Monetary Rewards Are Not Always That Rewarding

What’s better than free money? 

Actually, when it comes to reward and recognition programs, quite a few things may be. So says a new study by the Incentive Research Foundation, Award Program Value & Evidence.

The thoroughly documented report discusses two broad topics that should be of lasting interest to any HR professionals involved in employee recognition programs: 

  • The advantages of non monetary rewards vs. cash 

  • How today’s businesses are measuring the ROI on their incentive, reward and recognition programs, both tangibly and intangibly 

“Though there is much evidence that cash rewards can have positive benefits for productivity, a sizable and growing body of research finds that tangible non-cash rewards deliver equal or greater returns to organizations in most circumstances than equivalent cash rewards,” the study states. 

Of particular value, the report examines a number of psychological factors that make non monetary rewards effective. These factors are important considerations for HR practitioners to keep in mind, with insights into workplace behavior that may go beyond choice of reward offerings. 

1) Mental accounting

According to research, monetary rewards trigger a type of subconscious “mental accounting” in recipients. The result is that what’s supposed to be “something special” ends up regarded as just an extension of regular salary. And what do employees do with their salaries? They buy groceries and pay the cable bill.

To be sure, monetary rewards can certainly come in handy for household expenses, but the price is forgoing an actual reward experience. Which means the reward they worked so hard to obtain didn’t feel all that rewarding. Which decreases the chances of them working as hard next time. 

This mental accounting opens the door to other reasons why non-cash rewards can be more effective than cash. The reason employees often pour their reward into the household pot? In a word, guilt. While they’d likely rather take that hard-earned $250 and apply it to something out of the ordinary, such as a weekend trip, there will always—always—be more pressing needs.  

A non monetary reward gets around that problem by removing the option: You can’t use a gift certificate to a fancy restaurant to pay off a credit card. Use it or lose it, and do it with a clear conscience. 

Monetary rewards or bonuses can become conflated with regular salary in other ways, too. For example, if the annual employee bonus is based on company performance, there’s no ironclad guarantee they’re going to get it. However, when employees are fully aware that the company hasn’t failed to reach its performance goals for 15 straight years, that “bonus” becomes an “entitlement.”  

Employees will surely enjoy getting it, but it will provide zero motivational value. They expect it, just as they expect a direct deposit of their paychecks every two weeks. Then, should the bonus finally not come through some year, there’ll be hell to pay. 

Lastly, perhaps the most important reason non monetary rewards can have an advantage is memory. Research indicates that experiential rewards, such as travel, can produce memories that last a lifetime, with positive associations with the organization that helped provide them. Such memories will inspire and motivate employees to do whatever they need to do to get more of them. The memory of buying kitty litter? Probably not. 

2) Effort justification

People place greater value on tangible awards they find attractive, and on those they personally work to obtain. This is now commonly known as the IKEA effect, in which you place often disproportionate value on things that you “built” yourself, with each twist of a tiny screw representing another increment of emotional investment. 

A 2017 study cited in the IRF report illustrates how employees can overvalue non-cash rewards. As part of a lab experiment, participants were asked to estimate the value of a movie ticket. Despite knowing that the price was $8.50, the average guess was $9.25. Later, after participants had to work towards the reward of a movie ticket, they were again asked to estimate the value. This time, the average was $11.50. 

This tendency is reminiscent of the principle of loss aversion, in which losing something you already have is more painful than gaining the same item is pleasurable. But the message is clear for HR: If they build it, they will come. The harder you work to achieve something, the more valuable you believe it is, even when you know it isn’t. The green jacket presented to the winner of the Masters Tournament might be worth $250. Yet those who have earned the right to wear one wouldn’t sell it for $250,000. 

Which is a good segue to the next psychological factor. 

3) Social signaling (trophy value)

The definition of trophy value: What’s the point of earning some great reward or recognition if nobody knows about it? Tangible rewards can be displayed and discussed, serving as motivation for both the reward earner and non-earners. Monetary rewards, not so much. 

For example, the grand-prize plasma TV that now fills an entire wall of your employee’s living room is something they and other employees can talk about. Both can appreciate the reward, and use it as motivation for earning the next one. By contrast, talking about a $5,000 bonus will be a very short, and very one-sided, conversation. Tangible rewards with trophy value generate greater anticipation and “afterglow” than cash rewards, delivering greater impact both during and after the incentive program.  

The full report can be downloaded here.

Rewards can be more than just a transaction. Learn how you can create motivating experiences in your rewards and recognition programs in our ebook, Is Cash Really King?