When Money, As An Incentive, Fails

According to a Whitepaper by Tim Houlihan of the Reward Systems Group, common wisdom to increase performance would dictate a change in the monetary compensation plan. Pay more cash and get more results. Many corporations do just that, says the report.

Though it is undeniable that money works to drive behavior, and money used as an incentive yields positive results, the fact is that money is not the optimal reward to get extra effort from people. When considering financial efficiency, ROI or total results, there are superior alternatives to cash for incentives, The Whitepaper discusses the reasons why.

In the 1980’s, says the report, American economic professors questioned classical economic theories as they relate to individuals. They created a field of study called behavioral economics, with the focus on what people actually do rather than what classical economic theories say they will do.

Today, this growing field of study has proven what we have known on an intuitive level: people are often inconsistent and irrational in the actions they take. So knowing that we humans sometimes act irrationally, how can this knowledge help us drive desired behavior?

There are many factors that influence our behavior beyond rational thinking, says Richard Thaler, PhD, at the University of Chicago. The most notable among these are our emotions and the desire to seek pleasure. In a study of New York City cab drivers’ activity on rainy afternoons, most cab drivers knocked off early, at the point in time they met their personally set daily ‘quota’ for fares.

The rational response proposed by classical economists would be for them to work the same number of hours and make more money on rainy days. However, cabbies would rather enjoy an early afternoon off than earn extra money.

But this research was confirmed by CultureWorx, a human resources consulting firm, says the paper, when they noted: “If money were the ideal motivator, commissioned salespeople would operate at peak efficiency at all times. But what actually happens is just the opposite. The salesperson becomes ‘income adjusted’ ... either they earn the same amount of money for selling fewer products and services, or earn more money for selling the same amount of products or services.”

The same vein of research has been pursued by Ran Kivetz, PhD, a professor at the Columbia Graduate School of Business. In numerous studies, his work reveals that people act in what appears to be an irrational manner, says the report. That’s because their actions are driven by their emotions to, as Kivetz says, “precommited

to luxury.” We do this because we have so much already yet we want more. Compensation, in the form of money, is first used to meet our living needs and what’s left over, after paying our bills, can be used for the luxuries we desire. Because paying our bills drains the emotion out of the reward, money ends up being a less efficient motivator.

While Scott Jeffrey, PhD, was getting his doctorate at the University of Chicago, says the report, he investigated which rewards would be the most effective in getting University staff members to improve speed and accuracy in the University’s incentive lab. In a controlled study he tested hard cold cash against a variety of non-monetary rewards, such as massages and tangible rewards. He used only a verbal “thank you” for the control group. Jeffrey found that even a simple thank-you can have a positive impact on performance. The cash reward, as one might expect, drove a significant improvement in performance: 14.6% over the thank-you group. Most notable, however, was the tangible rewards group, the massages, that drove a 38.6% increase over the thank-you group.

Finally, Dan Ariely, PhD, a professor at MIT, discovered that people treat rewards with explicit cash values differently than those presented without an explicit cash value. Ariely’s study was based on people being asked if they’d help change a tire in exchange for different rewards.

65% of all those asked, when no reward was introduced, said yes and saw similar results when offered a reward in the form of a piece of candy (such as a wrapped peppermint). However, when offered $0.50 as a reward for changing the tire, many people felt insulted and only 48% of those asked were willing to help.

A study with Goodyear Tire & Rubber is the most cited research on cash versus tangible rewards. Tom Gravalos, a then marketing manager

at Goodyear, embarked on a project to end the fruitless cash/non-cash debate. Tire dealerships in the USA were split after being stack-ranked, with one group rewarded cash, and the other group rewarded with an equivalent value in points (point values were disguised so participants wouldn’t perceive the reward as money). The results were clear: the dealerships rewarding points sold 46% more tires than the group rewarded with cash.

Culling from BI WorldWide’s own Results Library of more than 10,000 individual metrics from programs operated, finds similar results. The key observation regarding efficiency of rewards can be summed up this way: non-monetary award points are 15% more effective at getting participants to deliver results than cash or cash equivalents.

The Aberdeen Group estimates that cash incentives cost $0.12 per incremental dollar, while

  • Non-cash incentives average just $0.04 for the same incremental dollar
  • Non-cash programs cost just 3-5% of a company’s compensation budget, compared to 5–15% for cash reward programs
  • It takes more cash to get the same attention and motivation acquired through non-monetary rewards
  • Cash rewards raise long term compensation implications as they become viewed as entitlements to the recipients and lose motivational effectiveness

Concluding, the Whitepaper finds that many sales executives believe that because we can think rationally about a reward, it’s potential impact on our lives, and the energy required to acquire it, that their sales staff will behave in a rational manner to achieve these rewards.

 However, that’s not how humans function, says the report. Our rational thinking and anticipated rational behavior are usually superseded by our emotions. To make the most efficient use of resources, sales executives must leverage that powerful interrupter, emotion, by maximizing the use of non-monetary rewards.

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