Financial vs Non-Financial Incentives: Is Cash King?

Financial and non-financial incentives are yardsticks for sales performance. In business, people often debate whether the best catalyst is financial or non-financial incentives. To take a closer look at which is most suitable for any given scenario, this article explores:

• Types of incentives
• Financial incentives
• Non-financial (non-cash) incentives
• Cash versus non-cash incentives: a study
• How to implement incentive rewards

Types of incentives

There are three types of incentive rewards. These are:

• Tangible incentives – money or cash, such as commissions or bonuses, based on a formula that measures performance.
• Non-cash tangible incentives – points that can be redeemed or exchanged for prizes such as merchandise or experiences.
• Intangible incentives – performance awards such as socially visible recognition. This could include trophies, announcements, photos, or plaques.

What are financial (cash) incentives?

Financial incentives are monetary rewards for specific actions or behaviours, such as making the most sales in a quarter. Companies implement these financial schemes to increase productivity and effort.

Examples of financial incentives include:

Commissions over and above baseline salaries

This model fosters a results-driven culture, aligning individual success with company goals. Ideal for engaging sales teams, this incentive structure empowers managers to increase employee motivation and drive business success through tangible performance-based earnings.

Target bonuses

Similar to sales commission, bonuses for meeting targets are a way of financially tying - and therefore incentivising - individual performance to the overall financial objectives of the business. If all individuals meet their target bonus criteria, then the business will meet its revenue targets.

Profit sharing schemes

Profit-sharing schemes aim to foster a collective commitment to organisational growth by paying a portion of profits to its employees. This can often inspire better teamwork and a genuine sense of ownership amongst employees, who come to work each day knowing their individual and team performance will have an impact on their financial reward.

Gift cards

Gift cards can be a more personalised way to incentivise high performance. While they may seem very similar to cash, because they can only be spent on certain items, they help employees separate work-related incentives from everyday expenses. They can allow them to purchase what they want, rather than just what they need.

Stock options

Stock options are a form of compensation that allows employees to purchase shares in the company at a predetermined price. This can prove an effective motivator to all employees, because if they are literally invested in the business, then they are more likely to produce their best work. Offering stock options to employees is also a good way to retain your best talent, as the value of the stock increases over time (if the business is performing well).

The benefits of financial incentives

When given a choice, it's tempting to assume that employees naturally gravitate towards financial incentives.

Studies have found that money motivates the performance of individuals and teams, though it cannot be credited as the sole or best motivator. When financial rewards are tied to specific goals or outcomes, productivity increases and targets are met more often.

Boosts morale and motivates employees

As an extrinsic motivator, financial incentives lift the morale and effort of employees. Individuals or teams harbour a sense of personal achievement as they get rewarded (or paid) for dedication and goal accomplishment. Financial incentives also fuel the desire to repeat or exceed these achievements, setting continued efficiency and progress in motion.

Rewards efforts

Employees feel that fair and satisfactory financial incentives warrant the efforts they put in. They reinforce external motivation, meaning that employees continually do their best.

Makes unpleasant work worth it

Increased financial rewards for less enjoyable tasks motivate people to do them. If people know that they will earn more by taking on certain undesirable jobs, there will likely be more willing volunteers than if the rate of pay was equal.

Cultivates company loyalty

People who believe that they receive adequate financial rewards are much more likely to stay loyal to a company. This in turn builds valuable experience and tempers high staff turnovers.

Provides financial security

Sufficient financial incentives boost job satisfaction in uncertain economic climates. Monetary benefits provide financial security and economic stability, which is especially important to those with families and other financial commitments.

Cost-effective

Employers can structure monetary incentives around targets, which means that the sales goal covers the financial rewards. This is cost-effective and benefits both the company and the employee.

The cons of financial incentives

Regardless of how attractive they are, there is a flip side to monetary rewards. It is essential to consider these drawbacks to ensure a holistic approach to employee motivation and satisfaction.

Short-term focus

A short-term focus can drive employees to prioritise transient goals for instant financial rewards. This can become counterproductive towards the longer-term needs of the business.

Extrinsic motivator

As an extrinsic motivator, financial incentives can diminish the intrinsic will to accomplish non-financial goals, such as keeping a customer satisfaction index score above a certain level. Monetary benefits can hamstring creativity, passion for the job, and a sense of personal achievement.

Negative competition

Financial incentives can also fan the flames of negative competition. These rewards establish income disparities, which, in turn, may lead to workplace inequity.

Unethical conduct

To maximise immediate financial benefits, employees may also resort to unethical means, such as cheating or manipulating the system, to attain higher commission payments or climb internal league tables. It may cause employees to value the money more than the ethics of a job, and customer satisfaction can suffer as a result.

What are non-financial (non-cash) incentives?

Non-financial incentives are value-based rewards such as recognition, constructive feedback, sales incentive travel, experiences, or merchandise. These kinds of rewards pivot around:

• Personal and professional development
• Job satisfaction
• Intrinsic motivation to cultivate a personal sense of accomplishment
• Company morale and loyalty

The benefits of non-financial incentives

At first glance, cash seems like king, but the value-based significance of non-monetary incentives is undeniable. Non-financial employee rewards build the foundation for long-lasting loyalty and sustainable growth and express corporate gratitude far better than an impersonal cheque.

Better employee engagement

Non-financial incentives nurture employee engagement. These are intrinsic motivators that highlight achievements and cultivate an emotional commitment to, and passion for, the job.

Psychology shows that intrinsic motivation is lasting and meaningful. Non-monetary experiences develop opportunities for job satisfaction and company loyalty – things that money simply cannot buy.

Memorable

Recipients are more likely to remember where and why they earned that once-in-a-lifetime trip or the latest tech. Cash rewards, though nice at the time, easily get lost in daily budgets for things such as fuel or groceries.

A non-monetary reward creates lasting memories. These, in turn, foster commitment to the company.

Personalised recognition

A non-monetary reward is personal. It empowers managers to customise and personalise their appreciation, giving it a unique and meaningful touch.

Non-financial incentives also allow companies to combine intrinsic and extrinsic motivators, which serve both growth and increased drive. This boosts morale and motivation.

More sociable

Recipients of non-financial incentives such as merchandise and experiences are more likely to discuss and enthuse publicly about the reward they have received. This is because it's more socially acceptable to mention the new watch or luxury weekend break that they've been able to acquire as part of an incentive scheme.

In general, employees tend not to talk about the exact amount of commission or bonuses they've earned with other colleagues - so the money is essentially banked and forgotten about.

Cost-effective

Because non-financial rewards can be perceived by the employee to be of higher value than they actually are, it can cost companies less overall to implement rewards programmes where goods and experiences are used as incentives.

The cons of non-financial incentives

Similar to financial incentives, non-financial incentives also pose a few obstacles. It is, however, easy to overcome them with the right strategies.

Varied effectiveness

Individuals may value non-financial incentives differently – some may think they're great, others not so much. This makes it challenging to find non-monetary incentives that hit the right notes with everyone. Variety and choice can effectively address this obstacle.

Can miss the mark

Companies run the risk of losing sight of financially motivated employees. These are the people who will often say that they are motivated primarily by money, and would rather have a bigger salary than the opportunity to earn a free holiday.

However, despite some employees' own belief that 'money talks', research consistently shows that non-financial incentives impact employee motivation more significantly. Science suggests that intrinsic value and emotive motivators spur employees to greater heights than money. Therefore, cash alone may not be the answer for an all-encompassing, successful rewards scheme.

Requires a targeted strategy

Non-financial rewards rely on various options, requiring companies to adopt targeted approaches before implementing such schemes. Selecting different rewards and recognising diverse preferences are just some of the challenges.

Partnering with a sales incentive specialist such as BI WORLDWIDE enables you to develop an understanding of company sales teams and the factors that motivate them. With expert insights into what motivates your staff, you can create a non-financial rewards scheme that recognises employee efforts, inspires continued commitment to the business and drives incremental results.

Cash vs non-cash incentives: Which is better?

Dr George John, a renowned professor of marketing, conducted a study to determine whether cash is indeed king when it comes to incentives in sales environments. The outcomes of the experiment were insightful.

In his book, aptly titled Is Cash King?, he discussed the findings of the University of Minnesota researchers who pitted cash against non-cash rewards. The study centred on a cash incentive-driven Twin Cities-based sales force selling frozen food to retailers. This was a large organisation with annual sales of around $700m.

Sales representatives earned cash and Ovation Points for targets met. These points could be redeemed for merchandise such as golf clubs and luxury watches. Each Ovation Point cost the company $3.75, and before they were removed, the perceived value of the Ovation Point to staff members was just $0.55 per point.

However, when the Ovation Points were taken away, selling efforts decreased and sales figures plunged by 4.5%. More interestingly, the perceived value of the points rose to $5.70 - more than they cost the company to deliver, and more than 10x the amount they were valued at before they were removed.

It can be concluded that the perceived value of the points was redeemed against 'wants' and not 'needs', and the first outweighed the latter in terms of importance. The evidence proved that tangible non-cash plans are worth a company's effort because they capitalise on the human tendency to put them in an emotional bracket of recognition – which seems to be worth more than cash.

This means that non-financial incentives can influence a company's culture as well as its financial performance. They grow commitment and loyalty because they create a sense of personal and professional achievement, resulting in higher efforts from employees.

Bridging the gap between financial and non-financial rewards

Points systems, such as those used frequently by BI WORLDWIDE clients, are the bridge between financial and non-financial rewards. Points act as a type of currency that can be redeemed in a marketplace for merchandise, similar to the Ovation Points used in Dr John's study, experiences and personal development rewards.

The benefit of using points over cash for financial rewards is that they mask the monetary value of goods, removing the element of "spend justification" that cash would bring. Essentially, cash can be spent on "needs" as well as "wants", but the points remove the ability to spend on "needs" and cater almost exclusively to the "wants".

This means that the level of recognition and satisfaction is higher because they feel like they earned that new television or luxury handbag. And this feeling of recognition only increases over time, as more goods and experiences are acquired, leading to long-term job satisfaction and effort.

Choice and personalisation in non-financial incentives

At BI WORLDWIDE, we always advocate for an element of choice within a non-financial incentive scheme. Being able to personalise the goods they receive as their reward can make a big difference. If the prize is a set of golf clubs but you've never played golf, it has far less meaning than if you can choose your non-financial reward.

Reward options don't have to stop at tangible goods, either. Allowing employees to use points to book an experiential reward such as an experience day or even a holiday or opening the possibility to learn or develop a new skill can be extremely motivating.