The Incentive Research Foundation (IRF) has released a white paper on the value of incentive, reward and recognition (IRR) programs to drive more sales, increase revenue, result in a larger share of the market, or produce some other return on investment.
As the incentive market and trends around it continue to grow, the report highlights the positive relationship between compensation—including rewards—and performance.
Here are six key points to take note of.
The report said that one plus from using tangible non-cash rewards comes from a process called “mental accounting”. Intangible rewards—such as experiential travel rewards—can create lasting memories and positive associations with the organisation that provided the reward.
On the other hand, when employee receive cash rewards, they subconsciously associate the reward with their salaries, and may use it for everyday purposes—for instance, paying the utilities, buying groceries and making car and mortgage payments.
In other words, people tend to make utilitarian purchases when given a cash reward, and consequently derive very little meaning or appreciation from it.
Non-cash rewards are not always higher in monetary value than cash rewards, but the report said that recipients tend to place high value in non-cash rewards—especially if they’ve earned it through hard work and perseverance.
In the past, this has been labelled as “The Ikea Effect”, which describes the phenomenon by which people place greater than market value on things they’ve worked to build or achieve. In a 2017 lab experiment, it was found that participants overvalued non-cash rewards. Movie tickets were used as the “hedonic” non-cash rewards and were compared to the value of cash rewards.
Even though participants knew the price of the movie ticket (about US$8.50 at the time), when initially asked to estimate its value, the average value they guessed was $9.25. After the experiment, in which participants had to work to earn the reward, they were asked to estimate value of the ticket for a second time and the average value rose to US$11.50.
One of the advantages that recipients have when it comes to non-cash rewards is, to put it bluntly, bragging rights. For example, tangible non-cash rewards are highly visible when you might ask a reward earner about the TV or the trip they earned, encouraging them to think and talk about their reward repeatedly.
However, discussing one’s cash reward might come off as immodest, and be considered socially unacceptable. Since tangible non-cash rewards generate greater anticipation, discussion, and “afterglow” than cash rewards, they generate greater impact during and after the implementation of the incentive programs.
It’s a no-brainer that rewards—whether cash or non-cash—promote drive and perseverance among employees. But non-cash rewards can appear to be more psychologically attractive, hence motivating employees to work harder, and can even lead to behaviour change.
A 2017 study found that participants in consecutive sales contests pursued cash or tangible non-cash rewards. Although there was no significant difference in performance between the two groups, median sales results in the second contest were significantly better among those rewarded with the gift cards in comparison to those rewarded with cash.
On top of that, participants in the tangible non-cash reward group used a training video made available to them twice as much as those in the cash group, suggesting a greater desire for the reward.
Importance of program design
The value of incentive programs has been thoroughly justified, but it’s also worth discussing the benefits of program design. The report suggests that well-designed reward programs motivate people to higher performance, resulting in measurable improvements in sales and revenues.
To this point, even the most committed proponent of rewards will admit that poorly designed reward programs can cause enormous damage. For example, many have found that in incentivised sales contests, employees may intentionally delay sales just before the contest begins to maximize their reward, and perhaps worse, try to squeeze in other sales prematurely toward the end of the contest.
As a note of caution to incentive planners, the report said that non-cash programs and rewards can lose their novelty over time in what’s called the “Champagne Effect”: the first glass is the celebration and is meaningful, but every glass after has less and less impact.
Cash, on the other hand, doesn’t 'get old'. Because it is fungible, cash can stay apace of recipients’ changing needs and interests. If employees don’t make regular changes to non-cash reward programs to reintroduce novelty and make sure that the same people aren’t winning year after year, programs might lose their effectiveness.