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Don't Show Me the Money!
October 01, 2009
By Leo Jakobson
New independent, academic research to be published next year in a scholarly journal lends long-needed scientific support to the long-held experience of incentive professionals on why non-cash incentives are preferable to cash.
The research, which has been accepted for publication by the Journal of Economic Psychology, published under the auspices of the International Association for Research in Economic Psychology, examines the contradiction at the core of the incentive industry: Why program participants consistently say that they prefer cash but the experience of the incentive industry—and the results of at least one study, first reported more than a decade ago in Incentive—is that people, in fact, prefer non-cash incentives.
“One of the things that motivated this project was the understanding that folks in the incentive industry really did have this lay belief that non-cash incentives are more powerful motivators than cash incentives,” says Victoria Shaffer, Ph.D., an assistant professor in the Department of Psychology at Wichita State University, in Wichita, KS, and lead author of the current research. “But, at the same time, I was aware of a couple of informal surveys that found that people would prefer to have cash incentives. These are ‘real world’ or ‘lay’ theories. I wanted to see if these could be replicated in the lab and then if I could start to understand why those preferences were different in different situations.”
In six related experiments, performed largely on college students, Shaffer was able to replicate this contradiction. In the language of psychology, explains Shaffer, who is director of Wichita State’s Decision Making Research Lab, this is a preference reversal: “When you ask a person a question in one format, they give you answer A. Then you ask the same question but word it a little differently and, all of a sudden, you get answer B.”
Specifically, if you ask people how happy they would be with a luxury non-cash award and with a cash award—without comparing the two—they will be happier with the luxury item. But if you allow them to compare the two, they will give you a different answer. They will choose the more practical award: cash.
“From a psychology perspective, I think one of the most interesting parts of the research is that people don’t necessarily choose what may make them the most happy, and I find that inherently fascinating,” says Shaffer. “I think that is one of the things that people in the industry may not be aware of, because I think you will assume when you ask somebody, ‘Which of these things do you prefer?’ you are going to get a response in which people will choose the thing that makes them the most happy.”
That conflict isn’t limited to the field of incentive awards. “One of the things that we know as decision scientists is that people typically don’t have very good access to the factors that affect their decisions,” says Shaffer. “There’s a lot of literature in my discipline that suggest that people aren’t good at predicting their future feelings and aren’t good at actually indicating what’s affecting their behavior.”
But where Shaffer’s work so far came up short was in answering the critical next question: Which type of incentive, cash or non-cash, leads to better performance? That is a question, she feels, requires more research.
Study 1: The Folly of Cash
The first of the six experiments Shaffer conducted asked one group of subjects to rate how satisfied they would be with a choice of five luxury non-cash awards worth about $1,500 at the time of the experiment, including a 51-inch Sony HDTV and a five-night Carnival cruise to the Caymans and Jamaica. A second group was asked to rate how satisfied they would be with a $1,500 cash bonus, and a third group had to choose between the $1,500 cash bonus and one of the non-cash awards. All groups were Wichita State undergrads told to imagine they are recent graduates who have just finished their first year working at a job they like for a good starting salary of $35,000.
The first two groups were asked to rate their satisfaction with the bonus offered on a seven-point scale, with one meaning “extremely dissatisfied” and seven “extremely satisfied.” The cash group’s median satisfaction rating was five, or “somewhat satisfied,” whereas the non-cash group reported a six, or “very satisfied.” The third group was asked to state whether they had a slight to strong preference for cash, non-cash, or no preference. In this group, 63 percent preferred the cash bonus.
“Those imagining receiving non-cash awards reported that they would be significantly more satisfied than those folks who had to imagine receiving a cash bonus,” Shaffer says. But those with a choice “overwhelmingly chose cash,” she adds. “That really kicked our interest because, again, we have got counterintuitive things going on here, with people predicting that they would really enjoy the non-cash incentive more,” Shaffer says. But they were “choosing to receive the cash incentive. So the rest of the paper was trying to determine why that contradiction existed.”
“Our hypothesis was that people would enjoy a non-cash award more because it has greater affective properties, and by affective properties we simply mean the enjoyment you feel,” she says. “If you receive a 51-inch flat-screen television, your emotional response to that, we predicted, would be greater than if you received the equivalent value in cash.”
Shaffer also found if you give people a choice between the 51-inch flat-screen TV and the cash value, people are going to choose the cash because, she says, “they realize all of a sudden cash is inherently more fungible,” explaining that fungibility simply means how easily an item can be exchanged for something else you need, and cash, which can be traded for any good or service, is the most fungible item in our society.
“Offered cash,” she says, “people will think, ‘I could buy the same 51-inch flat- screen TV with this cash’ or ‘I could buy one I liked a little bit better’ or ‘I could use half of it on a TV and the other half on groceries.’ When people get to choose between the cash incentive versus the non-cash incentive, that’s when the issue of fungibility becomes highlighted.” Her next four experiments delved a little deeper into this issue: affective response versus fungibility.
The Psychological Basis of Non-Cash Motivation
Still, Shaffer notes that fungibility is not exactly the same thing as justifiability, one of the psychological processes described in a paper co-authored a few years ago by Shaffer and Scott Jeffrey, Ph.D., then an assistant professor of psychology at the University of Waterloo, in Ontario, which was published in the journal Compensation &
Benefits Review.
It covers the same ground as a report Jeffrey did for the Incentive Research Foundation (which at the time was still called the SITE Foundation), “The Benefits of Tangible, Non-Monetary Incentives,” which is much quoted among incentive professionals. It deals with four psychological concepts: justifiability, social reinforcement, separability, and evaluability.
Jeffrey’s paper for the Incentive Research Foundation (IRF) gets more attention than any of that organization’s other studies, says Rodger Stotz, its chief research officer. “It looked at tangible non-monetary incentives through the lens of how the mind works,” Stotz says, calling it one of the best research papers available. “It conforms to a lot of the work done in the field of neuroscience. There’s a tremendous amount of research on how the mind works and how people make decisions. It gets very involved,” he adds, noting, “scientists are doing CAT scans while people are making decisions.”
Discussing the paper she co-wrote with Jeffrey, which was titled “The Motivational Properties of Tangible Incentives,” Shaffer says “justifiability plays one of the largest roles in why, theoretically, non-cash incentives could be better motivators.” She explains: “If an incentive recipient is given a cash reward, it would be difficult—especially in this economy and especially if you have a family, student loans, or [other debts]—to justify splurging, even though you may enjoy it more,” she says. “One of the natural advantages of a non-cash incentive is that you can reward your employees with something luxurious that they may really enjoy, without forcing them to make that choice and have to justify it for themselves.”
In Jeffrey’s IRF report, he gives this example: “A salesperson might never go on an expensive and ‘frivolous’ trip to Hawaii; however, if the trip is earned for hard work, and the participant must ‘use it or lose it,’ there is no need to justify taking it.”
The second concept, social reinforcement, comes down to what the incentive industry calls trophy value—the ability to talk about the award and, more importantly for the company giving it, what the recipient did to win it. It is socially acceptable to talk about an incentive trip you took, Shaffer notes, but “it’s really in bad taste to talk about how much cash you received from the company.”
Separability is a bit more complex. “This is where we get into the concept of mental accounting and decision making,” Shaffer says. “We don’t think of our finances as one large pot; we think of them as several smaller pots. One of the great things about non-cash incentives is they don’t get lumped into the income pot generally.” But cash bonuses do, so the $1,500 bonus Shaffer discussed with her research subjects would get lumped into a $35,000 salary pot, while an incentive trip of that value would get lumped into a recipient’s far smaller vacation fund.
Finally, there’s evaluability, which plays into the affective properties of non-cash incentives Shaffer hypothesized would make them more enjoyable. Evaluability, she says, is “basically saying you can dial up or down how excited you feel about a non-cash incentive; it has that flexibility.” So if the sales incentive is a trip to Hawaii, you imagine all the things you’d enjoy—the beautiful beach, the great weather. “Whereas with cash, you can’t dial it up and down because it’s exactly what it is,” she says. “It’s $1,500.” On the other hand, she warns incentive planners if a participant thinks the award is unreachable, he or she can “dial down” the excitement.
Experiments 2 through 5
Shaffer’s second experiment compared three types of awards: cash, luxury non-cash, and utilitarian non-cash awards like a washer/dryer, groceries, and gas. Evaluating each separately, Shaffer found both luxury and utilitarian awards rated very satisfactorily, while cash was again only somewhat satisfactory. But when offered a choice between each type of non-cash award and cash, the group offered a choice of non-cash utilitarian award and cash was indifferent. But two-thirds of the luxury-versus-cash group said they would prefer cash.
The third experiment looked at the emotions various awards elicit—what Shaffer calls affective responses. A cash group and a luxury non-cash group were asked how enjoyable each type of award was, how satisfied they would be to receive it, and how happy that award would make them. In every case, the non-cash awards scored higher.
The fourth experiment was another cash versus non-cash comparison, this one designed to highlight cash’s fungibility. After being asked to evaluate four statements—two noting that cash can be used to buy anything, and two focusing on non-cash awards’ ability to excite—participants were to choose between cash and five similar luxury non-cash awards. In this case, participants came down far more strongly on the side of cash than in previous experiments.
The fifth experiment surveyed real employees who had earned non-cash incentive awards (merchandise or gift certificates) in programs administered by Chicago-based Hinda Incentives. A scenario described two incentive winners, both receiving high-value awards, one cash and one a luxury non-cash award. Participants were asked five questions: Which person they would rather be, which would enjoy their award more, which would be more likely to tell friends about it, which would be prouder of it, and which would work harder for it. They said they would prefer cash, and that the cash winner would work harder, but also that the non-cash winner would prefer her award and be more likely to tell friends about it. “Part of what I think was important about this research was that we really showed that the answer depends on how you ask the question and what question you’re asking,” Shaffer explains.
Study 6: What Works Best
Shaffer’s sixth experiment was her attempt to duplicate the results of the Goodyear Tire experiment, showing that non-cash awards caused superior performance. That did not work out as well.
Briefly, two groups of students were asked to solve 45 anagrams, or scrambled words. One was told the top scorer would receive $250, and the other group was offered a choice of three prizes of equal value at the time—such as an Apple iPod, or a Sirius satellite radio. Neither group did better than the other.
“I was disappointed,” Shaffer says. “I have some thoughts about it.” In the paper submitted to the Journal of Economic Psychology, she described them this way: “Given that a job often represents work that captures a person’s strengths, it is possible one might feel more positive about their likelihood of obtaining the bonus at their actual place of employment. Therefore, the effort obtained from participants on this task may not match the effort that would be put forth in their job.”
She adds: “Furthermore, participants may have perceived this task to be extremely difficult and, therefore, believed their likelihood of obtaining the bonus was slim.” As she mentioned while discussing evaluability, that can dial down the value of either award. So when it comes to the question of whether non-cash incentives drive better preformance than cash, Shaffer doesn’t believe you can look at her sixth experiment and say, “Aha! There is no performance difference,” she says. “Because in the workplace that may be very different. I don’t think the issue is closed in any way, shape, or form. I think there is still lots of research to do on that.”
The difficulty is getting a company to participate in research to be published. The Incentive Research Foundation is currently in talks with a company that just shifted from a cash program to a non-cash one that is considering allowing itself to be studied.
Shaffer's Take-Aways
There are a couple of concrete pieces of advice Shaffer feels comfortable giving incentive planners, based on her work so far:
Don’t Offer Cash Comparisons
“When people are given the two side by side, they would prefer cash [to non-cash awards],” Shaffer says. “So you might avoid all references to how much these [award] items cost.”
Give Things They Can’t Get Themselves
“One of the other suggestions that I make in the article is offer some things that employees couldn't buy for themselves,” she adds. “Some really powerful non-cash incentives would be things like the Mary Kay [Cosmetics] example of the pink Cadillac. That is the classic. That’s not something that people can get their hands on. Or [sporting event] tickets that are in a company box. Stuff like that where you could never even come up with the cash equivalents.”
Limit the Non-Cash Award Choices
“I think there is a slippery slope when choosing the number of [non-cash award] alternatives. If you just had one alternative, not everybody is going to be really excited by it. If you had a handful of alternatives to select, you would probably be able to pique the interest of almost everybody in your company. On the other hand, the more alternatives that you provide, the more obvious it becomes that the goods are not fungible and cash might even be preferable. I would say a few options would probably be the best. I am not sure if there is a magic number. I think more research could be done in this area to hone in on what the appropriate amount of alternatives would be.
Brand Probably Matters
When choosing luxury non-cash awards for her research, Shaffer specified brand-name items, including a Bose 3-2-1 DVD home entertainment system and a five-night Caribbean cruise on Royal Caribbean’s Enchantment of the Seas. “I did choose things that sounded a little bit sexy, if you will,” she says. “My instinct is that they probably have a little bit more of an affective appeal—although I don't have any data to support that.”
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