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Faculty Insights

Will Tangible Rewards Make Your Employees Work Harder? It Depends

By Willie Choi

June 18, 2019

Companies are increasingly using performance-contingent tangible rewards to motivate their employees. Tangible rewards are non-cash rewards that have monetary value, like gift cards, travel vouchers, and merchandise. A 2016 survey by the Incentive Federation indicates 84% of surveyed U.S. firms offer tangible rewards, spending more than $90 billion annually.

Associate Professor Willie Choi

Proponents of tangible rewards argue that tangible rewards are more effective motivators than cash rewards because employees think about tangible rewards differently than they do cash rewards. In particular, proponents claim employees tend to think of cash rewards as simply “more salary,” but are less inclined to view tangible rewards in this way. They point to various differences between cash and tangible rewards as potential reasons why this might be the case. However, these claims haven’t been systematically tested by researchers.
My co-author, Adam Presslee of the University of Waterloo, and I recently conducted a series of laboratory experiments with students to examine the combined and individual effects of three commonly cited differences between cash and tangible rewards:

  1. Joint versus separate frame: Employees perceive cash rewards to be framed jointly with their salary, but perceive tangible rewards to be framed separately from their salary. For example, cash rewards are often paid together with an employee’s salary in a lump sum, while tangible rewards cannot be paid in a lump sum with salary.
  2. Utilitarian versus hedonic consumption: Employees tend to spend cash rewards in more utilitarian ways, similar to how they use their salary, while tangible rewards are often hedonic in nature, and represents “wants” instead of “needs.”
  3. Expected versus unexpected reward opportunity: Employees tend to quickly develop an expectation for the opportunity to earn cash rewards and view the opportunity as being a “built-in” component of their compensation plan (like they view their salary), but they are less likely to develop such expectations for the opportunity to earn tangible rewards because these rewards are often unexpected and feel like a windfall.

Each of these differences is expected to lead employees to perceive the cash reward as being relatively more similar to their salary, which affects how employees subjectively value the reward, and in turn, their motivation to earn it.

Testing the Three Differences

In our main experiment, participants performed a task on a computer and could earn either a cash reward or a tangible reward based on their performance. Importantly, we made sure that all three differences between cash and tangible rewards were present. The goal of this holistic experiment was to determine whether the performance benefits of tangible rewards materialize when all three differences are present. Then, we conducted three additional experiments to isolate the incremental effect of each individual difference.
In our experiments, participants performed a task on the computer for several rounds, with each round lasting two minutes. In each round, participants had a difficult, but attainable performance goal. In some of the rounds, participants could earn a reward for attaining the performance goal. In addition to recording whether participants attained the performance goal when a reward was offered, we also measured participants’ commitment to attaining the performance goal when a reward was offered, and their perceptions of the degree of similarity between the reward and the fixed compensation they received in each round (this compensation served as their salary in each round).

Results: Multiple Differences Matter

In the main experiment, we find participants offered tangible rewards perceive less similarity between the reward and the fixed compensation they receive in each round, indicate greater goal commitment, and attain the performance goal more than do participants offered cash rewards. These results are consistent with proponents’ claims about the performance benefits of tangible rewards. Interestingly, in the three additional experiments, we find minimal evidence that any one individual difference has any significant effect.
Collectively, these results suggest that, in settings similar to the one we examine in our experiments, no single difference between cash and tangible rewards is sufficient for motivating greater performance. While the results of our experiment cannot tell us exactly how many differences are sufficient, they do suggest that a multitude of differences are necessary in order for the performance benefits of tangible rewards to materialize.
Read the working paper “When Do Tangible Rewards Motivate Greater Effort Than Cash Rewards? An Analysis of Three Commonly Cited Differences” [PDF]
Willie Choi is an associate professor in the Department of Accounting and Information Systems at the Wisconsin School of Business.