The Incentive Research Foundation's Award Program Value & Evidence Study takes a look at the broad benefits of financial versus non-financial rewards and the role they play in employee recognition programs. The findings of this study were fascinating, so we wanted to break down the key learnings and share them with you. Non-cash rewards for employees are more than a passing trend. As we’ll explain, the data speaks to why and how non-financial rewards lead to more successful employee recognition results for organizations because they are more meaningful to people and activate new, lasting workplace behaviors and performance.
The growing trend of non-financial rewards for employees.
When it comes to non-cash rewards versus cash rewards, which one wins? A growing body of research has found that tangible non-financial rewards deliver equal or greater returns to organizations than an equivalent cash reward. In fact, a McKinsey Quarterly report indicates that employees who earn sufficient salaries are more motivated by managerial praise and one-on-one conversations with leaders than by monetary rewards, stock options, or even pay raises.
This trend of awarding non-monetary incentives is being reflected in the behaviors of companies as well. As of 2016, 84 percent of U.S. organizations have turned to non-cash incentives, which represents a three-fold increase from twenty years earlier when only 26 percent of organizations used non-cash rewards. Why is this? Research points to a few reasons, which we’ll cover in the next section.
5 reasons why non-financial rewards outperform financial rewards.
The Award Program Value & Evidence Study identified potential theories as to why non-cash rewards tend to outperform cash rewards when it comes to employee productivity. Here are the most compelling reasons for the success behind offering non-monetary rewards:
1. Perseverance, effort, and performance.
When people find a reward more psychologically attractive, they want it more, so they’re motivated to work harder to get it. What makes a reward psychologically attractive? Ultimately, offering more meaningful, personalized activities––like experiences–– as incentives that involve the aspect of choice, aren’t repetitive or predictable, and involve spending quality time learning something new and with friends and loved ones. Changing the reward motivation in this way eventually leads to sustained workplace behavior change. Since non-financial incentives, like a trip to Hawaii, are likely to be more attractive to someone than a cash bonus, they’re going to work harder for it and, as a result, performance will increase.
2. Mental accounting.
Cash rewards are known to trigger a process of mental accounting, which is when the recipient blends the cash reward with salary and uses it for a utilitarian purpose such as paying the bills, buying groceries, or making mortgage payments. As a result, they derive very little meaning from this type of reward. Non-financial rewards for employees, on the other hand, can linger in a reward earner’s memory for years (and don't just take our word for it––check out a real Blueboard reward recipient's experience in the video below!). For example, experiential employee gifts that revolve around travel can create lasting memories and positive associations with the organization that provided the reward.
3. Effort justification (a.k.a. “The Ikea Effect”)
“The Ikea Effect” describes the phenomenon in which people place greater than market value on things they’ve worked to build or achieve (like building furniture). For example, this could include sales reps hitting higher goals to earn a unique sales incentive such as VIP concert tickets to see their favorite band. Even though a non-financial rewards aren't more economically valuable than equivalent cash, recipients often place a greater monetary value on awards they’re attracted to and that are more personally meaningful to them.
4. Social signaling.
Non-financial incentives are highly visible. For example, if an employee wins a skydiving experience, they’ll post about it on social media and share details of the experience with coworkers the following day.
On the other hand, discussing a cash bonus might come off as bragging and be considered socially unacceptable. Since non-cash rewards generate greater anticipation, discussion, and “afterglow” than cash rewards, the positive side effects, including happiness and productivity, tend to stick around longer.
5. The Reciprocity Effect.
Cash tends to be viewed by recipients as transactional, which means they lack any relationship-building and positive emotions. On the other hand, an emotionally impactful non-monetary reward triggers appreciation, which leads to a greater desire to reciprocate the gift because the recipient believes that more thought was put into choosing this gift.