Employee Reward: Why non-cash can beat cash
We all like to receive presents; there is something about receiving a tangible award that trumps cash. But there are four main reasons for using non-cash awards over cash within an employee recognition programme and perhaps in addition to cash in a staff incentive programme:
Non-cash awards differentiate a recognition programme from pay. Some time ago I was consulting with an organisation reviewing their recognition programme. They paid recognition awards through payroll usually a month or more after the event. Tax was deducted and inevitably the payment was quickly used up in the regular monthly outgoings. Other than a letter informing the individual of the award, there was little or no celebration. Interviews and focus groups with managers showed that their dominant view was that this was really just part of the pay system; they saw that the important part of the recognition programme was the pay. The great majority or recipients, on the other hand, said that the most memorable and important part was receiving the letter of thanks recognising what they had done. A typical comment was, “I’ve worked here for 20 years and this is the first time I’ve really been thanked.”
Differentiation can be explained by the psychological process of separability (Jeffery, 2003) which simply says that people will typically separate different sources and uses of funds and aggregate others. For example, most people will mentally separate the appreciation in value of their home from their salary. On the other hand as both salary and any cash award are earned as part of their job they are likely to be mentally combined. A cash award lacks separability so that cash that is given, for example to recognise some particular achievement, does not stand out in the mind of the recipient. Although this can be countered by the organisation using some celebratory ceremony it is better to distinguish something outside the norm by using non-cash.
Some organisations I have worked with who use cash awards within their recognition scheme have reported that some of their managers appear to have used these cash awards in 2009 and 2010 to simply top up a very low pay award. If you have a system that allows a reasonably substantial cash award within one process – in this case a recognition programme – it is inevitable that some people will work backwards to find ways to use the money available, where they may be restricted from spending a similar amount within the pay review. Much better is to use non-cash within the recognition scheme and allow some non-consolidated cash bonus within the pay review system. These two are then separate and can be differentiated in the minds of both the managers and the recipients.
Non-cash awards can have, ‘memory value’; that is their effect is longer lasting than cash. This is also known as ‘Trophy value’. It is sometimes said that cash is a motivator for as long as it takes before it is spent. A US survey (Workspan, November 2006) asked people how they spent their last cash reward, incentive or bonus. The results are shown in the table below.
These results hardly support the use of cash if you want some longer term value. Cash does not bring back fond memories.
In contrast, every time a non-cash item is used or enjoyed the recipient may remember why and how he or she earned it. So every time the TV is watched the individual will be reminded of the organisation and his or her achievement that led him to receive it. Although someone is unlikely to show his or her neighbour their pay slip, it is rather more acceptable to show off something tangible that has been earned. So you would not say to your neighbour, ‘I just received an £800 bonus’, but you might proudly show them the new TV you were given by your organisation or tell them about the exotic holiday you received. An important component of recognition is the social reinforcement from others knowing about your good performance. A non-cash award can be more effective than cash at enhancing this reinforcement.
My first proper job was with a direct selling life assurance company. I joined as a graduate training in 1975 and soon moved to work in Training and Development and then Compensation. The sales people were on commission only, with no salary. Clearly an environment with a very direct cash based incentive reward strategy. But not so. In addition to the cash commission, the company employed a whole range of non-cash awards, prizes and incentives. There was the million dollar roundtable, the Chairman’s club, the regional awards and the annual conventions in luxury locations abroad. What all of these very desirable things did was to enable the successful sales people to demonstrate their success in a way that cash alone could not. Achieving these different non-cash awards were all about getting recognition and esteem from others. There was a degree of exclusivity about the prizes. Only a relatively small number would achieve them to be feted by the executives of the company.
The perceived value of a non-cash award can be much higher than the actual cost, so that a non-cash award is valued more highly than cash of the same value. It may be that the organisation can source an award much cheaper than the individual could. This may be because they are buying in bulk or can negotiate a better deal with a supplier or through a third party. It may be because they can use their own product or services (or those of an associated company) as an award. An example would be a hotel chain providing a weekend stay for an employee and partner or a restaurant group giving dinner for the recipient and family.
The psychological process here is called ‘evaluability’ (Jeffrey, 2003). That is, a recipient evaluates the award in different ways. When a pleasurable non-cash award is used, people tend to see the positive elements rather than any negative. This is known as an affective reaction to the award or incentive. Jeffrey gives the example of an award of a trip to Hawaii, where the thoughts about the trip will be about lying on the beach with a drink rather than the possible negative aspects such as having to stop the newspapers, taking the dog to the kennels, going to the bank to get currency etc. This then leads people to use their feelings when determining the value of the award or incentive. This can increase the perceived value of a non-cash award compared with the value of cash which, of course, is easy to evaluate.
A second process that is working here is known as ‘justifiability’. In this context it means that even if someone could afford to buy the non-cash gift, they may well not feel that they wanted to spend the money on a luxury or aspirational item that they might think of as frivolous. However, if a non-cash award was viewed as a luxury that the participant valued, but could not justify purchasing, then the individual could justify to himself acquiring it if it was earned for a particular achievement or hard work.
A non-cash award can be tailored to the needs and interests of the recipient, showing a greater amount of thought than a simple cash sum would reflect. We only need to think about the difference between receiving a birthday present of a cheque or a really well chosen gift.
John Timpson, Chairman of Timpsons the UK shoe repair chain, talks about the importance of knowing your people. Timpson says that a manager should know things like their employees’ partner’s name, children’s name/ages/schools, last holiday, main hobbies, career history. How can you expect to engage and motivate them if you do not know much if anything about them? It is about recognising the whole person who comes to work.
If you know your people, a manager can ensure that a non-cash award or gift is personal and will be appreciated. It shows that you know and care about them and have paid attention to their interests and desires. You may be able to find something that they can share with their family or partner. This can be particularly valued where the individual has had to put themselves out at the cost of their partner or family. But it equally holds that if you get it wrong it can make what should be a very positive event very negative.
Jeffrey S (2003) ‘Executive White Paper: The Benefits of Tangible Non-monetary Incentives’, The SITE Foundation
Workspan, (2006) ‘Leveraging Recognition: Noncash Incentives to Improve Performance’ November 2006 pp19-22
An extract from A Guide to non-cash Reward to be published in February 2011