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Recognition vs. Compensation

This article addresses the fundamental question of when to use cash or tangible awards in your incentive, performance, or recognition program. It summarizes research on the subject and outlines steps to be taken in this critical area of employee motivation.

Managers who plan incentive programs often face the basic question: What should we offer as awards – cash, or tangible incentives such as merchandise, travel and gift certificates?

Proponents of cash incentives argue that nothing is easier to give. Cash is easy to administer, and employees can use it for anything they want without the restrictions placed on other types of awards. If you ask employees, most will say they prefer cash. Almost every study of employee attitudes about incentive programs finds cash on top of the list of preferred awards.

In contrast, proponents of tangible non-cash incentives will tell you that cash is a poor motivator, pointing out that it has little “trophy value.’ Most people don’t want to talk about how much they earn, and the money often ends up being spent on everyday necessities or paying off overdue bills. They’ll also argue that cash incentives quickly become confused with salary and bonuses and so become yet another yearly expectation. Try to end the cash program, and you get resentment and disillusionment because, in effect, you’ve cut pay. Keep it going, and your recognition investment gets lost in the compensation/benefits equation.

Who is right? More companies seem to be taking the view that incentive travel and merchandise programs are a sound investment. The 2007 Incentive Merchandise and Travel Marketplace Study, conducted by the Incentive Federation, found that 85 percent of companies view incentive travel as an investment rather than a cost, while 77 percent consider incentive merchandise to be more of an investment than a cost. Another Incentive Federation study supports the view that tangible non-cash awards are more compelling than cash. Eight out of 10 respondents in the 2005 Survey of Motivation and Incentive Applications said that travel awards and merchandise are remembered longer than cash awards, and 75 percent believe they can build a more exciting and more memorable incentive program around travel or merchandise than they can around cash. In addition, 60 percent of survey respondents said employees are likely to view cash incentives as part of their compensation package.

In fact, when B. I. Performance Service Inc. of Minneapolis conducted a study with its client, Goodyear Tire & Rubber Company, in which dealers were divided into separate but presumably equal groups, one offered tangible rewards (B. I.’s catalog and travel program) and the other offered cash. The dealers in the group using tangible awards significantly outperformed the cash group during the promotion period. An almost identical study conducted by B. I. and Mazda Motors Corp. achieved similar results.

Depending on your company’s goals and culture and the composition of your target audience, of course, both cash and tangible awards may play a role in your motivational plans. But the evidence showing that the benefits of tangible non-cash incentives outweigh those of cash is pretty strong. A research study on “The Benefits of Tangible Non-Monetary Incentives” conducted by Dr. Scott Jeffrey of the Department of Management Sciences at the University of Waterloo in Southern Ontario (and available on the website) found that four different psychological processes can contribute to increasing the perceived value of tangible non-monetary incentive awards over cash-based awards having the same market value:

  • Evaluability. It’s more difficult to assign a specific value to a non-cash award, and non-cash award recipients are likely to place a higher value on the award than its actual cost.
  • Separability. Cash incentives tend to be aggregated with overall compensation, non-cash awards stand out as rewards for performance.
  • Justifiability. When a non-cash award is something a program participant would not purchase on his or her own, the participant can justify the award, and being able to justify the award means it has greater power to be motivational.
  • Social Reinforcement. There are social taboos associated with discussing cash and compensation. Non-cash incentives are free of those taboos. Recipients are free to discuss the award with coworkers and others thus increasing the perceived value of the award and its trophy value.

Few organizations want to be bribing their employees regularly with cash or gifts. Most want employees to be motivated by the desire to excel and advance the interests of the organization. But any discussion of motivation can quickly enter the world of organizational psychology, whose arcane language is a challenge to those both inside and outside the profession. Still, a basic review of the field is helpful in understanding the process of motivation.

Many factors beyond cash or tangible awards influence whether an employee is satisfied and ready to give 110 percent to the job. Long ago, the psychologist Abraham Maslow identified a hierarchy of five basic kinds of needs that govern this process. He argued that these needs are interconnected and may be viewed as a kind of pyramid. For a person to be motivated, the needs must be satisfied in the following (ascending) order: physiological, safety, social, esteem, self-actualization. Self-actualization, at the top of the pyramid, is a complex state of being in which people have clear goals and a self-sustaining desire and ability to achieve them. It is the Holy Grail of motivation, and it is not realized at most companies.

Another seminal work to consider is that of Frederick Herzberg, who brings Maslow’s thinking into the realm of job performance. His “Dual Factor Theory” divides the issue into: 1) conditions surrounding the task; and 2) the task itself. The first part, which he calls “hygiene factors,” includes such things as annual pay raises, job-site conditions and company policies. But he contends that the real motivators are the factors directly related to the task itself: Is the task challenging? Does successful completion of the task contribute to a sense of personal growth? Properly addressing such issues, Herzberg argues, gets you to the top of Maslow’s hierarchy of satisfaction.

Where Theory Meets Practice

Even though they don’t specifically address the debate about cash and tangible awards, Maslow and Herzberg provide important insight into the issue. Maslow’s work suggests, for example, that performance strategies have to make a distinction between material, social and spiritual issues. And Herzberg makes it clear that no reward will inspire people if their basic needs are not met or if they get little satisfaction from the work process.

Together, Maslow and Herzberg suggest a need to distinguish between compensation and recognition and to address all the other issues critical to motivation and performance. An example of the latter: Even if you have happy, hard-working employees, will they do the specific things your company needs them to do in order to achieve its goals?

Compensation Vs. Recognition

Webster defines compensation as “that which is given or received as an equivalent for services, debt, want, loss, suffering, etc.” Clearly, compensation is linked to security and safety, since no one feels completely safe unless they’re sufficiently compensated to meet their needs.

Recognition, on the other hand, is defined as “acknowledgment and approval, gratitude, etc.” Recognition appeals to the higher levels of Maslow’s hierarchy of needs, especially social and self-esteem needs. Herzberg’s theory linking satisfaction with the process and end-result of work probably is an essential component of reaching the highest level on Maslow’s scale – self-actualization. At that level, people have a self-sustaining motivation that thrives on continually improving the process of work and its end result.

Even though the distinction between compensation and recognition is clear in theory, most companies get them confused in practice. This occurs because most organizations develop incentive and performance strategies without determining whether they want to compensate employees or recognize them.

Currencies of Compensation and Recognition

On one issue, there is no debate: Cash is the world’s best form of compensation. Ask any employee what they want most in return for their work, and cash will be the answer. Try taking cash away entirely and replacing it with tangible awards, and you’ll have a revolt on your hands. When a Tennessee-based auto-parts manufacturer tried to reduce overtime pay with an incentive program that offered merchandise and travel, union employees started wearing T-shirts printed with a message taunting the program. Lesson: When you want to compensate people for their work, look no further than your checkbook.

Recognition is a trickier issue. In most western societies, cash rarely is accepted as a means of recognition. Winners of awards in sports, business, and science often get cash awards, but when they attend the awards dinner they receive merchandise, travel, trophies, and public expressions of gratitude as well. Likewise, most people don’t give cash to express thanks but attempt to choose tangible expressions of gratitude that are more personal. In other words, the currency of recognition is almost always anything but cash.

That distinction helps clarify the debate between cash and tangible awards. If your goal is to compensate people for extra performance, offer cash. On the other hand, if your goal is to recognize people and express thanks for performance, consider something tangible that has staying power.

When to Compensate and When to Recognize

Few companies consistently poll workers about corporate objectives and policies, yet many leave the critical choice between compensation and recognition up to employees. Surveying employees about their choices assumes that you will get the best performance out of employees if you give them what they want.

As the song says, it ain’t necessarily so. Furthermore, you could fall into the trap of having to bribe employees to achieve your goals. If you prefer to have self-motivated employees, the best approach is to emphasize the need for continuous improvement at all times and place less emphasis on the compensation or recognition received for it.

Since cash has a material impact on people’s concern for safety and security, its use must be carefully considered as an award for special performance. Cash works best when employees have reason to expect they can earn the same amount the following year if they work as hard. If employees receive a generous cash bonus one year with no hope of getting it the next, many will feel as if they’ve taken a pay cut.

Cash has significant advantages, however, if your organization wants to promote individual performance and has no reason to tout top performers or publicize what they did to achieve their status. Since many employees prefer to keep the exact amount of cash compensation secret from colleagues, offering cash helps ensure that people will keep quiet about their rewards.

With recognition, however, the objective is to express thanks for exceptional performance and to create role models throughout the organization. While employees may not want to talk about their $5,000 bonus, they’ll gladly boast of the free trip, gift certificate, or some other desirable award they received. Because recognition, by definition, comes as a result of exceptional performance, it’s easier to position it as a one-time event that may or may not be repeated. And, since the award probably won’t be used to defray living costs, there’s a better chance employees won’t feel cheated the following year if they’re unable to qualify for special recognition.

Caution: Whatever your goal, your program will become addictive if too much emphasis is placed on the award instead of on the inner satisfaction that employees experience with accomplishment.

Understand Your Audience

Of course, making the distinction between recognition and compensation doesn’t address all the issues. Careful consideration should also be given to the makeup of your audience. If you’re trying to get low-paid workers to improve their performance, you might consider addressing compensation issues before offering tangible awards as recognition.

According to Maslow, people can’t move toward self-esteem and self-actualization without first meeting their physical needs. By this, one might conclude that cash makes the best reward for low-paid employees. But it isn’t that simple. If your goal is to maximize output continually, you must decide which of two strategies makes sense for your organization. The first is a pay-for-performance plan that gives the hardest working employees the ability to make additional money every year. The second is a recognition program built around tangible awards that express gratitude to top producers or workers who have improved their performance significantly during the year.

Cash is an issue in programs for higher-paid employees, too, but here you’re dealing with people who are at, or near, the summit of Maslow’s pyramid. There’s a good chance they have all the money they need, so they may respond only to extraordinary gifts or travel opportunities or to special levels of organizational recognition, such as a President’s Club or Chairman’s Circle.

This is why many incentive programs aimed at higher-paid individuals almost always include carefully selected tangible awards. Higher-income people can buy the material goods they want, but money can’t buy corporate recognition and self-esteem.

Other Factors Affecting Motivation

If all you had to do to motivate people was choose between tangible awards and cash, your organizational problems would be simple. Unfortunately, Maslow’s and Herzberg’s theories, as well as practical experience, suggest that motivation and performance are more complicated than that. Also involved are:

  • Clear goals linked to organization objectives. Your target audience can work as hard as possible, but it won’t do any good unless people perform necessary functions that bring the organization closer to its objectives.
  • Attainable goals. No compensation or recognition program stands a chance of influencing behavior if the majority of employees feel incapable of achieving the desired level of performance. To make sure you don’t set the goal too high, review the group’s previous accomplishments.
  • Training. In addition to the desire for success, people need knowledge and tools. You can offer someone the most compelling compensation plan or recognition, but neither will work unless the individual has the ability to achieve the goal.
  • Job satisfaction. Few compensation or recognition plans succeed for long if they don’t consider fundamental workplace issues, such as employees’ role in job design, responsibility for quality of the finished product and commitment to organizational goals.

Compensation/Recognition Checklist

Use this quick test to determine whether your program’s goals call for cash compensation or non-cash recognition. If you answer Yes to most of the questions in both A and B, your program may call for both compensation and recognition.

  1. Compensation. If you answer Yes to at least three questions, your strategy probably calls for a cash approach.
    1. The recipients of this year’s awards will have as good a chance to win the award next year.
      Yes No  
    2. Our organization prefers to reward top performers in a private manner.
      Yes No  
    3. Our organization has no need to emphasize specific types of employee actions or behavior.
      Yes No  
    4. Our target audience consists mostly of low-income employees who are cynical about the motives of management.
      Yes No  
  2. Recognition. If you answer Yes to at least three questions, your strategy probably calls for a non-cash approach.
    1. There is no guarantee or assurance that our company will conduct any other incentive/performance programs in   the future.
      Yes No  
    2. Our organization wants to hold up top performers as a model to others.
      Yes No  
    3. Our organization wants to emphasize specific types of employee actions and behavior.
      Yes No  
    4. Our target audience consists mostly of high-income people who do not feel the need for more money.
      Yes No  

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