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Award Program Value & Evidence White Paper
Most leaders expect their investments in incentive, reward and recognition (IRR) programs to drive more sales, increase revenue, result in a larger share of the market, or produce some oth-er return on investment. Leaders may also seek measurable improvements in production costs, product quality, reduced accidents and down-time, lower attrition and absenteeism, and in-creased engagement, amongst other outcomes.
There is little debate as to whether rewards work to promote productivity. A large body of academic literature demonstrates the positive relationship between compensation (including rewards) and performance. A meta-analysis of extensive research revealed how the presence of reward programs resulted in an average 22 percent gain in performance (as compared to organizations offering no reward program). For programs in place longer than six months, av-erage performance gains leapt to 44 percent for individually-based rewards, and to 48 percent for team-based rewards (Condly, Clark, & Stolovitch, 2003). There is growing academic evi-dence that investments in non-cash rewards can elicit equal levels of performance for less cost than cash.
Academic Studies on the Psychological Mechanisms Underlying the Advantages of Tangible Non-Cash Rewards
One of the advantages of using tangible non-cash rewards stems from a process called “men-tal accounting.” Cash rewards are known to trigger a process of mental accounting in recipi-ents, in which the reward earner classifies cash rewards with salary (Thaler, 1985). Subcon-sciously, people blend the cash reward with pay and use it for the same every day purposes – for example, paying the utilities, buying groceries and making car and mortgage payments (Presslee, 2017). People tend to make utilitarian purchases when given a cash reward, and consequently derive very little meaning or appreciation from the latter (Dunn, Aknin & Nor-ton, 2014). As these are unmemorable and unemotional transactions, any positive associations between the recipient and the organization are lost quickly (Allen, Shore, & Griffeth, 2003; Eisenberger, Armeli, Rexwinkel, Lynch, & Rhoades, 2001).
Tangible non-cash rewards, on the other hand, can linger in in a reward earner’s memory for years. Experiential travel rewards, for example, create lasting memories and positive associa-tions with the organization that provided the reward (Jeffrey, 2017). As Professor Khim Kelly states, the tangible non-cash reward “… is not economically more valuable but the val-ue comes from it being more meaningful, they remember it a lot more and so they enjoy it a lot more. Fun, enjoyable experiences stimulate a part of the brain that cash doesn’t.” (Kelly, 2017).
Among well-compensated employees, it is even possible that people will pay for recognition. In a 2009 paper, Harvard professor Ian Larkin describes a firm in which software salespeople earn higher rates of commission as they book incremental sales over the course of a sales quar-ter. Sales at the beginning of the first month in any quarter earn a standard commission but additional sales over the remainder of the three months earn increasing rates of commission. The company also runs an annual “president’s club” to formally recognize the top ten percent of salespeople, it operates on the calendar year while sales quarters follow the fiscal year. In December, some salespeople find themselves on the cusp of qualifying for the “president’s club.” In these cases, Larkin found they will book sales immediately (to qualify) rather than delay them into subsequent months to earn higher commissions. On average, salespeople forego about $30,000 (roughly 5% of take home pay) just to get into the president’s club, a distinction that earns them a gold star, an email from the CEO and a weekend trip worth a few hundred dollars. Larkin has found that president’s club members enjoy no higher rates of promotion or do better financially in the future, their motivation, he concludes, is based en-tirely on the recognition and their “standing” (i.e., status) versus their peers (Nobel, 2011).
Appreciation Versus Entitlement
In a 2013 study at a semiconductor plant in Israel, Duke Professor Dan Ariely and colleagues randomly divided employees into four groups, three of which were incentivized with either $30, a pizza coupon, or a motivating text message from the boss. The fourth – the control group – received no reward. Performance significantly increased among the three reward groups – about 4.5 percent for cash and 6.5 percent for pizza and for praise. When the re-wards were removed, performance in each of the reward groups fell, as might be expected, however, only the cash group’s performance fell to a level lower than that which existed be-fore the rewards were introduced. This suggests that the cash reward had become necessary to motivate employees to perform (Bareket-Bojmel, Hochman, & Ariely, 2014).
Effort Justification (“The Ikea Effect”)
Even though a tangible non-cash reward cannot be more economically valuable than equivalent cash, recipients often place greater monetary value on tangible awards to which they are attracted (Loewenstein, Weber, Hsee, & Welch, 2001). As the researchers put it, this shows “there’s something to the idea that you put more value on tangible rewards that you’re working toward” (Choi & Presslee, 2017). This has been labeled “The Ikea Effect,” which describes the phenomenon by which people place greater than market value on things they’ve worked to build or achieve (Norton, Mochon, & Ariely, 2011).
In a 2017 study, Adam Presslee and Willie Choi found that participants overvalued non-cash rewards. In their lab experiment, they used movie tickets as the “hedonic” (a pleasurable thing or experience you may want but don’t need) tangible non-cash rewards and compared them to cash rewards. Even though participants knew the price of the movie ticket ($8.50), when initially asked to estimate its value, the average value they guessed was $9.25. After the experiment, in which participants had to work to earn the reward, they were asked to es-timate value of the ticket for a second time and the average value rose to $11.50.
Social Signaling (“Trophy Value”)
Among the most powerful advantages non-cash rewards have over cash rewards is their recognition value (Mahmood & Zaman, 2010). Tangible non-cash rewards are highly visible; people know who has earned them. For example, you might ask a reward earner about the TV or the trip they earned, encouraging them to think and talk about their reward repeatedly (Shaffer & Arkes, 2009). Discussing one’s cash reward, on the other hand, might come off as “bragging,” and be considered socially unacceptable (Jeffrey & Shaffer, 2007). Since tangible non-cash rewards generate greater anticipation, discussion, and “afterglow” than cash re-wards, they generate greater impact during and after the implementation of the incentive pro-grams (Adams, 2017).
Perseverance, Effort and Performance
The appealing aspect of tangible non-cash rewards also leads to greater perseverance at work. Underlying this effect, Professor Khim Kelly explains that when people find a reward more psychologically attractive, they want it more, so they are motivated to work harder to get it. This emotional attachment leads to behavior change: reward earners like the tangible reward more, so they work harder for it and performance increases (Kelly, 2017).
Recently, in 2017, Kelly and her colleagues led a large field experiment in which participants in consecutive sales contests pursued cash or tangible non-cash rewards (gift cards restricted to hedonic purchases). They found that although there was no significant difference in per-formance between the two groups in the first contest, median sales results in the second con-test were significantly better among those rewarded with the gift cards in comparison to those rewarded with cash. More precisely, underperformers in the first contest who were in-centivized with the tangible non-cash reward did significantly better in the second contest than underperformers incentivized with cash. It is also important to note that participants in the tangible non-cash reward group used a training video made available to them twice as much as those in the cash group, suggesting a greater desire for the reward, leading to greater effort to attain it (Kelly, Presslee, & Webb, 2017).
Measuring the Benefits of IRR Programs
In their landmark 2005 study of the use and value of rewards and incentives, Professors Pel-tier, Schultz and Block found that “clearly defined, measurable objectives” are among the most important success factors in IRR programs. The researchers held that this is true whether the objectives of the program are hard, tangible, and easily measurable (e.g. increased sales), or intangible and more difficult to translate into financial metrics (e.g., greater collaboration). Incentive and reward programs that are assessed based on tangible, financial objectives as well as intangible, non-financial objectives result in improvements at both levels (Banker, Pot-ter, & Srinivasan, 2000).
Focusing on the Hard, Tangible Financial Benefits
When organizations measure the success of their IRR programs, they tend to focus on the financial benefits. In a 2017 survey of more than 350 U.S. based large firms, the Incentive Research Foundation (IRF) found that more than three-quarters of top performing companies analyze performance data from their employee incentive programs against sales data and use that information to improve decisions (IRF Incentive Benchmarking Survey, 2017).
Typical metrics tracked include decreased turnover and increased productivity (e.g., widgets produced), sales, revenue, market share, as well as gains in customer loyalty and satisfaction, and even customer acquisition, where customer lifetime value is known (Bryant, & Allen, 2013; IRF, 2017; Incentive Federation, 2016; Madhani, 2014; 2015; Peltier, Schultz, & Block, 2005).
In its 2015 Program Design Study (U.S.) the Incentive Federation found that 73 percent of firms measure productivity and 49 percent track retention tied to their employee incentive and reward programs. In sales and channel partner incentive and reward programs, almost 70 percent measure revenue from increased product sales, while 49 percent and 75 percent, re-spectively, track new customers. Half the respondents say they track increased market share in channel programs, while in sales programs, only 20 percent measure salesperson retention.
Other hard measures include incentive program impact on absenteeism. More granularly, some firms weight absenteeism higher or lower depending on the day of the week. For exam-ple, Friday and Monday score higher (worse) than mid-week absenteeism (Devillers, 2017). The notion of weighing impact variously is a central component of Return on Investment (ROI) analysis which aims to establish a full and credible estimation of program benefits.
Measuring Intangible Benefits
Measurement of some elements of the intangible returns of IRR programs seem to be picking up momentum in companies. The IRF recently conducted a study of 137 managers of reward initiatives. When surveyed, they reported being more likely to assess the impact of their re-ward programs with regards to employee retention, customer satisfaction, and overall perfor-mance when using exclusively non-cash incentive programs than when using exclusively cash reward programs (Schweyer, Thibeault-Landry & Whillans, 2018). Moreover, managers using the broad spectrum of cash and non-cash tangible and intangible rewards were found to be more likely to link their customer satisfaction data to their hard, financial revenue metrics than their counterparts using only cash reward programs (Schweyer, Thibeault-Landry & Whillans, 2018).
This is further corroborated by the finding that when companies use both cash and non-cash reward programs, they tend to tie their cash reward program component to hard, financial metrics, such as performance and revenue, and their non-cash reward program component to intangible benefits such as employee presenteeism and satisfaction (Schweyer, Thibeault-Landry & Whillans, 2018,).
One interesting exception to note is the increased likelihood of companies using these mix of rewards initiatives to tie their non-cash rewards to employee absenteeism, which is easily translated to a hard, financial metric. This suggests that some metrics may be intuitively easier to measure and associate to non-cash reward programs. As it would appear, companies may already have the desire to measure the impact of their IRR initiatives, but may simply lack the knowledge to conduct appropriate ROI.
Return on Investment Analysis
A relatively small but significant number of firms use formal ROI calculations, such as the ROI Methodology (see Figure 2) to determine the net benefits of their programs (Dawson, 2017; IRF, 2017; Phillips, Phillips, & Schell, 2015; Incentive Federation, 2015).
The ROI Institute, 2016
ROI Calculation: % ROI = (Total Benefits - Total Costs) / Total Costs
An ROI analysis using the ROI MethodologyÔ compares the full costs of an incentive program to its gains – both tangible and intangible – normally within a one-year time frame after the termination or last cycle of the program. The calculation to arrive at the tangible, financial returns uses simple math: Total benefits minus total costs divided by total costs, multiplied by 100 to get a percentage ROI.
Organizations using the ROI MethodologyÔ should include every benefit that can be credibly converted to money. Obviously, changes in sales may be the best measure where sales incentives programs are concerned. In these and other programs though, employee absenteeism and employee and customer retention can be accurately converted to hard dollars and should also form part of the equation.
In some settings, changes in employee theft of company assets – including padding expense accounts – and theft of their own time (i.e., arriving late, leaving early) can and should be measured (Ariely, 2016). In incentive wellness programs, organizations might calculate increased enrollment and use of associated benefits and then calculate the hard dollar returns, such as lower health premiums, reduced absenteeism, etc.
In measuring ROI, it is important to consider external factors that might have impacted the results. For example, if the economy changed during the period of measurement, or if a main competitor went out of business, it will impact the metrics (e.g., sales) used to calculate returns. An attribution estimation, in which those closest to the program determine what percentage of the gains should be attributed to the incentive program, makes the final ROI calculation more accurate.
Supplementing ROI Analysis with Change Point Analysis
It is important to note that in some cases, ROI analysis – even using the ROI Methodology – might miss some of the less obvious costs and benefits of a program depending on the thor-oughness of those estimating attribution. To overcome this, consider combining ROI analysis with a “Change Point Analysis” to better understand the effects of the incentive program be-fore, during and after its implementation. Put simply, change point analysis determines if, when and how many changes occurred.
For example, in a study involving sales contests in 2003, researchers using ROI and change point analysis discovered a steady decline in sales – below what would have been expected if the contest were not run – for three weeks before the program began. Sales spiked almost ver-tically when the contest started and then declined for about three weeks after the termination of the contest, despite remaining consistently above baseline expectations (Forum for People Performance and Measurement (n.d.)).
Using this measurement technique, the research team hypothesized that salespeople deliber-ately delayed closings a few weeks before the contest began so that they could capture them during the contest, and then worked extremely hard to close as many sales as possible before the contest ended. They hypothesized that sales remained higher than baseline for a consider-able period after the termination of the contest because salespeople were closing deals they generated but couldn’t finish during the contest.
The net ROI using this more comprehensive technique was higher than the ROI calculation alone – a positive 10 percent (Forum for People Performance and Measurement (n.d.)). The greater insight, though, may be in better understanding the behavioral effects of incentive programs in order to improve design in the next cycle.
The hard, tangible, financial benefits of IRR programs, though far from guaranteed, are well understood and reasonably easy to measure. The intangible, non-financial benefits of IRR programs are less understood and much less documented. They are also more difficult to measure, and are the focus of the companion paper, Establishing the Intangible Value of Awards Programs.
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