Why to Use Non-Cash Awards

IRF study summarizes evidence of incentive award programs' value


The research leaves little room to dispute the fact that a well-conceived, well-run incentive, recognition, or reward program improves productivity and performance.

 In fact, one study that looked at many other studies' rewards programs found that after six months, companies will see average performance gains of 44 to 48 percent in productivity. Within this research, there is plenty of evidence that non-cash rewards work better than cash, for a variety of reasons.

To explain that and help program managers explain it to their bosses, the Incentive Research Foundation on April 24 released a new study summarizing these benefits and the reasons for them, as well as research backing it up, "Award Program Value & Evidence." The study was sponsored by Incentive.

"Most leaders expect their investments in incentive, reward, and recognition programs to meet specific goals, such as driving more sales, increasing revenue, or producing some other return on investment," says Melissa Van Dyke, president of the IRF. "'Award Program Value & Evidence' presents a strong case for using non-cash reward programs to motivate employees and practical advice on how to measure the success of these programs to ensure goals are met."

The first section of the study focuses on research that shows the psychological mechanisms underlying the advantages of these tangible non-cash awards. It then focuses on ways to successfully measure the results of these programs, providing hard numbers to show their worth.

The psychology of non-cash awards
The first of the six reasons for the success of these tangible non-cash awards is mental accounting, or more simply put, the fact that getting something like a pair of headphones, a gift card to a restaurant, or a trip to someplace special is more memorable than cash. The reason is simple: given cash, most people do something responsible with it, like pay a credit card or buy groceries. And that's good, but ask them what they did with the award three months later and they likely won't remember. A tangible award -- a splurge -- remains with them, both physically and mentally, for a long time.

The second reason, seeking status, is the well-proven fact that many people will choose to be recognized -- such as by a president's club trip somewhere fun where they can mingle with the top brass -- instead of choosing cash. One study showed that salespeople would choose to book sales into a fiscal quarter when they can earn entry into a president's club rather than pushing those sales to the next quarter in a way that could earn higher commissions. On average, salespeople were willing to forego about 5 percent of their take-home pay to go on the award trip.

Other reasons tangible non-cash awards work better than cash include:

--Appreciation Versus Entitlement: the fact that once given cash, many people come to see it as part of their salary rather than an award, and feel punished if they don't win.

--Effort Justification: also known as "The Ikea Effect," this shows that people will put a higher value on tangible awards they have earned as a reward than its cash value. For example, they will value an $8.50 movie ticket at $9.25 to $11.50 when it was won as an award.

--Social Signaling: this means trophy value, the bragging rights that comes with an award. People will talk about winning a new TV or a trip but almost no one would discuss a cash bonus.

--Perseverance, Effort, and Performance:
 tangible non-cash awards lead people to work harder to win a potential award to which they have formed an emotional attachment.

Still, there are potential pitfalls when using tangible non-cash awards. These range from what the study refers to as "the champagne effect" (the first glass is the celebration, each subsequent glass has less impact) to financial hardship, which simply means that if low-paid employees are struggling to get by, cash can be vital, not just an enticement.

Measuring a program's value
It's easy to say that an incentive, recognition, or reward program works based on experience, feedback, or research into why these tangible non-cash awards are effective, but putting hard numbers behind your own program takes a bit of work.

The second half of "Award Program Value & Evidence" takes on this task, starting with hard financial measures like increased sales, as well as decreased turnover, increased productivity, and growth in revenue and market share, as well as customer loyalty and satisfaction, and customer acquisition. The latter two can be hard to put a hard value to, but their value to a company's bottom line is well researched. The same applies to overall performance. Other techniques like ROI analysis and change point analysis are discussed as well.

The study concludes that the "hard, tangible, financial benefits of IRR programs, though far from guaranteed, are well understood and reasonably easy to measure."

The Award Program Value & Evidence white paper can be downloaded here.

The full studied can be downloaded here.