Many brokerages are offering tangible rewards to boost performance, but what makes them more effective than cash rewards? And why are some more effective than others?
Many brokerages are offering tangible rewards to boost performance, but what makes them more effective than cash rewards? And why are some more effective than others?
A report released by US researchers Scott Jeffries and Victoria Shaffer has highlighted the drivers that push employees to strive harder for one incentive over another – regardless of monetary value.
“A significant amount of money is being spent on tangible incentives with a limited understanding of how they can best be utilized,” said the report.
Previous studies conducted by Scott Jeffries, one of the report’s authors, found that, while employees will usually state a preference for cash incentives when asked, staff performed up to three times better when offered tangible rewards over cash bonuses.
This discrepancy can be attributed to four key categories, said the report: Justifiability, social reinforcement, separability and evaluability.
Justifiability
The first category relates to the luxury value of an item. The best kind of rewards, said the report, are those that “employees could not normally justify buying for themselves, even if they had sufficient funds.”
“For example, a salesperson might never propose that his or her family take an expensive and ‘frivolous’ trip to Hawaii, but everyone might be pleased if it were earned as a reward for good performance.”
Social reinforcement
Everyone loves recognition. A reward recognises an employee’s hard work, but the on-going recognition from their friends, colleagues and families will have an even stronger and longer-lasting effect on the employee’s motivation.
A highly visible rewards means that others will know about the reward without the employee mentioning it, meaning they can achieve recognition without looking like a braggart.
“Friends and colleagues may broach the subject of the award with questions like, “So Bill, how are those golf clubs you earned from the firm? Have you played with them yet?” While cash may also be highly visible, it is less socially acceptable to say, “So Bill, how’s the $1,000 you earned from the firm?”
Separability
People naturally mentally segregate their income into different categories, such as investment income, rental income or wages. They also do the same with their expenditures, such as mortgage repayments, bills, entertainment or travel.
When an extra income or expenditure is added to one of these categories, it is evaluated relative to other items in that category.
“For example, if a person makes $50,000 a year, a $1000 bonus will only be considered a 2% increase if it is mentally aggregated with salary,” said the report.
“Suppose that an employee has a ‘vacation’ budget of $3,000 per year, and they are awarded a $1,000 vacation from the firm. This change represents a 33% increase, much higher than the 2% gained through cash.”
When it comes to bonuses, then, employees will place a higher value on items for which they would ordinarily allocate only a small amount of money.
Evaluability
Finally, when emotions are attached to an item, it becomes difficult to give it a monetary value.
If an employee is offered a holiday or a massage, they are likely to associate the prize with feelings of enjoyment and relaxation. These feelings then become more salient than the actual dollar value of the prize.
Once the employee is able to mentally alter the value of the prize, the value can be pushed even higher as the employee exerts more effort to achieve the reward.
“If an employee is working hard to achieve the award, then he or she will attempt to convince themselves that the award is worth a great deal to them, bringing their beliefs in line with their actions.”
Studies have also shown that more emotive rewards are thought about more frequently by employees, and that as thoughts of the prize increase, so does productivity.
So what are the criteria for a truly effective performance incentive? According to the report, the best rewards should be things that are:
- Unique and change over time
- Luxurious rather than practical
- Infrequently purchased by employees
It is also important not to give the market value of a reward to employees, said the report, to allow for employees to apply their own value to the incentive.
“Cafeteria-style” reward schemes, where employees can choose from a range of items, are suggested as the best option. They cater to the different tastes of different employees, while still allowing for all of the benefits above.
