Why Are Non Cash Rewards Better Than Cash?
When you’re maxed out as far as number of sales reps and field experience goes, what else can you do to increase sales and drive market share? Increase each of your sales rep’s productivity, individually. Incentive programs can help you maximize each salesperson’s potential. Before you implement an incentive program to do just that, it’s helpful to ask yourself some fundamental questions about your team and your market:
- Are your sales reps fully trained, informed and experienced in selling your products/services?
- Is there room to move in your market? Can your buyers take on more of what your reps are selling?
- Are your products and services appropriately priced?
If your answers to all of these questions indicate that you have opportunities to expand your selling capabilities, then it may be time to set an incentive program into motion. So where should you start? Many companies use a monetary compensation plan, ie. cash bonuses and rewards. Although it may seem like the quickest, easiest and most universally appealing option, cash rewards are often far inferior to non-cash rewards from in terms of cost effectiveness, ROI and overall results. At Loyaltyworks, our 30+ years of experience in the incentive industry has taught us that non-cash rewards are more effective than cash. In this article, we’ll take a look at why cash falls short and how you can maximize incentive program potential by using non-cash rewards.
Behavior Economics: Three Studies
The concept of behavior economics is key to understanding why people often choose non-cash rewards over cash. Behavior economics studies often indicate that people act in inconsistent and irrational ways. Let’s look at three separate academic studies that examine how people respond to cash vs. non-cash rewards:
1. University of Chicago economist Richard Thaler, PhD, studied the habits of New York cab drivers in the 90s and found surprising results. Although cab drivers stood to make much more money on rainy days—when demand for cabs is higher—they often quit after reaching their daily quota. Although logic dictates that they would make the most of the high demand and earn more money, they preferred having more time off. Money, in this case, was not a sufficient motivator.
2. Monmouth University professor Scott Jeffrey, PhD, conducted studies on motivating University of Chicago staff to improve the speed and accuracy of their work. He offered them cash, non-cash and verbal rewards. The group that received cash improved their performance 14.6% over the group that received verbal recognition, while the group that received non-cash rewards (such as messages or tangible rewards) improved 38.6% over the verbal rewards group. (Strategic Brand Engagement, Fisher, John G. 2013).
When Jeffrey asked participants about their rewards afterward, two-thirds of those who earned non-cash rewards said they would prefer to have the value of the reward in cash rather than the reward itself. Yet it was the group who received non-cash rewards that outperformed everyone else! This is a great example of people acting in ways that are inconsistent with what they say about their motivations.
3. James Heyman (University of California, Berkeley) and Dan Ariely (Massachusetts Institute of Technology) also conducted an experiment that offered important insights on how people think about cash vs. non-cash rewards. In his study, passers-by were offered different rewards in exchange for completing simple tasks like moving a computerized ball on a screen or solving a series of computerized puzzles. The results indicated that participants were less motivated by low cash rewards than by tangible, non-cash rewards (in this case, candy) of the same value.
Heyman and Ariely explained these results by suggesting that there were two markets in participants’ minds: a social market and a monetary market: “Using monetary payments causes participants to invoke monetary-marketplace frames and norms. When money is not involved (i.e., when there is no monetary reward or there is a gift reward), the market is perceived to be a social market).
Applying the cash value removed the emotional content from the reward and reduced it to a cash value people perceived as insignificant and insulting. In other words, the candy was worth more to people—and was more motivating—without drawing attention to its cash value. People were more engaged when participating in a social market rather than a monetary market.
The Non-Cash Advantage
These studies confirm that, when your objective is to increase people’s engagement in an activity they already know how to do, you must appeal to their desires, emotions and their idea of a social market. For companies looking to execute an incentive reward program, this means that you should use a non-cash reward system. Scott Jeffrey’s experiment, along with the Heyman and Ariely experiment, provides evidence that a non-cash system is more cost effective than a cash system. Business research organization The Aberdeen Group estimates that cash rewards cost about $0.12 per incremental dollar vs. $0.04 per incremental dollar for non-cash incentive rewards.
The other problem with cash incentives is that people begin to view them as expected, ongoing compensation. If that compensation doesn’t continue increasing, they lose interest. By contrast, a reward catalog like Loyaltyworks’, with millions of non-cash options, is unlikely to become dull to participants anytime soon. Essentially, it costs more to motivate employees with cash than with non-cash rewards.
While cash rewards may seem like the most widely-appealing incentive reward, since people tend to say they prefer cash, several academic, behavioral economics studies indicate this is not the case. The emotions associated with rewards are very likely to overpower the simple logic of cash’s usefulness. You can even put a cash value on the influence of those two emotions: it’s a difference of about $0.08 per incremental dollar spent on an incentive program. With non-cash reward programs, not only are your rewards more attractive and motivating to your employees, but you end up spending less money on those rewards.
Director of Marketing at The ISI Group of companies, consisting of:
- Incentive Solutions, Inc.
- Travel Solutions
Direct Contact: 678-514-0224
Sales Hotline: (800)-844-5000
- Ariely, Dan and Heyman, James. 2004. Effort for payment: a tale of two markets. Retrieved from http://people.duke.edu/~dandan/Papers/PI/2markets.pdf
- Babcock, Linda; Camerer, Colin; Loewenstein, George and Thaler, Richard. Labor supply of New York City cab drivers. 1997. Retrieved from http://people.hss.caltech.edu/~camerer/web_material/cabscvfbook.pdf
- Jeffrey, Scott. 2003. “Theory of Tangible Rewards.” Private conference