Why Cash & Store Gift Certificate Incentives Often Fail

When you ask employees what they’d rather have, cash or a gift, they always say, “Oh, just give me the money.” So why is it that when you give them cash or cash substitutes like Gift Certificates to the local mall, it’s less effective than doing a gift program like ours? There are several reasons.

First, when you use cash or gift certificates you automatically lose HALF of every incentive dollar to taxes. There are important tax provisions that our programs help you take advantage of, which save you big bucks in income taxes. Notice what this article, published in Occupational Health & Safety, says…

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 research-when 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, to buy a six pack of beer or a bag of groceries, and is immediately forgotten.” Says 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. 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.

Proof Positive that Cash Isn’t King!

Recent studies by Goodyear have uncovered astonishing results when comparing cash incentives to merchandise awards. They show that cash incentives are only HALF as motivating as a merchandise award. This information is reprinted from Incentive Magazine.

Tom 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 non-cash 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.

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 company-owned 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 the points 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 be he 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 non-cash 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 I’ve got some hard facts.

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 there’s rarely enough money in a clients budget to buy performance. That’s why you need the emotional response that only a non-cash reward can provide.

 

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