The Carrot Principle: How the Best Managers Use Recognition to Engage Their Employees, Retain Talent, and Drive Performance

Got carrotphobia? Do you think that recognizing your employees will distract you and your team from more serious business, create jealousy, or make you look soft?

Think again.

The Carrot Principle reveals the groundbreaking results of one of the most in-depth management studies ever undertaken, showing definitively that the central characteristic of the most successful managers is that they provide their employees with frequent and effective recognition. With independent research from The Jackson Organization and analysis by bestselling leadership experts Adrian Gostick and Chester Elton, this breakthrough study of 200,000 people over ten years found dramatically greater business results when managers offered constructive praise and meaningful rewards in ways that powerfully motivated employees to excel.

Drawing on case studies from leading companies including Disney, DHL, KPMG, and Pepsi Bottling Group, bestselling authors Gostick and Elton show how the transformative power of purpose-based recognition produces astonishing increases in operating results -- whether measured by return on equity, return on assets, or operating margin. And they show how great managers lead with carrots, not sticks, and in doing so achieve higher

• Productivity
• Engagement
• Retention
• Customer satisfaction

The Carrot Principle illustrates that the relationship between recognition and improved business results is highly predictable -- it's proven to work. But it's not the employee recognition some of us have been using for years. It is recognition done right, recognition combined with four other core traits of effective leadership.

Gostick and Elton explain the remarkably simple but powerful methods great managers use to provide their employees with effective recognition, which all managers can easily learn and begin practicing for immediate results. Great recognition doesn't take time -- it can be done in a matter of moments -- and it doesn't take budget-busting amounts of money.

This exceptional book presents the simple steps to becoming a Carrot Principle manager and to building a recognition culture in your organization; it offers a wealth of specific examples, culled from real-life cases, of the ways to do recognition right. Following these simple steps will make you a high-performance leader and take your team to a new level of achievement.

1

A Missing Ingredient

Striding home from the local mercantile, Charles Goodyear glanced down at a charred piece of India rubber in his hands and hoped it wouldn't be another dead end. It was 1839. For five roller-coaster years, he had searched for the missing ingredient that would stabilize rubber. Had he finally found it? It was a little frightening, really, to be teetering on the edge of something revolutionary like this, especially considering how many times he had come this far and failed.

Goodyear's first brush with fortune had come when he was just twenty-six. He had set up the first hardware store in America to sell domestically manufactured farm implements. The timing was right, and the venture was successful. In fact, it was doubly successful from Goodyear's perspective: not only did he own the store, he was a partner in the firm that produced many of the implements sold there.

Everyone, including Goodyear, agreed that fortune and fame were his for the taking -- everyone, that is, except fate. Within three years, several of Goodyear's American suppliers closed their doors. Goodyear, who had been just inches from wild success, served the first of many sentences in debtors' prison.

About the same time, rubber companies around the country were universally closing their doors. Although the new waterproof gum elastic from Brazil had captivated the public when introduced, it was untested and had a lot of bugs. In the heat, rubber products became soft, sticky, and smelly. In the cold, they became hard and brittle and often cracked.

But while most were giving up on rubber, Goodyear became fascinated by the substance and the challenge of stabilizing it. The waterproof gum from Brazil was cheap enough for him to purchase even while in debtors' prison. With little to occupy his time, he spent hours working it with his wife's rolling pin, though with no success. Once out of prison, he tried mixing the rubber with magnesia and lampblack dissolved in turpentine. Next, he combined the rubber with magnesia and boiled it in quicklime and water. Over the next five years, Goodyear tried hundreds of experiments. Then one day, he rubbed nitric acid on a sample of rubber to remove its coating of bronze paint. It turned the sample black, but also made it smooth and dry and almost clothlike. The acid, it turned out, was a curing agent.

It seemed to work so well, in fact, that the U.S. Post Office in Boston ordered 150 rubber mailbags cured with nitric acid in the hope that waterproof bags would protect the mail from rain and snow during delivery. Goodyear made the mailbags, then stored them while he took his family on a celebratory vacation. They returned to find the bags had rotted in the warm storage room; the acid had cured only the rubber's surface, leaving the interior to decompose.

The year 1839 was difficult. The Goodyear children dug in the neighboring farmer's fields for potatoes to eat. Farmers gave them free milk. Many times that winter Goodyear considered giving up, but then he would experience a minor breakthrough, and success would seem so close that he had to continue.

And now, after five long years, it seemed he had done it. He stopped in the winter night to examine the charred piece of rubber in his hand. How had it happened? The last few moments were a blur.

He had gone to the mercantile to demonstrate his new mixture of rubber and sulfur to the men gathered there. When they laughed at him, he responded in disgust, forcefully flipping a small piece of the rubber-sulfur mixture in his hand onto the nearby stove. He wanted to storm from the store, but rubber and sulfur cost money. So he went to the stove to pick up the piece he imagined had melted on the hot surface. But instead of softening, the rubber had charred like leather, and on the edge of the charred section was a brown rim, where the rubber had perfectly cured.

Heat was what had been missing.

The transformation of rubber from a useless substance to a resilient product was as simple as adding a missing process -- heat, in the form of steam. Goodyear named the process vulcanization after the Roman god of fire, Vulcan.

Today it's hard to imagine life without Goodyear's rubber. There would be no electricity, no cars, no computers, no bicycles, no radios or televisions, no phones. We wouldn't have airplanes, washing machines, or toasters. We wouldn't even have our favorite pair of old sneakers.

Years later, those chronicling his life called Goodyear's moment of discovery an accident. Goodyear strongly disagreed. He argued that if he had not "applied himself most perseveringly to the subject," the accident would have had no meaning. He asserted that he was the only man "whose mind was prepared to draw an inference" from the incident. In other words, he was prepared and ready to go when the rubber hit the sizzling, pot-bellied stove.

Goodyear was a visionary. Not only could he see a future that others could not, he was the only man in a crowded room to recognize the introduction of heat to sulfur and rubber for what it was -- a revolutionary, transformational acceleration process.

We've found that in business, there are leaders who are visionaries. They see the untapped potential of their workforces and believe it is possible to reach higher. They have spent years experimenting with their leadership styles. They have consulted mentors, read business books, and attended seminars. Through their efforts, they have brought their employees a long way toward reaching their maximum potential -- but not all the way. And there's the rub.

Show us any leader who sets clear goals, communicates openly, respects people and treats them fairly, holds people accountable, and creates trusting relationships, and we'll show you a leader who's almost got it right.

Show us an organization where people are coming to work on time, doing their jobs, and feel satisfied, and we'll show you an organization that is close to achieving its full potential.

Show us some good management books that promise to transform your organization from ordinary to extraordinary, and we'll show you wisdom that will push you nearer to your goals than you've ever gotten before.

Almost. Closer. Nearer. Some would argue that they are good words. For some leaders, they might even be good enough. But for those of us who are determined to reach beyond the ordinary to our maximum potential, "almost there" is a frustrating place to be.

What we need is an accelerator.

Scientists have known the secret of accelerants for decades, adding them to speed up chemical reactions, achieving results more quickly. Accelerators work the same way in business, making the things you're doing work better, faster, and more smoothly, without throwing you (or your organization) off balance.

It may sound like magic, but it isn't. The relationship between a management accelerant and improved business results is highly predictable. In fact, an accelerant is the missing ingredient that will bridge the gap between where your team is now and where it can be. And in the workplace, there is no accelerator with more impact than purpose-based recognition. The numbers prove it.

First, the Research

Our guts always told us that acceleration was the answer. During the past fifteen years, we have visited more than two dozen countries, taught seminars to almost a million people, and spent thousands of hours consulting with leaders of Fortune 500 titans. Through that time, we have repeatedly witnessed the power of recognition to improve not only morale but business results as well. But what we really needed -- and what drives businesses in general -- is unmistakable empirical evidence. That evidence is what makes this book unique. Here are just a few preview insights from our research that might startle you:

• In response to the question "My organization recognizes excellence," the organizations that scored in the lowest fourth overall had an average return on equity (ROE) of 2.4 percent, whereas those that scored in the top fourth had an average ROE of 8.7 percent. In other words, companies that most effectively recognize excellence enjoy a return that is more than triple the return of those that do so the worst.
• The teams and offices rated most highly by employees in response to, "My manager does a good job of recognizing employee contributions," also typically place in the top scores for customer satisfaction, employee satisfaction, and retention.
• Of the people who report the highest morale at work, 94.4 percent agree that their managers are effective at recognition. In contrast, 56 percent of employees who report low morale give their manager a failing grade on recognition, and only 2.4 percent of people who have low morale say they have a boss who is great at recognition.

Numbers like these are the result of one of the most extensive and in-depth studies ever conducted on workplace productivity, involving ten years of research by The Jackson Organization and 200,000 interviews with managers and their employees around the globe. Employing a large team of expert researchers, analysts, and consultants, The Jackson Organization collaborated with us to quantify the connections among employee satisfaction, business outcomes, and recognition.

Our primary research tool was surveys, but pure numbers can be cold and uninspiring, so in addition, to cull the emotions and thoughts behind the data, we conducted several dozen focus groups in five major metropolitan cities where we met with groups of line managers from all industries. And finally, throughout 2005 and well into 2006, we conducted one-on-one interviews with hundreds of managers and their employees, primarily in the United States and Canada, but also in the United Kingdom, Germany, China, South Africa, Singapore, Malaysia, Thailand, and Turkey. (For more detail about the studies, see the appendices.)

And after all this research? What we have found about motivation, effective management, and the impact of the accelerator is actually quite remarkable. We think Goodyear would be proud.

So if you're tired of almost achieving your potential, if coming close isn't nearly good enough anymore, let's shift things into high gear. Get ready to accelerate.

Not-So-Soft Recognition

Lying idle. That's exactly what the recognition accelerator has been doing in many organizations for much too long. Like heat in Goodyear's innovation, it's been here for a long time: overlooked, misapplied, misunderstood, and largely untapped. The fact is that 79 percent of employees who quit their jobs cite a lack of appreciation as a key reason for leaving. Sixty-five percent of North Americans report that they weren't recognized in the least bit the previous year.

The simple but transformative act of a leader expressing appreciation to a person in a meaningful and memorable way is the missing accelerator that can do so much and yet is used so sparingly. But it is not the employee recognition some of us have been using for years. Not by a long shot. This is purpose-based recognition. It is recognition done right, recognition within a context of effective leadership. And as the most dramatic accelerator of human potential, it's the most effective carrot.

What is a carrot? For a successful leader, it's an acceleration tool. Our Oxford English Dictionary calls it "something enticing offered as a means of persuasion." In business, a carrot is something used to inspire and motivate an employee. It's something to be desired. In fact, it tops the list of things employees say they want most from their employers. Simply put, when employees know that their strengths and potential will be praised and recognized, they are significantly more likely to produce value.

Yet some will ask, "Isn't money the most effective carrot? Aren't the allure of bonuses and increases in salary what really motivate our employees?"

The fact is that money is not as powerful a reward as many people think. While pay and bonuses must be competitive to attract and retain talented employees, smaller amounts of cash -- anything short of $1,000 -- will never make the best rewards because they are so easily forgotten.

In fact one-third of the people you give a cash award to will use that money to pay bills. Another one in five won't have any clue in a few months where they spent the money or even how much they received. Just ask yourself, did you save the bank deposit slip from the last time someone gave you a $200 cash bonus? Is it tucked away in a scrapbook of memories? Of course not. But what about something useful and tangible that was given to you as a reward? Not a baseball cap, T-shirt, or canvas tote bag, but something usable and valuable. Chances are that even years later, you still own it and can picture the award in your mind.

The more prevalent problem with cash is that the supply is limited and strictly controlled, and your people know it. For many of the managers reading this book, that might not be the case. Many of us in middle and senior leadership roles are indeed motivated by the allure of a large bonus or increase in salary. Hefty sums of cash may in fact be motivating to us. But realize that for the majority of the people in your charge, that's just not in their cards. And here's why: no matter what they do, your employees know you have only so much cash to share with them. Pay, for example, is determined by the employee's experience, job type, higher corporate policy, location, and other factors outside your and your employees' control. If an employee is doing a fantastic job, you might be able to swing a 5 percent raise at the end of the year. Not much motivation there. As for large bonuses tied to personal performance, they are typically reserved for mid- to upper-level leaders. Lower-level employees and professional staff typically receive a standard bonus amount, with very little variation from person to person. Not a lot of motivation to excel there either. Benefits too are locked in. As a manager, you can hardly offer an excellent employee a better dental plan.

The happy surprises of pay and benefits that a motivated employee hopes for are frequently beyond your control to provide. The reality is that most workers are locked into a routine of sameness, paycheck to paycheck. So it's time to learn what you do control: the carrot supply.

"When people join us, they obviously have agreed on the pay," said Elizabeth Martin-Chua, vice president of Philips Electronics in Singapore. "What they are hoping for is a good environment where they can use their capabilities and talent to good advantage and then be recognized for it."

Martin-Chua's comments are backed up by a study by HRM Singapore, which in December 2005 interviewed 3,000 people in this highly developed country on the South China Sea. When asked, "What do you really want from your job?" employees ranked "Pay" number three on their list. Number one was "Career/Learning Development Opportunities." Number two? "Recognition." Interestingly, number four was a better "Relationship with Manager." According to the editors, "The economic success of Singapore means that employees need more than pay to be motivated."

And that leads us to the key finding of the 200,000-person study by The Jackson Organization: the central characteristic of truly effective management -- the element that shows up time and again in every great workplace -- is a manager's ability to recognize employees' talents and contributions in a purposeful manner. Our study results show that when recognition is considered effective, managers:

1. Have lower turnover rates

2. Achieve enhanced business results

3. Are seen as much stronger in what we call the Basic Four areas of leadership:

• Goal setting

• Communication

• Trust

• Accountability

In other words, recognition accelerates a leader's effectiveness. Dee Hansford, former head of Walt Disney World's cast recognition department, can attest to the difference purpose-based recognition can make. In 1996, the theme park was very busy. With a twenty-fifth anniversary celebration, the park experienced a 15 percent rise in guest attendance. Despite the increased traffic, that year no pay raises or bonuses were given. Under such conditions, you might think employee satisfaction would have fallen off the charts. Instead, employee job satisfaction rose 15 percent.

The difference was the recognition skills training Hansford and her team had given to more than 6,000 managers and supervisors. Now, frontline leaders had the ability to praise operator Steve for keeping people happy when a ride went down for maintenance, recognize the restaurant staff for making the kitchen sparkle, or thank Goofy for being especially . . . well . . . goofy that day.

Disney might have considered the year a success simply on the basis of employee morale alone. But there was even more magic in store: at the end of the year, Disney's annual report showed a 15 percent increase in revenues directly attributable to the theme park -- in a year without a bonus or a raise given.

Watching the impact of recognition on a company is a bit like watching the center pole lift up the middle of a large tent: everything else rises too except one thing -- turnover. With effective recognition, that can drop like a rock.

Retention Accelerated

Like a black hole in space, corporate turnover absorbs resources at an astonishing rate. It is far and away the most significant uncalculated expense in corporate America. Some estimates to replace a departing employee range up to a stunning 250 percent of that person's annual salary. In this case, a little prevention is definitely worth a pound of cure. According to author Fred Reichheld, just a 5 percent increase in employee loyalty can increase profits by as much as 50 percent.

The reason turnover has such a high cost has to do with the type of people who are leaving. If most of the people who left were poor performers, turnover would be a good thing. But it's not. Organizations that fail to effectively recognize their employees are losing the very workers they wish they could keep to meet their goals.

Turnover is an estimated $5 trillion annual drain on the U.S. economy, making it the most significant cost to its economy and one of the most ignored economic factors in business history. Compounding the problem is the fact that with the global economy heating up, the shortage of skilled, talented workers is growing even more severe. By 2008, the U.S. Bureau of Labor Statistics predicts a shortfall of 10 million workers in America. That means we are all in a race for talent, and the best place to find talent is under our noses. We must retain our solid and our outstanding performers by keeping them engaged. And yet some 75 percent of the U.S. workforce is not fully engaged on the job. The United States is not alone in this predicament. In the United Kingdom, surveys show that more than 80 percent of workers lack real commitment to their jobs. Estimates of the cost of disengaged workers on the British economy range between 37 and 39 billion pounds sterling per year.

An insidious result of turnover is the psychological damage to the employees who stay. Turnover decimates the remaining workplace because many employees mentally follow their departing colleagues: they worry about their futures, passively wait for things to get better, or actively look for new positions.

It is becoming increasingly difficult for leaders to ignore the destructive impact of turnover. In our travels, a majority of the CEOs and senior leaders we work with cite retention of key employees as the most important factor to their success -- not one of but the key factor.

In response to the slow bleed, many leaders and organizations have sought to remedy matters. The Society for Human Resource Management periodically surveys employers on retention initiatives. Common initiatives include tuition reimbursement, competitive vacation and holiday benefits, higher pay, and better employee selection methods. The results of such perks and methods on employee trust levels have been underwhelming at best, to the consternation of the leaders who designed them. "Why isn't it working?" managers wonder. "After all, we're giving employees what they want." And there's the problem: employers don't know what employees really want.

A fascinating survey has been conducted three times since 1949, when author Lawrence Lindahl first began studying human behavior at work. Each time the results have been the same. In the survey, managers were asked to name what they thought employees in their organizations wanted. Then management's list was contrasted with the list prepared by employees. Every time, managers guessed that good wages and job security would top employee lists, but their people always cited "feeling appreciated" and "informed." While a serious disconnect exists, it's clear what employees really want.

So what is working? Overwhelming research points the finger at recognition. A Watson Wyatt Reward Plan Survey of 614 employers with 3.5 million employees showed that the average turnover rate of employers with a clear reward strategy is 13 percent lower than that of organizations without one. In addition, Gallup's study of nearly 5 million employees reveals that an increase in recognition and praise in an organization can lead to lower turnover, higher customer loyalty and satisfaction scores, and increases in overall productivity. And U.S. Department of Labor statistics show the number one reason people leave organizations is that they "don't feel appreciated."

Perks like tuition reimbursement can never take the place of a frontline supervisor who sets clear goals, communicates, builds trust, holds employees accountable, and then recognizes in an effective manner.

That's what KPMG LLP, the U.S. audit, tax, and advisory firm, discovered when it implemented its national recognition program, Encore. By providing managers with a formal way to recognize their employees and teams, the firm has improved overall employee survey scores.

On its annual work environment survey, KPMG asks, "Taking everything into account, this a great place to work." In the three years since the introduction of an effective recognition system, positive employee scores on that question have increased more than 20 points. Now, it's important to note that the three years in question were also a time of tremendous scrutiny and pressure for the accounting industry, with employee satisfaction in most of these firms nearing all-time lows.

Sylvia Brandes, director of compensation for KPMG's 19,000 U.S. employees says, "Recognition has become a fever." She adds that KPMG has done its homework through analysis of the effectiveness of its recognition efforts. "What we found is that groups that do not present a lot of Encores [awards] in their organizations tend to have greater turnover. We also found turnover among people who received an award was half that of those who hadn't received an award. And we found a correlation between functions or organizations that had higher scores for recognition and the number of Encore awards that were given within that group."

Business Results Accelerated

KPMG's results are far from unique. Research firm Watson Wyatt has asked employees to identify "very significant" motivators of performance, and 66 percent said "appreciation." The numbers come as no surprise, as many of us might naturally expect an accelerator like recognition to affect motivation.

Then our researchers at The Jackson Organization made an important discovery within their data of a highly pecuniary nature. While the research consultants had always seen recognition as a key driver of employee engagement and satisfaction, they had never cut the data to test for a connection between effective recognition and business outcomes. When they did, the result was startling: from every angle, every financial metric, every way of looking at it, investing in recognizing excellence is strongly associated with the best financial performance.

The major study included 26,000 employees at all levels in thirty-one organizations of varying sizes and profitability. As part of the study, these organizations allowed researchers to conduct not only an in-depth employee survey, but also to dig into their financial reports. Some companies were very profitable; others were not. Some had engaged workforces; others did not. The sample size and variance of company profitability and engagement created data that are statistically unquestionable.

In addition to answering general questions about their level of engagement with their firms, employee respondents stated their level of agreement on a scale to the question: "My organization recognizes excellence." The responses by organization were averaged and grouped into four quarters. Those organizational results were then compared with these profitability measures: return on equity, return on assets, and operating margin.

Recognition and Return on Equity

Return on equity (ROE) is a critical measure that encompasses profitability, asset management, and financial leverage. Calculated by taking the fiscal year's earnings and dividing them by the average shareholder's equity for that year, it is used as a general indication of how much profit a company is able to generate given the investment provided by its shareholders.

According to the data, companies that effectively recognize excellence enjoy an ROE more than three times higher than the return experienced by firms that do not. But that's not all, not by a long shot.

Recognition and Return on Assets

An equivalent connection is shown between recognition and return on assets (ROA), a fiscal year's earnings divided by total assets. This is a good measure of a firm's effectiveness in using the assets at hand to generate earnings. According to the data, companies that effectively recognize excellence enjoy an ROA more than three times higher than the return experienced by firms that don't.

Recognition and Operating Margin

Operating margin is another measurement of an organization's profitability and efficiency. The ratio of operating income to sales, operating margin shows how much a company makes from each dollar of sales before interest and taxes. In general, businesses with higher operating margins tend to have lower costs and better gross margins. That gives them more pricing flexibility and an added measure of safety during tough economic times.

Of all the financial measurements, employee recognition has the most significant impact on operating margin. According to the data, companies in the highest quartile of recognition of excellence report an operating margin of 6.6 percent, while those in the lowest quartile report 1 percent.

Of this research, Karen Endresen, Ph.D. of The Jackson Organization, said, "Up until this study, the link between recognition and financial performance was largely anecdotal. Recognition was considered by some to be an emotional afterthought, while those who believed that effective recognition would drive results had no hard data to prove it. This study took recognition results from myth to reality -- from the soft side of business to a proven business essential."

It is a simple truth: we work harder at places where we feel recognized and valued for our unique contributions. And valued and engaged employees bring great value and profit to their organizations.

What these data show us, in a very dramatic way, is that recognition is one of the key characteristics of effective managers and great organizations. But before we can understand how it accelerates performance, we must grasp the other characteristics of great management: the Basic Four.

Copyright © 2007 by O.C. Tanner Company