84% of US firms use non-cash, tangible incentives (e.g., merchandise, gift cards, travel, etc.) to motivate and reward their employees. Those in favor of non-cash incentives argue that they leave a more lasting impression than cash rewards; that when people receive a cash reward, they tend to treat it like salary and use it for forgettable things – paying the electric bill for example. Rewards like flat-screen TVs, gift cards or spa treatments, on the other hand, stand apart from salary. They address what the employee wants as opposed to what they may need.
By striking an emotional chord versus a rational one, proponents claim non-cash rewards become more memorable and desirable, motivating employees to work harder, thereby improving performance. And, unlike cash, they avoid creating an expectation of further reward.
This paper focuses on whether these claims are valid and, if so, why. It is among the first to attempt to isolate the conditions in which non-cash rewards may work better than cash. It is also the latest to investigate whether reward recipients perceive cash and non-cash rewards differently, and if so, whether that perception drives performance improvements.
The researchers use laboratory experiments to test three arguments that are frequently drawn upon in support of the use of non-cash rewards:
- Reward recipients mentally account for (i.e., classify) cash rewards as part of their fixed salary, and non-cash rewards as something separate.
- They classify cash rewards as money to be spent on functional goods and services, and certain non-cash rewards as a windfall to be used for fun, indulgent, or exciting things.
- Cash rewards create an expectation of further reward.
Importantly, they investigate whether these conditions lead to greater goal commitment and effort at work. If the three conditions above hold true, then reward recipients should value non-cash rewards more than cash and be willing to work harder to achieve goals associated with earning them.
Four experiments with more than 320 participants in total were performed. Subjects were paid to perform simple computer-based tasks over a series of twelve two-minute rounds. Participants were (randomly) given the chance to earn an additional cash or non-cash reward if they achieved a difficult but attainable goal. The researchers carefully manipulated the conditions for each of two groups across the four experiments to test the three arguments described above.
In the initial experiment, cash reward group participants were told that for each round in which they met or exceeded their goal, they would get $30 instead of $20, this created an “expected” condition. Participants in the non-cash group were told only after the 8th round that they could earn a $10 AMC movie gift card (in addition to the $20) in each remaining round (4) on condition they met or exceeded the same performance goal as in the cash group. This created a “windfall,” or unexpected condition.
Note that cash-motivated participants were not told they would receive “$20 + $10.” The researchers deliberately framed the reward as part of fixed pay to better approximate the way cash rewards are often delivered in organizations (as a lump sum). Finally, cash reward participants were asked to imagine spending their money (base and reward) on things like groceries and utility bills. Non-cash reward participants were reminded of the fun nature of their reward (e.g., movies and concession stand items).
- The non-cash reward group outperformed the cash reward group. Significantly more of those in the non-cash group met their goals than in the cash group. The researchers conclude that “… goal-based tangible [i.e., non-cash] rewards will lead to greater effort than goal-based cash rewards.”
- Participants perceived cash rewards ($10 bonuses for goal attainment) as significantly less distinguishable from their standard payment ($20 per round) than the $10 AMC movie gift cards. The researchers found that the more distinguishable the reward from the standard payment, the greater the goal attainment.
- Non-cash reward participants were significantly more committed to attaining their reward goals than those in the cash group. The researchers found that the greater the goal commitment, the greater the goal attainment.
- In the final experiment, one group was offered the AMC gift card for goal attainment in each of the 12 rounds (the expected group), the other was offered the same gift card only after round 8 (the unexpected group). Goal attainment was significantly better in the unexpected group.
It remains unclear whether:
- A program designed to frame rewards as separate from fixed pay will drive better results.
- A luxury/fun non-cash reward (e.g., an AMC gift card) will work any better than a functional reward (e.g., a grocery gift card) in generating greater goal commitment or achievement.
- Rewards that are unexpected will result in significantly greater goal attainment than those that are expected.
It is clear, however, that a program designed to include all three of the elements above is likely to drive greater goal commitment, effort and goal attainment than an equivalent cash reward program.
- Non-cash rewards prove more motivating, on the whole, than cash rewards in these experiments. They drive greater goal commitment, greater effort, and greater performance. The researchers conclude: “The results of our main experiment support proponents’ claims about the motivational benefits of tangible rewards, and thus suggest compensation system designers may want to consider the use of performance-contingent tangible rewards to increase employee motivation.”
- The experiments fail to explain why non-cash rewards result in greater goal commitment, greater effort, and greater performance. If one or more of the elements were revealed as the primary reason, managers could focus more of their efforts on that motivational lever. The researchers advise: “ … no single difference is strong enough on its own to motivate greater effort. Rather, firms are best served to use tangible rewards that differ from cash rewards on several dimensions, in order to maximize the perceived difference between the reward and employee’s salary.”
- This research confirms that managers should frame rewards as separately as possible from fixed pay, they should emphasize fun/luxury non-cash rewards over functional cash rewards, and they should avoid creating the expectation of a reward to the extent possible. In the words of the researchers: “Collectively, these results suggest a multitude of differences between cash and tangible rewards may be necessary in order to get the motivational benefits from using tangible rewards.”
Q & A
We asked the authors the following questions about their research.
Is it safe for managers to conclude that a restricted use gift card – like the AMC movie card – will work better than an equivalent value non-cash reward that is more like cash, for example, an open gift card (that can be spent on anything)?
We can only speculate because we do not explicitly compare restricted gift cards to open gift cards in our study. However, based on our results, to the extent employees view hedonic (i.e., wants), restricted use gift cards as more separate from salary than open use gift cards are from salary, then it is reasonable for managers to conclude the hedonic, restricted use gift cards will be more effective. With that said, in our lab experiment we needed multiple differences to be present to find the performance benefit of a hedonic, tangible item over cash. Given restricted and non-restricted gift cards share greater similarity to one another relative to a hedonic, tangible item does to cash, it might challenging to managers to find differences in how employees think about the two types of gift cards. In fact, if managers find it difficult to identify restricted use gift cards for products/services that employee truly view as hedonic, firms could be better off using open gift cards. Ultimately, it remains an empirical question and one that we would love to explore with any companies interested in working with us.
Does this research lend any weight to the argument that rewards should NOT be used as carrots. In other words, that rewards should come after goal achievement as a form of appreciation and not be offered contingent on attaining the goal (which, some argue is a form of coercion)?
Our study examines a goal-based incentive system whereby individuals are rewarded for goal attainment. These types of performance contingent incentive systems are common in practice, and have been shown to be highly effective at motivating effort. Indeed, unanticipated rewards can also lead to improved subsequent employee effort because employees reciprocate the ‘gift’ with harder work. However, our study does not compare the relative effectiveness of goal-based rewards to unanticipated rewards such as spot rewards or forms of appreciation. Again, it remains an empirical question and one that we would love to explore with any companies interested in working with us.