Cash Incentive Pitfalls
The Trouble with Money
When motivating sales people to sell more, employees to do more, workers to comply with safety standards, or any number of other incentive and recognition structures, while cash is a seemingly easy strategy, there are drawbacks that must be considered by the program sponsor. With regards to cash, there are hundreds of empirical studies that point to the advantages of non-cash/tangible reward programs over cash-based programs. It may feel counter-intuitive to business leaders that cash isn’t the best choice to motivate behavior change. Therefore, it is worth the regular reminder on the conditions where cash makes sense, and when it can backfire. Further, because gift cards have become more popular as reward vehicles in incentive and recognition programs, it is important to understand the ramifications of including them in an incentive reward catalog, particularly those gift cards that can be used in a universal manner, just like cash.
When polled, most people will say they prefer cash over other forms of recognition. The trouble with money is that it takes more cash than tangible rewards to drive the same degree of behavior change and results. Cash is also taxed at 100% with no fair market value considerations by the IRS. Another key challenge for Human Resources and compensation professionals is the notion that, once introduced, it is challenging to pivot away from cash-based incentives because people start to rely on it for income. Cash also gets lost in the shuffle. Most people tend to forget where they earned it, why they earned it, and who gave it to them. In other words, there are no lasting brand associations with cash.
A Non-Cash Incentive Rewards Your Organization
In a landmark study over twenty years ago, Goodyear Tire & Rubber Company confirmed that the return on investment for non-cash programs outpaces cash. Goodyear operated a 6-month sales incentive program in over 900 stores with two control groups. In half of the stores, sales people were offered a cash incentive for every 12 tires of a specific type sold. Employees in “non-cash” stores were offered merchandise rewards worth the equivalent value as the cash. At the end of six months, the non-cash stores outpaced the cash stores by 46%. The ROI for the non-cash program was 31%. The cash program ROI was -20%.
Gift Cards Are Like a Cash Incentive
But what about gift cards? In my experience, there are two types of gift cards—those that fall into the “trophy value” category and those that fall into the cash equivalent category. Trophy value gift cards that offer the recipient the “right to indulge,” may act in the same manner as merchandise or travel incentives. These cards may work well, but the IRS likely still considers them cash equivalents, meaning they may cost the program sponsor and/or employee more at tax time. Cash equivalent gift cards such as Visa, American Express®, or retailers such as Walmart® or gas stations often fall into the “needs” category. People tend to use these cards as a supplement to their income. It is very challenging for the program sponsor to adjust the incentive structure, or eliminate the program altogether without an uprising. With this category of gift cards, employees may likely be forfeiting favorable “fair market value” tax considerations associated with non-cash/merchandise programs.
Overall, there is an appropriate place for cash in the compensation and commission model. But, before introducing cash or cash equivalents such as gift cards into an incentive and recognition structure, be sure to consider the impact of the decision from all angles.