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ipc

www.incentivecentral.org

WHITE PAPER

Why Incentive
Programs Endure
Recessions
Keeping quality
employees happy is
an important factor
in your business
success.

H

istorically, incentive programs, unlike other sales
and marketing strategies,
have endured economic
downturns. In fact,
according to a review of
past Incentive Federation and industry studies,
the incentive industry managed to grow
following the recessions that occurred in the
late 1980s, after September 11, 2001, and
during the downturn of the late 1990s, following the dot-com collapse. In fact, there is
no evidence that the industry suffered serious
declines following the recession in the late
1970s/early 1980s, and the industry continued to prosper even during the Great
Depression when the industry’s trade
magazine at the time, Premium Practice,
was filled with advertising pages.
This is not to say that the incentive business
is completely immune to recessions. In the
early phase of a downturn, the effects can be
dramatic. Projections for consumer, sales, and
channel partner programs, or even employee
productivity programs, can go haywire when
the economy experiences a jolt, as it has over
this past year. Fewer participants qualify for
rewards, and companies seek ways to cut
costs by curtailing motivational meetings and
incentive travel programs. Afterwards, the business tends to experience a rebound as organizations turn to highly targeted, cost-effective,
and measurable programs aimed at maximizing
specific market or cost-saving opportunities.
This white paper, produced by the
Incentive Performance Center (IPC),
explores why incentive programs tend to
thrive during times of economic stress,
despite the initial hit when bad times set in.
It helps explains why savvy companies turn
to incentive programs to drive business
growth even while cutting budgets for other
business development functions.

Advertising May Falter but
Incentive Programs Persist
Numerous industry studies reveal a pervasive
decrease in spending on
advertising during economic
downturns. Consider just one
recent survey, a summer 2008
ipc

www.incentivecentral.org

EXECUTIVE WHITE PAPER
WHITE PAPER

survey of 100 marketers conducted by the
Association of National Advertisers. It
found that 47 percent of respondents who
answered a question about budget cutbacks
planned to trim spending by at least 11 percent, and of those, about 10 percent would
slash spending by more than 30 percent.
The remaining 53 percent expected cuts in
the 1-10 percent range.

Why Savvy Companies Turn
to Incentives During Times of
Economic Uncertainty
Five fundamental reasons explain why
incentive programs, unlike other sales and
marketing strategies, withstand economic
downturns:
1. Low fixed costs, variable costs driven
by performance, high potential return
2. Ability to effectively target audiences
(no pay and spray)
3. Relative ease of measurement
4. Flexibility
5. Potential for both short-term and
long-term results
These five points are described in detail
below, so you can see what it means to your
organization in practical terms:
1) Low fixed costs, variable costs driven
by performance, high potential return
Set-up and ongoing communication are
the primary fixed costs of any incentive pro-

gram, whether it’s an employee, channel
partner, consumer or sales initiative. The
standard fixed costs related to strategic planning, communications, training, and systems
are approximately 20 to 30 percent of any
incentive program. This involves the time or
fees allotted for:
â…˘ Developing a strategic plan and budget for your campaign, which might include
meetings with key representatives of your
audience to make sure your plan stands the
test of reality;
â…˘ Designing and implementing a tactical
communications and engagement plan;
â…˘ Setting up the necessary systems for
managing and measuring the program, and
then monitoring results so that you can make
strategy shifts if necessary;
â…˘ Organizing meetings or events, etc., to
help communicate the effort.
In properly structured open-ended programs, the remaining 70-80 percent of the
cost of your program is not incurred until the
program has achieved its goals, or some portion of those goals, and the rewards have
been issued or redeemed. Compared with
advertising, direct marketing, and event marketing, well-designed incentive programs
have by far the highest level of cost accountability related to results. This is probably the
No. 1 reason for increased incentive usage
during tough times.

Fixed costs of commonly used sales and marketing strategies

20%

Publications

Consulting

40%

Advertising

60%

Direct Mail

80%

Public Relations

100%

The fixed cost of incentive
programs, unlike other sales
and marketing strategies,
is 20 to 30% of the program.
The remaining 70 to 80%
is paid only when the
program’s goals are reached.
(source: Incentive Research Foundation)

â—Ź

Incentive
Programs

Fixed Costs of Commonly Used Sales and Marketing Strategies

2

In addition, for those companies with a
low tolerance for risk, incentive plans can
be close-ended, designed to fit a set budget.
While not as motivating as open-ended programs, these programs can deliver improved
performance during times of extreme
budget stress.
2) Ability to effectively target audiences
Long before the days of the Internet and
database marketing, organizations turned to
incentive programs to boost sales and productivity because they didn’t need technology to identify the people most important to
their business. As long as there was an economical way to deliver a message to the targeted audience, organizations over the last
100 years or more have used incentive programs to target offers, enhancements, or
other engagement strategies to change
behavior and, subsequently, business performance. As noted above, incentive programs are attractive during tough economic
times because the cost of communicating
with a well-identified audience of people is
generally much less than mass-marketing
programs, such as advertising, direct mail,
and trade shows. Why? Because you have
already identified the audience that can
change your business outcome if they focus
on what they can do to help you achieve
those goals. In good times or bad, business
results depend on the willingness of a key
audience to do what they can as customers,
channel partners, salespeople, or employees
to contribute to our business success.
Today, using a low-cost Internet portal to
communicate your programs with a simple
enrollment or opt-in strategy, organizations
can deploy highly targeted, personalized,
and measurable ways to communicate on a
one-to-one basis with the people who can
drive your business results, no matter what
the audience or business goal. And this can
be done via the Internet very economically.
3) Relative ease of measurement
Naysayers argue that it’s impossible to
effectively measure any marketing program,
because of the multiple factors that can
affect outcomes. Sure, the actions of a competitor, the economy, or internal operational
and other issues can affect outcomes of any
program. That said, effectively structured
ipc

www.incentivecentral.org

WHITE PAPER
incentive programs make it possible to
screen out the noise of external factors
to find at least some cause and effect.
Here’s how:
â…˘ Build at least three measures into
your program: one outcome measure,
such as increased sales, or increased
output, or decreased defects; and two
related process measures—i.e., actions
that can contribute to the results, such as
making more cold calls (easily measured
today with a customer relationship management system), or complete machine
maintenance compliance to reduce
downtime, or consistently recalibrate
equipment to reduce defects, etc. Then
monitor the correlation between the specific behaviors promoted in the program
to achieve results and outcome. These
leading and lagging measures allow one
to confirm the inter-relationships and to
produce the desired results.
4) Flexibility
Things change. It’s much easier to address
change when the audience is highly defined
and the communication program in place.
You might wish to offer bonus points to promote a new feature your product team turned
out; you might want to add bonus points to
behaviors that early results indicate are having a highly effective impact on results.
You might learn that product knowledge
is an issue and that you have to give your
sales team a quick refresher. It’s quite difficult to change a trade show, advertising, or
direct marketing program in mid-stream but
it’s fairly easy, in a timely manner, to adjust
an incentive program.
5) Potential for both short-term and longterm results
Companies, of course, turn to incentive
programs to achieve short-term results. They
like the equation of being able to put down
only about 30 percent of the total potential
cost, with the remaining budget determined
by the degree of performance improvement.
That said, programs structured based on
research and best practices have the additional value of producing residual value.
That’s because the behaviors promoted during the incentive program generally have
long-standing value to the organization.

are not as easily engaged as in a
more trusting era.
It is a great testimony to the
power of incentive programs that
they have continued to flourish
despite the fact that so few business
people have formal training in program design and that so relatively
few organizations strategically
design, implement, and measure
their programs. The best programs
weave an essential combination of
business planning, inspiration, technology, communications, and mathematical measurement that merit
professional help—either from
trained internal or external
resources. The Incentive
Performance Center recommends
that any organizations seeking to
maximize results through incentive
programs employ either internal or external
resources trained in incentive program
design. The first place to start is with organizations that have individuals certified by
the Incentive Marketing Association, which
offers a complete program planning curriculum on strategic program design.
As companies make the shift from massmarketing to target-marketing, they will ultimately turn to incentive programs as a primary solution rather than a secondary or
complementary tool, for all the reasons outlined above. Each time an organization
replaces a mass marketing technique with a
one-to-one strategy, such as an incentive
program, it will realize a ripple effect of
benefits—engagement, satisfaction, behavioral changes, etc.— that will last over time.

Few Marketing Options
Offer Such a High Degree
Of Accountability
This so-called over-hang effect helps explain
why so many organizations whose cultures
are based on promoting positive behaviors
outperform their competitors in terms of
share price performance or financial results.
Compelling evidence shows that incentives drive bottom line performance and the
business and academic communities have
begun to understand and embrace their use
for a variety of constituents and wide range
of needs. In the area of employee motivation, a study by the Forum for People
Performance Management and
Measurement— “The Impact of Employee
Attitudes on Market Response and Financial
Performance”—revealed a direct link
between employee satisfaction and customer
satisfaction, and between customer satisfaction and improved financial performance.
Other studies target channel partners, sales
personnel and consumers.

A Note of Warning
The positive, long-term benefits of incentive
programs are not a simple do-this, get-that
proposition. The era of the carrot and the
stick is arguably gone, as people look for a
higher level of satisfaction in their business
relationships and are not quite as likely to
respond to a simple offer. For any incentive
program to succeed, the target audience
has to be convinced that the behavior
change is in their best interests, and people

The IPC is the corporate outreach arm of
the Incentive Federation, an organization
comprising associations, publications, trade
shows, incentive providers, and others involved
with all aspects of incentives, rewards,
recognition, and promotional products.
The IPC manages incentivecentral.org, a
not-for-profit information portal providing
comprehensive, objective information to help
organizations improve the
motivation, engagement, and
performance of customers,
channel partners, salespeople,
and employees.

3

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Why incentive programs_endure_recessions

  • 1. ipc www.incentivecentral.org WHITE PAPER Why Incentive Programs Endure Recessions Keeping quality employees happy is an important factor in your business success. H istorically, incentive programs, unlike other sales and marketing strategies, have endured economic downturns. In fact, according to a review of past Incentive Federation and industry studies, the incentive industry managed to grow following the recessions that occurred in the late 1980s, after September 11, 2001, and during the downturn of the late 1990s, following the dot-com collapse. In fact, there is no evidence that the industry suffered serious declines following the recession in the late 1970s/early 1980s, and the industry continued to prosper even during the Great Depression when the industry’s trade magazine at the time, Premium Practice, was filled with advertising pages. This is not to say that the incentive business is completely immune to recessions. In the early phase of a downturn, the effects can be dramatic. Projections for consumer, sales, and channel partner programs, or even employee productivity programs, can go haywire when the economy experiences a jolt, as it has over this past year. Fewer participants qualify for rewards, and companies seek ways to cut costs by curtailing motivational meetings and incentive travel programs. Afterwards, the business tends to experience a rebound as organizations turn to highly targeted, cost-effective, and measurable programs aimed at maximizing specific market or cost-saving opportunities. This white paper, produced by the Incentive Performance Center (IPC), explores why incentive programs tend to thrive during times of economic stress, despite the initial hit when bad times set in. It helps explains why savvy companies turn to incentive programs to drive business growth even while cutting budgets for other business development functions. Advertising May Falter but Incentive Programs Persist Numerous industry studies reveal a pervasive decrease in spending on advertising during economic downturns. Consider just one recent survey, a summer 2008
  • 2. ipc www.incentivecentral.org EXECUTIVE WHITE PAPER WHITE PAPER survey of 100 marketers conducted by the Association of National Advertisers. It found that 47 percent of respondents who answered a question about budget cutbacks planned to trim spending by at least 11 percent, and of those, about 10 percent would slash spending by more than 30 percent. The remaining 53 percent expected cuts in the 1-10 percent range. Why Savvy Companies Turn to Incentives During Times of Economic Uncertainty Five fundamental reasons explain why incentive programs, unlike other sales and marketing strategies, withstand economic downturns: 1. Low fixed costs, variable costs driven by performance, high potential return 2. Ability to effectively target audiences (no pay and spray) 3. Relative ease of measurement 4. Flexibility 5. Potential for both short-term and long-term results These five points are described in detail below, so you can see what it means to your organization in practical terms: 1) Low fixed costs, variable costs driven by performance, high potential return Set-up and ongoing communication are the primary fixed costs of any incentive pro- gram, whether it’s an employee, channel partner, consumer or sales initiative. The standard fixed costs related to strategic planning, communications, training, and systems are approximately 20 to 30 percent of any incentive program. This involves the time or fees allotted for: â…˘ Developing a strategic plan and budget for your campaign, which might include meetings with key representatives of your audience to make sure your plan stands the test of reality; â…˘ Designing and implementing a tactical communications and engagement plan; â…˘ Setting up the necessary systems for managing and measuring the program, and then monitoring results so that you can make strategy shifts if necessary; â…˘ Organizing meetings or events, etc., to help communicate the effort. In properly structured open-ended programs, the remaining 70-80 percent of the cost of your program is not incurred until the program has achieved its goals, or some portion of those goals, and the rewards have been issued or redeemed. Compared with advertising, direct marketing, and event marketing, well-designed incentive programs have by far the highest level of cost accountability related to results. This is probably the No. 1 reason for increased incentive usage during tough times. Fixed costs of commonly used sales and marketing strategies 20% Publications Consulting 40% Advertising 60% Direct Mail 80% Public Relations 100% The fixed cost of incentive programs, unlike other sales and marketing strategies, is 20 to 30% of the program. The remaining 70 to 80% is paid only when the program’s goals are reached. (source: Incentive Research Foundation) â—Ź Incentive Programs Fixed Costs of Commonly Used Sales and Marketing Strategies 2 In addition, for those companies with a low tolerance for risk, incentive plans can be close-ended, designed to fit a set budget. While not as motivating as open-ended programs, these programs can deliver improved performance during times of extreme budget stress. 2) Ability to effectively target audiences Long before the days of the Internet and database marketing, organizations turned to incentive programs to boost sales and productivity because they didn’t need technology to identify the people most important to their business. As long as there was an economical way to deliver a message to the targeted audience, organizations over the last 100 years or more have used incentive programs to target offers, enhancements, or other engagement strategies to change behavior and, subsequently, business performance. As noted above, incentive programs are attractive during tough economic times because the cost of communicating with a well-identified audience of people is generally much less than mass-marketing programs, such as advertising, direct mail, and trade shows. Why? Because you have already identified the audience that can change your business outcome if they focus on what they can do to help you achieve those goals. In good times or bad, business results depend on the willingness of a key audience to do what they can as customers, channel partners, salespeople, or employees to contribute to our business success. Today, using a low-cost Internet portal to communicate your programs with a simple enrollment or opt-in strategy, organizations can deploy highly targeted, personalized, and measurable ways to communicate on a one-to-one basis with the people who can drive your business results, no matter what the audience or business goal. And this can be done via the Internet very economically. 3) Relative ease of measurement Naysayers argue that it’s impossible to effectively measure any marketing program, because of the multiple factors that can affect outcomes. Sure, the actions of a competitor, the economy, or internal operational and other issues can affect outcomes of any program. That said, effectively structured
  • 3. ipc www.incentivecentral.org WHITE PAPER incentive programs make it possible to screen out the noise of external factors to find at least some cause and effect. Here’s how: â…˘ Build at least three measures into your program: one outcome measure, such as increased sales, or increased output, or decreased defects; and two related process measures—i.e., actions that can contribute to the results, such as making more cold calls (easily measured today with a customer relationship management system), or complete machine maintenance compliance to reduce downtime, or consistently recalibrate equipment to reduce defects, etc. Then monitor the correlation between the specific behaviors promoted in the program to achieve results and outcome. These leading and lagging measures allow one to confirm the inter-relationships and to produce the desired results. 4) Flexibility Things change. It’s much easier to address change when the audience is highly defined and the communication program in place. You might wish to offer bonus points to promote a new feature your product team turned out; you might want to add bonus points to behaviors that early results indicate are having a highly effective impact on results. You might learn that product knowledge is an issue and that you have to give your sales team a quick refresher. It’s quite difficult to change a trade show, advertising, or direct marketing program in mid-stream but it’s fairly easy, in a timely manner, to adjust an incentive program. 5) Potential for both short-term and longterm results Companies, of course, turn to incentive programs to achieve short-term results. They like the equation of being able to put down only about 30 percent of the total potential cost, with the remaining budget determined by the degree of performance improvement. That said, programs structured based on research and best practices have the additional value of producing residual value. That’s because the behaviors promoted during the incentive program generally have long-standing value to the organization. are not as easily engaged as in a more trusting era. It is a great testimony to the power of incentive programs that they have continued to flourish despite the fact that so few business people have formal training in program design and that so relatively few organizations strategically design, implement, and measure their programs. The best programs weave an essential combination of business planning, inspiration, technology, communications, and mathematical measurement that merit professional help—either from trained internal or external resources. The Incentive Performance Center recommends that any organizations seeking to maximize results through incentive programs employ either internal or external resources trained in incentive program design. The first place to start is with organizations that have individuals certified by the Incentive Marketing Association, which offers a complete program planning curriculum on strategic program design. As companies make the shift from massmarketing to target-marketing, they will ultimately turn to incentive programs as a primary solution rather than a secondary or complementary tool, for all the reasons outlined above. Each time an organization replaces a mass marketing technique with a one-to-one strategy, such as an incentive program, it will realize a ripple effect of benefits—engagement, satisfaction, behavioral changes, etc.— that will last over time. Few Marketing Options Offer Such a High Degree Of Accountability This so-called over-hang effect helps explain why so many organizations whose cultures are based on promoting positive behaviors outperform their competitors in terms of share price performance or financial results. Compelling evidence shows that incentives drive bottom line performance and the business and academic communities have begun to understand and embrace their use for a variety of constituents and wide range of needs. In the area of employee motivation, a study by the Forum for People Performance Management and Measurement— “The Impact of Employee Attitudes on Market Response and Financial Performance”—revealed a direct link between employee satisfaction and customer satisfaction, and between customer satisfaction and improved financial performance. Other studies target channel partners, sales personnel and consumers. A Note of Warning The positive, long-term benefits of incentive programs are not a simple do-this, get-that proposition. The era of the carrot and the stick is arguably gone, as people look for a higher level of satisfaction in their business relationships and are not quite as likely to respond to a simple offer. For any incentive program to succeed, the target audience has to be convinced that the behavior change is in their best interests, and people The IPC is the corporate outreach arm of the Incentive Federation, an organization comprising associations, publications, trade shows, incentive providers, and others involved with all aspects of incentives, rewards, recognition, and promotional products. The IPC manages incentivecentral.org, a not-for-profit information portal providing comprehensive, objective information to help organizations improve the motivation, engagement, and performance of customers, channel partners, salespeople, and employees. 3