motivate employees to
accomplish organizational goal and hence play a key role in increasing employee retention
within organizations. When employees are satisfied with the rewards and recognition plan
offered by their organization, this leads to employee retention. An individual’s motivation to
remain with an organization is greatly determined by the rewards and recognition strategy. To
guarantee not only the retention of but also optimum performance from its employees an
organization must offer a range of diverse means of rewarding its employees. With up to 80%
of a company’s expenses coming from human resources, it is vital that the workforce be
engaged. Employee engagement promote retention of talent, enhances customer satisfaction,
foster customer loyalty, company reputation and overall stakeholder value. Engagement is
found to correlate with positive organizational outcomes like lower absenteeism, lower
turnover intention, lesser costs and higher growth. Effective reward and recognition systems
influence employee engagement and enhance work performance. Rewards and recognition
have already been established as an antecedent of employee engagement (Fairlie 2011).
Employee Engagement
Rewards and recognition have major potential to positively affect employee engagement levels
and corporate performance, in a world in which 4 out of every 10 employees are not engaged
(Brown and Reilly 2013). According to Gallup’s annual engagement survey conducted in 2018,
only 34% of the U.S. workforce is engaged, with 53% not engaged and 13% actively
disengaged. Employee engagement is about the emotional connection employees have with the
organization they work for. High levels of employee engagement enable an organization to
attain better performance, competitive advantage, higher productivity and lower employee
turnover. Aktar and Pangil (2018) empirically found that effective rewards and recognition
positively influence employee engagement.
Employee Turnover Cost
The direct economic costs associated with losing talented employees includes: the costs of
replacing an employee; the separation of the employee; downtime; recruiting; interviewing;
on-boarding; and training and development of the new hire. The costs associated with losing
employees and recruiting, selecting and training new employees often exceed 100% of the
annual compensation for the position and vary between 1.5and 2.5 times the annual salary paid
for a job (Cascio 2006).
___________________________________________________________________________
Madhani, P. M. (2020). “Effective Rewards and Recognition Strategy: Enhancing Employee
Engagement, Customer Retention and Firm Performance”, The Journal of Total Rewards, Vol.
29, No. 2, pp. 39-48.
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In addition to these direct financial costs, losing employees can also lead to work disruptions,
loss of tacit or strategic knowledge embedded with organization, losses in productivity or
customer service, diminished diversity and even turnover contagion effect on remaining
employees (Allen, Bryant and Vardaman 2010). Both the direct and indirect economic costs of
employee turnover significantly impact on organizational performance and success. Park and
Shaw’s research (2013) presented a strong correlation between turnover and organizational
performance, showing that a one percent increase in turnover, results in a 40% reduction in
workforce productivity and a 26% loss in financial performance. This suggests failing to keep
employees can detrimentally affect profitability.
Employee Engagement – Key Benefits
Employee engagement is much more than employee satisfaction, as satisfaction refers to
‘contentment’ which doesn’t create drive as engaged employees understand and commit to the
organization’s mission and values and go beyond the call of duty towards the organization’s
goals which naturally drives high performance. Effective rewards and recognition strategy is
considered as one of the tools for enhancing organizational commitment. Enhancing
organizational commitment among employees is an essential element because that will result
in higher employee commitment, enhancing retention, increasing their job satisfaction and
improving performance. Committed employees have a sense of identification and belonging
with an organization. Commitment represents something beyond loyalty to an organization and
involves an active relationship with the organization such that individuals are willing to
dedicate their talents in order to contribute to the organization’s well-being. Employees with
high level of commitment contribute positively to the organization. In addition, organizational
commitment encompasses an employee’s belief in an organization’s goals and values, and
reflects a desire by an employee to remain a member of the organization and be loyal to it.
Engaged employees are energetically and effectively connected to their company’s goals,
which, in turn, positively affects organizational performance, whereas disengaged employees
are more concerned about time rather energy or dedication during their job performance. Poor
employee engagement also affects customer service, customer engagement, and ultimately
customer retention and profit. Organizations need highly engaged employees in their workforce
as employees with higher engagement at works can contribute more in organizational success
and competitiveness. Firms with highly engaged employees have been found to enjoy an
increase of more than 5% in operating margin and of 3% in net margin, compared to firms with
highly disengaged employees. Moreover, 72% of highly engaged employees (compared to 27%
of disengaged employees) believe they can positively affect customer service with this leading
to obtaining customer satisfaction, loyalty and firm profitability (Rabbanee, Haque, Banik and
Islam 2019). When companies enhance engagement of their employees, they accomplish
something that would be difficult for their competitors to imitate (Ghosh, Rai, Chauhan,
Baranwal and Srivastava 2016).
Illustration
Construction-equipment maker Caterpillar's increased employee engagement resulted in $8.8
million annual savings from decreased attrition, absenteeism and overtime in a European plant;
a 70% increase in output in less than four months in Asia Pacific plant; a decrease in the breakeven point by almost 50% in units/day, and a decrease in grievances by 80% in unionized plant
and a $2 million increase in profit and a 34% increase in highly satisfied customers in a startup plant (Vance 2006).
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Effective Rewards and Recognition Strategy: Critical Success Factors
Rewards and recognition practices feature as an integral component of HR strategy. Reward is
the material and psychological payoffs given to an employee as recognition for good
contribution and for performing tasks well in the workplace. Organizations can’t merely
replicate the rewards and recognition practices of other organisations; rather rewards and
recognition strategy must be created to support an organisation’s unique culture. Developing
rewards and recognition strategy has typically been more of an art than a science.
People want to be rewarded, but do not know what they need. There is no guarantee that the
various rewards and recognition provided will affect each individual employee in the same
way, and this should be accounted for. A system of rewards cannot therefore expect to be
successful unless the organization has a thorough understanding of the various needs,
expectations, and values - as well as education, skills, and potential - of its diverse employees.
Hence, rewards and recognition plan will be applied differently, depending on employee
segment and profile: functions, roles, skills, geography and demographics (age, gender, income
level and family status). Many companies put together their rewards and recognition package
by relying more on instinct and opinion than on hard quantitative analysis to decide what will
be more motivating to employees. When properly designed and executed, rewards and
recognition strategy can be a powerful driver of business success. An effective rewards and
recognition strategy enables organisations to deliver the right types of rewards and recognition,
to the right people, at the right time, for the right reason.
Managers put lot of efforts for performance enhancement of employees and then are shocked
when they remain unmotivated, unappreciative and unhappy as it lacks proper design and
implementation of rewards and recognition plan. Organizations should adopt unconventional
and creative methods to restructure their rewards and recognition programs for engaging and
retaining their workforce. Effective rewards and recognition program can either drive or
diminish organisational performance, depending on how well it connects with and supports the
HR strategy as well as overall business strategy. Five critical success factors of effective
rewards and recognition strategy are given below:
1. Holistic
Effective reward and recognition plan must be holistic to address the entire employment
‘Value Proposition’.
2. Integrated
The components of rewards and recognition plan must fit together and complement each
other.
3. Aligned
The rewards and recognition plan must be designed to support the organization’s unique
HR strategy and business strategy.
4. Measurable
The rewards and recognition plan should be based on hard facts and quantitative
analysis.
5. Delivered
Effective communication, administration as well as ongoing monitoring of the rewards
and recognition strategy is critical to realising the sustainable benefits.
One size doesn’t fit all when it comes to rewards and recognition. As rewards and recognition
strategy are more about best fit than best practice, rewards and recognition should complement
each other to support all dimensions of employee motivation. A useful approach is to aim for
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consistency with local flexibility. Individuals place different values on various aspects of
rewards and recognition, and these valuations change over time. While differing dimensions
make the job of designing rewards and recognition plan more complex, they can also create
opportunities to target HR budget and eliminate potentially wasteful, one-size fits-all spending.
Rewards and Recognition: Complementary Relationship
Rewards and recognition are means for organizations to demonstrate how valuable employees
are to them. Effective rewards and recognition strategy also signal that an organization cares
about the well-being of its employees and is willing to invest in them. Rewards and recognition
can be differentiated by describing that rewards are tangible or intangible incentives offered to
employees after the accomplishment or success, whereas recognition is the public
acknowledgment of an employee’s contribution to the organization. The use of recognition
serves as reminders of the commendable performance that led to their receipt. The memory of
such recognition will further reinforce that the organizational values the employee. When
employees receive appreciation and recognition for their work; such employees reciprocate
with a sense of obligation and respond with continued high performance. However, recognition
is not sufficient in itself and must come along with rewards. Rewards can control behavior
externally, as they can announce future benefits to those who expect them. Rewards can
increase the likelihood of a behavior to be repeated over time as it aims at increasing specific
behaviors. Similarly, rewards without recognition would saturate employees with tangible
items that would gradually lose significance. Hence, recognition is integrated with rewards in
order to produce a more inclusive, effective, and broader HR strategy.
Rewards include both tangible and non tangible financial rewards. Effective recognition
strategy should cover all three types of recognition within an organization, i.e. organizationwide formal recognition, departmental-specific informal recognition and everyday
spontaneous recognition. Everyday recognition validates the attitude of caring and appreciation
for a majority of employees. It also gives support, credibility and meaning to the few who
receive the nominated or earned formal or informal awards. While rewards may be great for
attracting people towards a desired outcome, recognition is considered as a tool for sustaining
this attraction for retaining the motivation. Both rewards and recognitions are interlinked and
complementary as they act as reinforcement mechanism to create a continuous performance
enhancement culture in the organizations (Figure 1).
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Reinforce Intrinsic Motivation
(Relational nature)
Strategic
function
Rewards
(Tangible
Intangible)
Employee engagement
Customer retention
Firm performance
Recognition
(Formal
Informal
Day-to-day)
Administrative
function
Reflect Extrinsic Motivation
(Transactional nature)
Figure 1: Rewards and Recognition: Complementary Relationship
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(Source: Model developed by author)
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Rewards being transactional in nature have an immediate influence on the employees. As
financial rewards has option value; the employee can purchase whatever would provide the
most value to him or her, however, such rewards may become unmemorable and unemotional
transactions and hence employees may derive less meaning, enjoyment and appreciation from
such rewards. Reward is a simple contract and tends to serve an administrative or maintenance
function but not a strategic one. Usually, rewards are more appropriate for the behaviors of
adherence to rules or meeting standards.
At the same time, a genuine recognition is more powerful though it is relative. Recognition, is
appropriate to intrinsically motivated behaviors such as commitment and initiative that
translates into service above and beyond the call of duty, and an eagerness to change and move
forward, they are a source of strategic differentiation. Such intrinsic behaviors also reflect the
unique value and contribution that employees give to a firm. The unique value of employees,
combined with the processes that integrate, align and deploy that value are ultimately what
make up an organization’s unique core capabilities. By strengthening and enhancing behaviors
that are a source of differentiation and uniqueness, recognition serves a strategic function.
Reward and recognition are quite distinct and represent a major duality in human motivation.
The basic difference between rewards and recognitions is that rewards are transactional, and
recognitions are relational. In other words, rewards are associated with ‘if-then’ ways of
working. They are conferred in the context that ‘if you do “A” only then, you will get “B” in
return’. Thus, rewards are about the “instrumentality” that it establishes where instrumentality
refers to an “in order to” relationship. Recognition, on the other hand, is more to do with
relational exchange between individuals. Recognition is about noticing and honouring. It may
encourage and support an action but does not establish the instrumentality that reward does.
According to various management theories, rewards and recognition are differentiated in Table
I.
Table I:
Reward versus Recognition
Sr. Management
No.
Theory
Contributor
1 Maslow
(1954)
2 Herzberg
(1966)
3
Deci
(1975)
Reward
Subsystem
Recognition
Subsystem
Coping/deficiency
motivation
Work motivation
based on hygiene
factors
Extrinsic
motivation
Expressive/growth
motivation
Work motivation
based on motivator
factors
Intrinsic
motivation
(Source: Table developed by author)
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Intrinsic Versus Extrinsic Motivation
Rewards and recognition represent two fundamentally different mechanisms of human
motivation. Rewards involve extrinsic motivation while recognition enhances intrinsic
motivation (Figure 2). Rewards increase employees’ feelings of satisfaction, achievement,
status, control, and power, while recognition serves as reminders of the commendable
performance that led to its receipt and hence reinforce that the organizational values the
employee.
Intrinsically motivated behaviours are performed in the absence of any apparent external
contingency as those behaviours are motivated by the underlying need for competence and selfdetermination (Deci 1975). Intrinsic motivation focuses only on the activity itself while
extrinsic motivation considers the instrumental value of the activity. Managers can prompt
intrinsic motivation through careful job design or tangible incentive programs. However, there
are many instances where it is difficult to redesign a job, and budgets may be too restricted to
provide tangible incentives. Effective rewards and recognition strategy can help create work
experience that meets the needs of employees and encourage them to contribute extra efforts.
Optimal mix of rewards and recognition not only increase employee motivation and
engagement, they also reduce organization expenditures and hence leads to win-win situation
for both employers and employees.
The whole essence of recognition system is that it has been argued that rewards will motivate
some of the people all the time and, perhaps, all of the people some of the time. But it cannot
be solely relied on to motivate all of the people all the time, hence rewards have to be reinforced
by recognition, especially those that provide intrinsic motivation. Firms with strong strategic
recognition programs exhibit greater productivity, lower turnover and greater returns on
investment than other firms in their industries (Nelson 2012).
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Non-Financial
Rewards
Low
Optimal
Mix
Recognition
(Intrinsic
Motivation)
Rewards
(Extrinsic
Motivation)
Optimal
Mix
High
Low
High
Financial
Rewards
Figure 2: Rewards and Recognition: Extrinsic versus Intrinsic Motivation
(Source: Model developed by author)
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Aberdeen Group Study
Study by Aberdeen Group and distributed by the Incentive Research Foundation (IRF)
highlights the importance of rewards and recognition as a vital compensation component. The
study titled “Incentive Success: Best-In-Class Sales Management” underscored the competitive
advantages companies can gain when they venture outside the traditional realms of
compensation. After comparing various sales professional compensation techniques used by
organizations achieving “best in class” stature against companies that lagged, the study found
that the compensation techniques that worked most effectively across top-performing firms
included a mix of non-financial rewards. In the Aberdeen study, the most common variable
that successful companies shared was not their size, or their business model or even their
industry category. It was their utilization of non-financial rewards. Organizations that took a
more holistic approach and implemented non-financial reward and recognition programs
outperformed rivals that did not (Aberdeen 2014).
Effective Rewards and Recognition Strategy: Enhancing Employee Engagement,
Customer Retention and Firm Performance
With effective rewards and recognition strategy companies should take care of their employees
first, because doing so will result in more engaged and satisfied employees delivering a better
customer experience, creating loyal customers who generate greater profits. A major
antecedent of employee job performance is employee job satisfaction because unless
employees are happy with their job they will not be willing to take the extra effort, to serve the
customer. When an individual customer is exposed to the emotional display of a group of frontline employees, the customer’s own emotional state is likely to become aligned with that of the
employees. Effectively managed rewards and recognition systems will have a strong positive
influence on employee attraction, motivation, and retention. Happy and dedicated employees
provide better service, can enhance customer satisfaction and positively contribute to a firm’s
bottom line financials, such as sales growth, market expansion or even profitability (Tortosa,
Moliner and Sanchez 2009).
Effective Rewards and Recognition Strategy
Effective rewards and recognition strategy should match employee’s preferences and needs as
employee differ in terms of risk preferences, career stage, skill differences, rewards
preferences, and other factors. Thus, companies are introducing new data mining and analytics
solutions to better understand employee’s preferences and customize rewards and recognition
plans. Managers should remember that the value of rewards and recognition plan is often
idiosyncratic to each employee. Not all employees value the same rewards, and not all people
value one reward to the same extent. Thus, managers should carefully match rewards and
recognition to the specific personal needs of employee. The effectiveness of rewards and
recognition plan depends on management’s ability to match these plans with employees’
characteristics, situations, and preferences. Rewards and recognition initiative can be effective
in improving internal service quality (Kopelman, Gardberg, and Brandwein 2011).
Internal Service Quality
Internal service quality is referred as the quality of work life - defined by the favourable
conditions of a workplace that support and promote employee satisfaction by ensuring that
rewards and recognition system meet or exceed their expectation. If organizations provide high
levels of internal service quality, employees perceive the organization as supportive and
committed to long-term investments in employees. A high level of internal service quality will
result in higher levels of employee satisfaction, productivity and retention (Ennew 2015).
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The employee satisfaction is imperative for providing better and timely service to the customers
and achieving their satisfaction and loyalty. Reward and recognition are viewed as some of the
most important factors related to employee satisfaction (Madhani 2019). Employee satisfaction
enhances retention and also drive down costs through reduced recruitment and training
expenditure and all the cost efficiencies resulting from higher service productivity. Rewards
and recognition play an important role in building and sustaining the commitment among
employees that ensure a high standard of performance. Employees are certainly closer to their
organizations and perform better jobs when they receive healthier rewards and recognition in
their organizations (Khawaja, Mazen, Anwar and Alamzeb 2012).
External Service Quality
Given the growing competition in global markets and the pressures from the international
economic environment, customer retention becomes an even more important corporate
objective. To achieve this, service organizations focus on service quality. A positive service
climate is an important antecedent of employee enthusiasm, sensitizing employees towards
providing superior service quality and delivering value to the customer during the encounter.
Customer contact employees are very important because their service performance represents
the intangible component of the customer’s perception of service quality, which influences
customer relationships and loyalty. Providing a satisfying work environment for employees’
results in to employee engagement and job satisfaction. Employee satisfaction positively
affects customer satisfaction as satisfied employee respond effectively to customer needs and
hence leads to good customer service. According to Heskett, Sasser Jr and Schlesinger (1997),
employee satisfaction is “reflected” in terms of customer satisfaction (also referred as
satisfaction mirror) which in turn generates business growth and profitability.
Firm Performance
Satisfied customers will continue to buy goods and services from the company and leads to
higher customer life-time value (CLV). Customer satisfaction is an important determinant of
repeat purchasing behaviour, and therefore it is the essential component of sustainable
competitive advantage (Montfort, Masurel and Rijn 2000). Customer satisfaction leads to
customer loyalty because it breeds attachment to the provider and motivates repurchase
intentions. Loyal customers amplify sales through frequent repurchases and customer referrals
and also reduce service costs and marketing expenditures because they are familiar with the
service provider’s processes and are reluctant to switch. There is a high correlation between
high customer retention and company profitability. Grønholdt and Martensen (2019) confirm
the expected positive impact of employee satisfaction, loyalty and attitudes on customer
satisfaction and loyalty and, in turn, on firm profitability.
Figure 3, shows how effective rewards and recognition strategy enhance employee
engagement, customer retention and overall business performance.
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Compelling
Place to Buy
Compelling
Place to Work
Rewards and
Recognition
(Optimal Mix)
Employee –
Engagement
Satisfaction
Productivity
Retention
Internal
Service Quality
Low
Turnover
Satisfaction
Mirror
Customer–
Satisfaction
Trust
Loyalty
Retention
Compelling
Place to Invest
Long term
Relationship
Cross-selling
&
Up-selling
External
Service Quality
Firm Growth
Revenue
Profit
Valuation
Firm
Performance
Figure 3: Effective Rewards and Recognition Strategy: Enhancing Employee Engagement, Customer
Retention and Firm Performance
(Source: Model developed by author)
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Following illustration explains how Zappos has effectively used rewards and recognition
strategy to enhance employee engagement, customer retention and overall business
performance.
Zappos
Zappos.com, the online shoe and clothes retailer illustrates how optimal design of rewards and
recognition lead to satisfied, engaged and empowered employees. Zappos believes that the
most productive employees work for the intrinsic rewards that come in helping others (Palmeri
2010). The company wants to ensure that employees aren’t focused only on the pay, but that
they also believe in the company’s long-term vision and want to be a part of its culture. (Hsieh
2010) Perks, as well as a comprehensive benefits package and wellness programs, are an
integral part of Zappos’ everyday culture as management believes that if employees are happy,
other challenges will be met. Employees can earn Zollars (Zappos dollars) for participating in
the required training by answering questions or volunteering to help out. Those Zollars can be
spent at an onsite store, making rewards and recognition visible and real (Zappos 2012).
Deployment of effective reward and recognition strategy has helped Zappos to achieve higher
customer retention as 75% of Zappos sales come from repeat customers who act as advocates
for Zappos (Askin, Petriglieri and Lockard 2016). In 2009, Zappos was acquired by Amazon
for $850 million.
Conclusions
There are numerous components of employee engagement and satisfaction: compensation, job
security, flexibility, meaningful work and professional growth. Compensation refers to
remuneration provided by the employer for services rendered by employees, which include
skills, time and their efforts. This research specifically focuses on rewards and recognition that
are contingent on an employee’s work performance. As people represent a potential source of
sustained competitive advantage for the organizations, the area of the rewards and recognition
become significant to their success or failure. Effective rewards and recognition practices
enhance internal service quality. The internal quality of a working environment contributes
most to employee engagement and satisfaction. Highly engaged and satisfied employees with
greater employee productivity and superior service quality leads to better overall service
performance. Therefore, HR managers should implement better internal service quality policies
and practices that focus on employee engagement, satisfaction, and service orientation to
enhance firm performance. Effective rewards and recognition strategy enhances employee
satisfaction; satisfied employees provide good service, which leads to satisfied customers, from
whom more profits are generated. The effects of internal service quality practices on employee
satisfaction vary in part according to the type of service and hence HR managers should tailor
internal service quality to ensure that the practices fit the particular jobs and meet the
expectations of employees in various service settings.
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ABOUT THE AUTHOR
Pankaj M. Madhani, Ph.D., (pmadhani@iit.edu) earned bachelor’s degrees in chemical
engineering and law, and an MBA from Northern Illinois University, a master’s degree in
computer science from the Illinois Institute of Technology and a Ph.D. in strategic management
from CEPT University. He has more than 32 years of corporate and academic experience in
India and the United States. Madhani works as associate dean and professor at ICFAI Business
School (IBS). He received the “IBSAF Best Teacher Award” twice (2013 and 2017). He has
published several management books and more than 300 book chapters and research articles in
various academic and practitioner journals. He also served as editor of the IUP Journal of
Corporate Governance. Madhani received the “Best Research Paper Award” at the 2016
International Management Convention. He is a frequent contributor to The Journal of Total
Rewards, having published more than 11 papers. His main research areas include sales
compensation, corporate governance and business strategy.
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Electronic copy available at: https://ssrn.com/abstract=3672972