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The Trouble With Money
By Vincent Alonzo May 1997 Incentive Magazine
Here's Proof That Cash Is Not The Best Motivator
pdf VersionTom Gravalos, manager of special accounts marketing for the Akron-based Goodyear Tire & Rubber Co., Was constantly butting heads with upper management whenever he presented a proposal for an incentive program budget offering travel or merchandise. The bosses wanted cash and were pretty vocal about the reasons why: Everybody has to have money.Whenever you ask people what they want they always say cash.What could be more motivating than something that everyone already wants and needs? In response, all Gravalos could offer was the usual arguments: Cash is considered income; cash has no trophy value or lasting effect, and cash has poor perceived value. Unfortunately, Gravalos had no facts to support these statements. All he had was anecdotal evidence derived from feedback from his program participants and assurances that this was correct from incentive houses, industry organizations and trade magazines. I was amazed about how little real data there was out there,says Gravalos. In fact, most available research supported the position that cash was a better motivator. In 1993, for instance, the New York-based Society of Incentive Travel Executives sponsored a survey of incentive preference on 534 employees of a nationally-known insurance company and cash came in No. 1. And managers feel the same way. When polled, many incentive decision-makers also believe money is the reward of choice for incentive programs. In 1995, bonuses and other incentive pay rose by 33 percent according to a survey by Hewitt Associates, a New York-based compensation consultancy. By 1994, after years if dancing around the issue in budget meetings, Gravalos had had enough. I got tired of having to defend the decision to use incentives with anecdotal evidence,he says. We run our company based on facts. Were quality-oriented and we test and analyze our products rigorously, yet in this particular part of the business we were relying on very sketchy facts to support a very expensive marketing strategy. Gravalos was certain that non-cash rewards were more motivating than cash. So he decided to put it to the ultimate test. Gravalos ran a sales incentive program that rewarded half the participants with cash and the other with non-cash. And guess what? Those rewarded with noncash produced results that were almost 50 percent greater than those motivated by just cash. Gravalos documented the results in a research paper. Its part of a growing pool of hard evidence that suggests that non-cash rewards actually motivate both employees and consumers better than cash rewards. The Goodyear Experiment Gravalos put those non-cash incentives to the test in a program to increase sales of the companys Aquatred®tires. The program was aimed at sales associates and managers at 900 companyowned stores and service centers across the country. The outlets were ranked in numerical order from best to worst in terms of sales, then divided into two groups. The top selling outlet was placed in group A, the number two outlet was put in group B, number three in group A, number four in group B, and so on until the entire pool was divided. This assured that the test results would be free of impinging factors such as regionality and created two group of nearly identical in performance. The groups were communicated to equally through promotional piecesand periodic newsletters. One group was arbitrarily chosen to receive monetary rewards for every increment of 12 tires sold. The second group received and equally priced selection of merchandise and travel rewards. The latter offer, called Awardperqs, was structured to plateaus which made it impossible to assign a monetary value to them. One of the problems with using a point system is that the participants often try to assign a monetary value to the points. A participant will see a radio in the award catalog that an be redeemed for three points, then will shop around, find out the retail price of the product is $30 and conclude that the points are worth $10. Once that happens, that person has translated thepoints into cash and its no longer a non-cash award. To combat this, the entire 200-page catalog used in the Goodyear program was divided into levels. None of the awards received point values and the cost spread between items in a given level was $25 on the retail level. If a participant went to a department store and looked up the price of an item, it could be $40, while another item in the same level could have a retail price of $65. If any of the participants tried to figure out the precise value of the Awardperqs they would end up with inconclusive information. The objective was to focus the attention and energy of the second group on the available merchandise and travel opportunities without regard to the monetary value. The results achieved in the program, which was designed to operate for six months, were compared with sales in the six-month period immediately preceding the program launch. In addition, results achieved by each group were compared with those of the other group. Measurement was on the basis of units sold, as well as in terms of the ration, or mix of sales of Aquatred tires versus other lines. The results of the program were startling even to someone as predisposed to non-cash awards as Gravalos. I fully expected the non-cash group to perform better in the program that the cash group, but I was startled by how great the margin of difference turned out to behe says. While the performance of both groups improved over the program period, the group motivated by the Awardperqs out performed the group motivated by cash by a margin of 46 percent. The Awardperqs group also produced a 37-percent greater increase in product mix sold, as compared with the previous six-month period, than did the cash group which also experienced a modest increase in this area. And, most important of all, the cash group generated a negative return on investment (ROI) with a minus 20 percent ROI while the Awardperqs group generated a plus 31 percent ROI. In other words, for every dollar invested, the company got back 80 cents from the cash group and $1.31 from the Awardperqs group. The bottom line was that the non-cash program was able to show a significant profit with a program that distributed rewards for every increment of 12 tires sold while the cash program could not. The cash program would have needed a higher, -- hence tougher goal, which could have been demotivating. Add to that the fact that the cash awards were competing with the retail value of non-cash items bought at cheaper, bulk prices, which created a perception of higher value among the participants receiving them, although Gravalos is quick to point out that this is speculation and cant be proven. Since this test, Goodyear has become firmly committed to incentive programs that offer noncash rewards. This test has given us the hard facts to comfortably make decisions on incentive marketing strategies in the future, says Gravalos. As a result of this experiment Gravalos feels even stronger about non-cash incentives than he did before. I would have been prepared to accept it if cash had won out after all, cash is easier to deliver,he says. Anyone considering the use of non-cash incentives has to realize theres a greater commitment required than just delivering cash its more complicated. But you get better performance. If you had asked me three years ago what works better, cash or non-cash incentives, I would have given you my opinion, but no facts to support it. Now Ive got some hard facts. Cleaning Up With Consumers Would the results of the Goodyear test have been the same if it had been aimed at non-sales employees or at consumers? Gravalos thinks it would. This isnt a question of who youre trying to motivate,says Gravalos. Its a question of human nature that transcends most differences that separate people. Theres some hard evidence to suggest that Gravalos is right at least when it come to consumers. A new study conducted by the Dallas-based Southern Methodist University (SMU) and sponsored by the Irving, Texas-based Promotional Products Association International (PPA), indicates that the distribution of promotional products useful or decorative items imprinted with a company name, message or logo can increase customer loyalty and encourage customers to patronize a business more frequently than can offers of cash discounts. The study centered on new customers of a Dallas-based dry cleaning chain at two locations over an eight-month period. The pool was 900 new customers accrued during a period of two week. The customers were randomly assigned to one of three groups. Each received a welcome letter from the management. One test group received three gifts: a sewing kit and lint brush, an imprinted latex balloon stress reliever and an imprinted notepad dispenser, each valued at $5 every 10 to 12 weeks. The second test group was offered $5 discounts on dry cleaning orders, also at intervals of 10 to 12 weeks. The third test group received only the welcome letter. The purchasing activity of each group was then measured and the following result were recorded. Over the eight-month period studied, average dry cleaning spending in the ad specialties group was 27 percent more than the group offered discounts and 139 percent more than the group offered no incentive. The ad specialties group spent $66 per active month compared to $52 for the discount group and $39 for the group that received only a welcome letter. After subtracting promotional costs from sales, the add specialties group was 20 percent more profitable than the group that received discounts and 123 percent more profitable than the group that was not exposed to promotions. ROI broke down to $19,068 for the ad specialties, $15,898 for the discount group and $8,548 for the control group. I believe, based upon my experience in consumer research, that if a company fosters goodwill and makes an effort to create a relationship with its customers, the end result will be increased consumer buying patterns,say the studys conductor, Alice Kendrick, associate professor of advertising at SMU. The way to foster good will and create relationships is through non-cash rather than cash. The results of Kendricks study support the findings of an earlier experiment that studied promotional products effects on short-term loyalty. In this experiment (also conducted by SMU and sponsored by PPA) involving a good delivery service, promotional products marketing was compared with price promotion (coupons) and no promotional at all. Three customer groups existing residential, new residential and business were given either a $2 coupon, an ad specialty valued at $2, or nothing at all. Each group was then measured on the basis of average number of repeat orders and the average number of days between orders. In all groups studied, the food-service customers who received ad specialties ordered more frequently, reordered sooner and placed orders significantly higher in dollars than those who received coupons. These studies prove that the effects of promotional products go beyond cash offers and are very effective tools for boosting the bottom line,says H. Ted Olson, president of the PPA. The dry cleaner involved in Kendricks study has already continued to offer ad specialties. All of its new customers receive some kind of imprinted promotional gift and, according to Kendrick, the company is considering a program that will give all customers a gift on their birthday. This dry cleaner is very interested in exploring alternatives to price discounting, and thats smart because our research shows that discounting your price erodes product or service integrity,says Kendrick. If youre constantly offering a discount, the discounted prices soon becomes the normal price. If youre constantly dealing only with price, that's what happens. When Cash Cripples Consumer programs arent the only types of motivational programs that can become destructive if money is the only reward. Lantech Inc., a Louisville, Ky.-based manufacturer of packaging machinery, began an incentive pay program in the early 1980s. Each of the companys five manufacturing divisions was given a bonus determined by how much profit it made. But according to Pat Lancaster, chairman of Lantech, the program backfired. It only motivated a small percentage of the employees. About 15 percent were motivated. They would think about what they had to do to earn the reward every day and work toward it, but most didnt think about it until the end of each month when the incentive period would end,says Lancaster. Jack isnt surprised that the program motivated such a small number of participants. According to Jack, the reason for the large-scale lack of motivation in most programs is that most participants in incentive programs dont accept the program goals. This is true even of non-cash programs,says Jack. Thats why when a company runs a travel program for 1,000 people, there are only 300 winners they were the ones who accepted the goals. The only way to get the participants to accept the goals is if they have input in the progress. But that was least of Lancasters worries. The employees who were motivated by the program would often make decisions that would impact the bottom line in the short term, thus qualifying them for the incentive, but hurt the long-term profitability of the company. Some divisions would sit on orders form other parts of the company until the end of each month, then rush to fill the orders. This created profits for the division filling the order but generated piles of costly inventory in the receiving division. It created a lack of focus on the customer, and that focus is vital to the success of any business,says Lancaster. It also created dissension within the company. Lantech divisions are so interdependent that it was often difficult to sort out which division was entitled to claim profits. It produced a lot of internal conflict and by the early 1990s I was spending most of my time on conflict resolution instead of focusing on better ways to serve out customers,says Lancaster. For example the divisions that built standard machines and the one that added custom-design features to those machines depended on each other for parts, engineering expertise and so on. Inevitably, the groups clashed, each one trying to assign cost to the other andclaim credit for he revenues. Fighting within the company grew so petty that one division even tried to stiff a competing division for a toilet paper bill. After more than a decade of company-wide turmoil, Lantech abandoned its incentive pay programs for its division. Now all 325 employees receive profit-sharing bonuses based upon the overall success of the entire company. And the company employs an ongoing incentive program that rewards the sales force with groups travel awards. In my opinion, incentive pay doesnt work, but travel does at least with sales but even then, the focus has to be on recognition. That takes away the toxic, selfish elements that appear whenever cash in involved, says Lancaster. Tractor, Not Cash, Goes the Distance There was no cash at all in the incentive program that motivated Herbert Lucke. In 1964, Lucke, a Magnavox dealer in Hannibal, MO., redeemed 130,000 award credits for an Allis-Chalmers Big 10 tractor, featured in a Magnavox sales program called Live Better With Magnavox. Lucke has been living better with that tractor for the last 32 years. Today, he uses it to mow his lawn Palmyra, MO. At nearly 81, he still has fond and vivid memories of Magnavox and what it took to earn the tractor. And often, over the years, he has shared the story with family and friends. Our Magnavox sales rep told us about the program. He had a little booklet that told us how many points we could get for selling the products and what merchandise they could be exchanged for,recalls Lucke. Believe me, our salespeople really kept track of their points in some cases I think it meant more to them than the commission on the sale. Cash gets ordinary. Luckes wife, Anne, also has strong memories of her husband earning the award credits and shopping through the book of awards. She selected a fur stole and hat that she still wears today. That stole and tractor would have cost and $500 a piece back then. If we had received that amount it wouldnt even be a memory today. But weve talked about that Magnavoxmower ever since the day we got it, say Lucke. Top 4 Reasons Why Cash Doesnt Work For years, incentive experts have offered anecdotal facts to support claims of the superiority of non-cash awards over cash. New research confirms this hypothesis but does not offer proof that the anecdotal evidence is true. But after decades of successful incentive programs, this common folklore of the incentive industry bears mentioning.
Cash is considered income. When people receive a cash bonus or gift, the subconsciously think income.In the case of a bonus, recipients will learn to expect it as part of their compensation package. If they dont receive the cash bonus the following year, they feel as if their salary was cut. Non-cash programs have a beginning, a middle and an end. You have no commitment to run the program forever. When you end a program that offers cash, people tend to view it as a pay cut and that can be devastating to morale which is the exact opposite of what youre trying to accomplish with an incentive program.Why Non-Cash Works Incentive participants say they prefer cash, but why did chaos ensue when Lantech uses only cash? Why did Goodyear salespeople perform better when motivated by non-cash rewards? Why do cleaning establishments and food service companies increase customerloyalty with ad specialties? And why does Herbert Lucke still get choked up over a tractor he won in a Magnavox program over 30 years ago? According to Alice Kendrick, associate professor of advertising at Dallas-based Southern Methodist University, theres a perceived value of non-cash items that makes them more motivation. I did a study in 1986 that asked focus groups to assign a cash value to a number of promotional items and most assigned a higher value to the items than they actually had,says Kendrick. But why do non-cash rewards motivate better than cash? In considering the probable cause its important to understand how the offers of rewards are perceived by the participants in an incentive program. About three years ago, we began to look into the reason why non-cash incentives motivate better than cash incentives. We discovered a host of studies from academic, government and medical sources and pieced together a model for the effective use of contingency based rewards. (An incentive is a contingency-based reward just the same as a sales commission is.) The research showed that the way the brain processes information is responsible for non-cash rewards having a greater impact on people than cash awards. Offers of non-cash rewards, such as those offered in the Goodyear program, are visualized or imaged by the right hemisphere of the brain. Such images or mental pictures trigger emotional responses which can be quite powerful. Conversely, offers of strictly monetary rewards are processed by the left hemisphere, which lacks the ability to create images. When a monetary offer is received, the brains lefts hemisphere assesses the information and determines whether the offer is sufficient, relative to the time or effort required to earn it. The emotional response is what drive behavior, not rational thought. With cash, its reduced to one issue how much. Of course if you offer enough money you can move the needle in most situations, but theres rarely enough money in a clients budget to buy performance. Thats why you need the emotional response that only a non-cash reward can provide. Call us for more information on how our incentive programs also save you losing HALF your budget to taxes!
Here's a reprint of the article WHY CASH OFTEN Fails...and also the Trouble with Money.
Why Cash Incentives Often Fail
Reprinted from Occupational Safety & Health. "Why Cash Incentives Often Fail"
Cash isn't all it's cracked up to be. When it comes to motivating someone or a group of people to work more safely, greenbacks are not the best way to go, compensation and incentive experts agree. And a major tax bite is taken out of any incentive given in cold, hard cash."Several national companies have IRS lawsuits going because they gave things as unexpected and innocent as, say, a $5 gift certificate to a local sporting goods company. The IRS called it 'disguised compensation,'" said Bill Sims Jr., president of The Bill Sims Company Inc. in Columbia, SC, which produces incentive programs for clients. Sims said he analyzed the tax consequences faced by workers making $6 an hour at a plant in Bethune, SC, where cash was the reward. The company had a $20,000 budget for its incentive program and decided it would award its employees the net of that amount after paying the taxes. The net after taxes and mandatory deductions was only $11,000, Sims said. "Any kind of cash is taxable," Sims said. "The average company-from our researchwhen they give a cash award, they lose 41 percent of the incentive dollar to taxes." Some gift certificates-the kind that can be converted to cash by purchasing an item for less than the face amount and taking the balance in cash-also are taxed up front. Careful planning in partnership with an incentive company can avoid the tax bite, he said. The other big drawback to cash as a motivation is that workers lose sight of it. "That money goes into your household budget, pays your Visa bill or your light bill. So you have nothing of trophy value," say Sims. Sims said he asked two workers at a company he was visiting what they had bought with the $200 cash bonus each received the previous year. One couldn't recall anything. The other man couldn't remember where the entire $200 went but said he'd bought a fishing rod with part of it. Additionally, "over a period of time, people tend to think of that (cash reward) as an entitlement. They think of it as part of their compensation,". The downside of cash incentive programs was featured on the cover of Incentive magazine's February issue with the headline, "The Trouble With Money." The cover story describes a program designed for Akron Ohio's Goodyear Tire and Rubber Company that tested cash against incentive certificates tied to a mix of travel and merchandise rewards. The key to the program, which involved sales of Aquatred tires, was that it was impossible for Goodyear's salespeople to relate the certificates to any monetary value. The group getting certificates sold significantly more tires that the group getting cash. "Offers of tangible rewards, such as those offered in the Goodyear program, are visualized, or imaged, by the right hemisphere of the brain," the report on the program explains. "Such images-or mental pictures-trigger emotional responses, which can be quite powerful. Conversely, offers of monetary rewards are routed by the brain to its left hemisphere, which lacks the ability to create images. When a monetary offer is received, the brain's left hemisphere assesses the information and determines whether the offer is sufficient, relative to the time or effort required to earn it." The typical incentive program is set up this way: Someone in charge tells the workforce, "We want you to achieve X. If you do it, your reward will be Y. Achieve 2X, and the reward is 2Y." Jack said the message to workers in this setup is "do your best," which is not a goal. Typically, 20 to 30 percent of the workers will respond by showing improved performance. The rest don't change. "We have to understand that people don't achieve goals that they haven't bought into," Jack said. Instead of telling workers to achieve, begin by asking managers in the department how far these workers will go toward the benchmark you want to reach, and what it will take to get there, he said. "A lot of the success you realize is directly related to the number of people you can involve in your efforts," Gravalos said. This means the company must have a plan that reinforces workers' interest, which will remain high as long as they consider the goals realistic and the rewards desirable. Another important factor in making a program successful is giving the workers a meaningful role in designing it, he said.
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