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Study Defines a 4-to-1 Rate of Return for Incentive Travel
October 20, 2009
By Leo Jakobson
Having fought off the worst of the AIG effect with a publicity campaign that culminated in a White House meeting with President Barack Obama earlier this year, the U.S. Travel Association also set out to put some sorely lacking hard numbers behind the notion that business travel, including incentive trips, is good for the companies that run programs and the economy as a whole.
The result is “The Return On Investment of U.S. Business Travel” report by Oxford Economics, a Wayne, PA-based firm that uses econometrics—essentially the use of statistical mathematics to test economic theory and aid economic decisions—to create as accurately as possible a picture of the true return the business travel industry brings to American corporations and the U.S. economy.
The research showed that the return is substantial, says Adam Sacks, founder and managing director of Oxford Economics’ Tourism Economics Division. Pointing out that $229 billion was spent on business travel in 2008, Oxford Economics found that for every dollar invested in business travel, companies realize $12.50 in incremental revenue. Furthermore, by canceling all business travel, the average U.S. company would forfeit 17 percent of its profits in the first year, the study found. It would take three years for that company’s profits to recover to the level before the cancellations, says Sacks, who adds that firms that cancel activity would always be that far behind a competitor that did not cut business travel.
On the incentive front, “The Return On Investment of U.S. Business Travel” found that pure incentive travel only accounts for 5 percent of the average company’s business travel budget, and the median return on a $1 investment in incentive travel is $4. The $4 return on investment for incentive travel was similar to that of conferences and trade shows, both of which produce ROI of $4 to $5.99, Sacks’ paper found. Customer meetings, unsurprisingly, produce the highest ROI, $15 to $19.99.
The Study
To reach these results, Sacks says Oxford Economics brought three tools to bear. The first and most important is the firm’s highly regarded econometrics model, which is used by organizations including the World Bank, U.S. Department of Treasury, and Bank of England, as well as many large corporations. Second was a pair of surveys, one of 300 American executives (vice presidents and higher) in February and the other of 500 frequent business travelers in April. Third was a review of existing literature on the subject.
The econometric analysis, which is “the backbone of this study,” Sacks says, “leverages data by the U.S. Bureau of Economic Analysis and the U.S. Bureau of Labor Statistics on the relationship between industry productivity and profitability and what each industry spends on travel. We flagged out over 13 years across 14 sectors to find the relationship between what companies spend on travel and their performance.”
What the research found, Sacks says, is that more than half of U.S. companies cut their travel budgets in the six months before the study was done, and those that made cuts reduced their travel budgets by an average of 35 percent. It raises what Sacks calls a “very relevant question” about these businesses: “Are companies acting in their own best interests? The findings of the research indicate that, no, companies are not operating in their own best interests by making these cuts,” he says.
Pointing to that $12.50 in ROI, derived from 13 years of government statistics, Sacks adds: “The bottom line of the analysis is that for every dollar that the average U.S. company spends on business travel, that dollar yields an incremental $3.80 in profits.”
The problem with econometric analysis, Sacks told Incentive, is that it looks at business travel of all kinds in aggregate. “There’s no way, through that piece of the analysis, to identify how much benefits are being realized through different types of travel,” he says. “That’s why we leaned on the surveys of business executives to understand how incentive travel plays into that overall equation of business profitability and performance.”
The Incentive Equation
So how did Oxford Economics come to that $4 ROI figure for incentive travel? The surveys looked at the benefits of incentives by asking executives how much they would have to pay in cash compensation—whether as a bonus or salary increase—to get the same motivational effect as an incentive trip.
“Which means they may not even get the trip, but it’s there as an incentive,” Sacks points out. “The average response was an 8.5 percent increase.
“What we did with that was say, ‘What does that mean in terms of that return on that investment?’” Sacks continues. “This is an interesting way to think it through: If we assume an employee’s base salary is $100,000, that 8.5 percent increase in compensation would be $8,500.”
Figuring the average cost of a three-to-four-night incentive trip plus airfare and expenses is $2,000, Sacks says, “it would have cost them more than four times as much to get the motivation and productivity benefit that the incentive trip would have produced.”
That is why Sacks says one of the takeaways from Oxford Economics’ study is “cash is an awfully expensive way to motivate people.”
That’s backed up by the literature review component of his research, Sacks adds. “When they’re asked, [incentive program participants] will say, ‘I’ll take the cash,’” he notes. “But in practice, the effect of an incentive is much greater. And travel is particularly powerful because it builds memories and loyalty, and it is in the luxury category—something they might not do themselves. So you’re building equity on a personal level that cash just doesn’t, unless it’s a lot of it.”
Besides incentive travel’s cost-effectiveness compared to cash, both the executives and frequent travelers told Oxford Economics researchers that it has a substantial effect on morale and job satisfaction rates. Four-fifths of executives and business travelers told researchers that incentive travel has a high impact on employee morale, and nearly three-quarters said it has a similar impact on job performance.
Business Travel’s Morale Boost
Many other types of business travel have an incentive component intended to boost morale, Sacks notes. Many meetings are held at resorts, while trade shows and conventions are often held in large cities or resort destinations that are draws themselves.
An important part of the report was the impact that the broader business travel category has on employee morale. And that’s not limited to the survey portion of the research. “A business trip may not necessarily be a reward trip, but there is a reward component,” Sacks says, adding, “that is built into the [econometric] modeling” that yields a $12.50 increase in incremental revenue for each dollar invested in business travel.
While the majority of the research looked at the hard sales aspect of business travel—such as retaining customers (across all industries, surveyed executives said cutting all business travel would cost them one-quarter of their clients and 28 percent of revenue) and converting prospects (40 percent of prospects met in person are converted, versus 16 percent without an in-person meeting)—another benefit of business travel the report sought to define was its effect on the business travelers themselves.
“Though perhaps easy to overlook, business executives and travelers also affirmed a strong relationship between travel and employee performance and satisfaction,” the report reads. It continues: “The ‘sharing of ideas’ was confirmed by 76 percent of travelers as a benefit of internal travel, indicating travel to be an investment in human capital. The majority of business travelers identified internal company travel as key to professional development (66 percent), job performance (58 percent), and morale (56 percent). And more than 40 percent of travelers perceive a strong relationship between travel and staff retention.”
“There are important implications for the staff of a company—the human capital of a company,” Sacks says. “It’s up to companies to evaluate the research’s implications for their decisions. But at Oxford Economics, we believe that decisions to cut travel are very short-sighted, that indeed there are bottom-line
benefits to be realized in the immediate horizon. But over a 12-month period, we’ve seen that cuts in business travel would generally be pennywise and pound-foolish.”
The Oxford Economics study commissioned by the U.S. Travel Association is available at Meetings Mean Business.
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