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items that directly affectthe Perceived Value Of TheAward and those thatincrease the Value OfE a rning The Aw a rd , b e c a u s ethe awards are earnedrather than purchased.

P e rceived Value of the Aw a rdn Evaluabilityn Separability

Value of Earning the Awardn Justifiabilityn Social Reinforcement

In the following docu-ment, the perceived valueof a non-cash award —influenced by the process-es of Evaluability andSeparability — will beexplored first. Followingthat overview, this paperwill provide an overview ofhow tangible, non-cashincentives can increasemotivation because theyare earned rather than pur-

chased, via the psychological processesof Justifiability and Social Reinforcement.

IN T R O D U C T I O NT h e re is perhaps no subjectdebated more fre q u e n t l y(or as vehemently) byincentive program practi-tioners and their clientsthan the value of tangible,n o n - m o n e t a ry (alsore f e rred to as non-cash)incentives versus cash.

BackgroundWhen a participant isdeciding whether an awardis “worth the effort,” theparticipant is consideringthe perceived value of earn-ing the award — thematch-up between thevalue of the award itself,and the effort required toearn it. Insights into thisdecision-making processcome from expectancy the-ories, which hold thateffort exerted in pursuit ofa reward is positively related to the valueof the reward offered for performance.This dynamic is known as the expectedutility of the award.

In addition, several principles ofsocial and cognitive psychology suggestthat participants may perceive non-mone-t a ry incentives to be more valuable thanthe retail value of that award in cash.For example, acknowledgement fro mpeers and other dynamics can extend thevalue of non-cash incentives over andabove the cash value of the incentive.

This has been re f e rred to frequently ast rophy value.

Objective Of PaperFour psychological processes describedh e rein influence participant perceptions oftangible non-monetary incentives, makingthem perceived to be of more value thancash incentives of equal market value.

Four Psychological ProcessesThe four psychological processes to be dis-cussed in this paper can be categorized as

TH E BE N EFIT SOf Tangible Non-Monetary Incentives

Four Psychological Processes Tip The Scales In Favor of Tangible, Non-Cash Incentives ...

Published by: The SITE FoundationCopyright 2003. All Rights Reserv e d .This paper is an edited version of afull report by the same name writtenby Scott Jeff re y, University of Waterloo.

For copies, contact The SITEFoundation.

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EVA L U A B I L I T YWhen a non-cash incentive comes in theform of a travel award, considered a plea-surable experience, an interestingdynamic occurs.

Affective Reactions DrivePerceived ValueThat dynamic is known as an affectivereaction to the incentive. As an example,when you think about a trip to Hawaii,affective attributes probably come first tomind - things like good weather, finebeaches, and great dining.

Research has shown that people usevivid items (such as the good weather,etc.) more frequently than mundaneitems (such as trip preparations, finding asitter, stopping the mail, etc.) to form atti-

tudes. Because attaching a monetaryvalue to non-cash incentives is difficult,the participant’s affective reaction to theaward substitutes for its predicted utility.

Value Ambiguity Increases Value PerceptionsSuch af fective evaluations drive p a rt i c i-p a n t p e rceptions re g a rding award valueas well; in fact, they tend to increase valuebeyond the actual. This is because aff e c-tive evaluations tend to have ambiguity invalue, allowing p a rt i c i p a n ts to cognitivelyalter the predicted utility of the award .Given that tangible, non-cash incentivesa re more difficult to “put a price on,” theyhave greater ambiguity and thus can beascribed a higher value than cash, which

has an established value (and there f o re noa m b i g u i t y ) .

In Conclusion...Non-Cash Incentives HaveEvaluability, Meaning They ...n Capitalize on affective reactions to theaward.n Increase the utility value of the awardand its significance.

SE PA R A B I L I T YPeople mentally segregate some sourcesand uses of funds, and aggregate others.A type of mental accounting processoccurs.

For example, most people mentallyseparate investment income and home(real estate) appreciation from salary;

however, because salary and a cashbonus are both earned as part of the job,they are likely to be mentally combinedwith the rest of the participant’s employ-ment income.

Cash Awards Not As “Separable”as Non-Cash IncentivesCash bonuses lack separability, becausethey go into a base salary mental account.Thus, the value of the cash bonus as ana w a rd for perf o rmance “above andbeyond” does not stand out anymore .Companies can counter this through a cer-emony and the like (to commemorate thep e rf o rmance); however, participants oftencontinue to view this money as ani n c rease in total compensation, because itis cognitively aggregated with salary.

Non-cash incentives are usually con-sumed less frequently; they are separatedinto smaller, more specific mental accounts(e.g., Travel, Entertainment), etc. In thesecases, the award has separability — it isnot aggregated with other compensation.

In Conclusion...Non-Cash Incentives HaveSeparability, Meaning Individuals...

n Separate the award from other compen-sation.n Make the award unique, the perfor-mance “stand out”.

JU S T I F I A B I L I T YMany non-cash incentive awards areviewed as luxuries that p a rt i c i p a n ts nor-mally cannot justify purchasing. If a p a rt i c-i p a n t values it highly (but would not pur-chase it) then the opportunity to earn it asa reward for hard work does not violatethe p a rt i c i p a n t’s standards of justification.

Earning The Incentive EliminatesThe Need To Justify Its PurchaseFor example, a salesperson might nevergo on an expensive and “frivolous” trip toHawaii; however, if the trip is earned forhard work and the participant must “useit or lose it,” there is no need to justifytaking it. Hard work thus becomes anattractive way to acquire something thatwas not justifiable otherwise. The result:Earning the non-cash incentive carriesmore value than earning the marketvalue of the incentive in cash.

In addition, cognitive dissonanceresearch suggests that if a participant isworking hard to achieve an award, theparticipant will try to mentally justify thatthe award is worth the effort. This

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Thus, the value of the cash bonus as anaward for performance “above and beyond”does not stand out anymore.

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brings the participant’s beliefs in linewith their actions and can increase theperceived value of a tangible non-mone-tary award. Put another way, the hardera participant works to achieve an award,the more valuable the award becomes.This in turn leads to more effort.

In Conclusion...Non-Cash Incentives HaveJustifiability, Meaning They ...n Allow the participant to justify the con-sumption of the award.n Motivate the participant to achieve andbe awarded with something more diffi-cult to obtain through purchase.

SO C I A L RE I N F O R C E M E N TOne of the most important re w a rds for a jobwell done is acknowledgement from one’speers, supervisors, family, and friends. Thissocial re i n f o rcement comes from othersknowing about the good perf o rm a n c e .

Acknowledgement Increases SocialUtility, Increasing ValueNon-cash incentives may be more effec-tive than cash awards in this regard,because the participant doesn’t need toadvertise earning them. For example, afriend or a colleague might ask, “So Bill,how are those golf clubs you earned

from the firm?” This is a socially accept-able question. On the other hand, it isless socially acceptable to say, “So Bill,how’s the $1,000 you earned from thefirm?”

Non-Cash Incentives More SociallyAcceptable To AcknowledgeMost people are uncomfortable braggingabout cash, but enjoy talking about theirnew golf clubs or trip. With tangible non-cash incentives being visible and sociallyacceptable to praise, question, or bringup, there is no need to go out of one’sway to call attention to them. By provid-ing a better means to indirectly call atten-tion to the award and what was accom-plished to earn it, the value of earning anon-cash incentive is enhanced relative tothe cash value of the incentive.

Non-Cash Incentives Have Trophy ValueNon-cash incentives like a big screen tele-vision will serve as a reminder to the par-ticipant about his or her perf o rm a n c e(and the firm) every time it is watched.Vacation travel provides memories, pic-t u res, etc. Cash awards can do this some-what, but only when a certificate, plaque,etc., is provided as a physical marker. Inthe case of a non-cash incentive, the awarditself is the physical marker.

The utility of earning a non-cash incen-tive is enhanced by the visibility of theaward and the absence of social normsagainst discussing them.

Cash Awards Are Less Likely To Be Tied To The Company ThatProvided Them

When a cash award is provided, itbecomes the p a rt i c i p a n t’s — anything pur-chased with it is something the p a rt i c i p a n tchose to purchase rather than somethingthe firm awarded to the p a rt i c i p a n t. Family,friends, and colleagues will also be morelikely to view what the p a rt i c i p a n t p u r-chased as something the p a rt i c i p a n t b o u g h trather than something that was award e d

for p e rf o rmance. This makes the linkbetween the company and the award weak-e r, diminishing the likelihood that good per-f o rmance (or the company that awarded it)will be discussed. This is less likely tooccur with tangible non-cash award s .

In Conclusion...Non-Cash Incentives Offer SocialReinforcement, Meaning They ...n Increase the value of non-cash incen-tives through trophy valuen Acknowledge the link between theaward and the company

IM P L I C AT I O N SWhat do the four psychological pro c e s s e smean to incentive program practitioners? Herea re some basic guidelines for consideration.

1. Make Your Awards Truly SpecialIf the participant is less likely to pur-chase the item (because he or she can’tjustify it) then making the award tru l yspecial will increase the value of earn-ing the award, and increase eff o rt toreceive it.

2. Use Infrequently PurchasedItems Or ServicesItems or services that participants wouldlikely not purchase on their own aremore likely to attract the attention of col-leagues, increasing the trophy value ofthe award.

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The result: Earning the non-cash incentivecarries more value than earning the marketvalue of the incentive in cash.

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3. Maximize (and Capitalize Upon)Social Reinforcement QualitiesTo maximize social reinforcement quali-ties, encourage participants to thinkabout the admiration that will result inachieving the award (and by proxy) theperformance that led to it. This willmake earning the incentive more valu-able and increase effort.

4. Communicate Awards As“Splurge” ItemsImply within incentive program commu-nications that the award is truly some-thing the participant would only purchaseas a luxury or personal treat. This willadd to the award’s trophy value andincrease its overall power as a motivation-al tool.

5. Vary Award Types To MeetDiverse NeedsFor each performance level, when participants can choose from a variety ofawards, utility value perceptions arei m p roved. Maximize utility value byoffering incentives desired by people hav-ing diverse tastes.

6. Minimize The Potential For“Loss Aversion”Switching from a cash incentive pro-gram to a non-cash incentive pro g r a mcan result in loss aversion - the perc e p-tion that losing something hurts morethan receiving the same thing of equalvalue. Put another way, if a cash incen-tive program is eliminated, any tangi-ble, non-monetary incentive pro g r a m simplemented in its place should be ofg reater perceived value. Because ofthis, it may be better to use a non-cashincentive in a newer program ratherthan replace a cash program with a non-cash pro g r a m .

7. Consider Other Potential BenefitsA firm may receive additional benefits

from non-cash incen-tives. For example:n Vacation travel mightpay back in improved pro-ductivity for rested partic-ipants .n Providing non-mone-tary incentives can helpattract a better group ofparticipants if suchawards attract partici-pants that are a better fitfor the firm. For example, awardingsomething like a hotel stay attracts peoplethat appreciate hotel stays and would bemotivated by them.

SU M M A RYThis paper suggests how the followingfour psychological processes can increasethe perceived value of tangible non-mone-tary incentive awards over and abovecash-based awards having the same mar-ket value.

Evaluabilityn Non-cash awards are more difficult toattach a monetary value to.n T h e re f o re, when participants focustheir thoughts on the positive attributesassociated with the award, it is ascribeda higher value.

Separabilityn Cash incentives tend to be aggregatedwith overall compensation.n Non-cash incentives tend to be kept sep-arate from compensation, thus standingout as rewards for performance.

Justifiabilityn When a non-cash award is somethingthat a participant would not purchase withcash on his or her own, the participantcan justify the award.n Being able to justify the award means it has greater power to be motiva-t i o n a l .

Social Reinforcementn Non-cash incentives have trophy valueand are more likely to be acknowledgedthan would be the case if the award werein cash.n There are social taboos associated withdiscussing cash.

n Thus, cash lacks thet rophy value and socialre i n f o rcement attributeswhich increase the per-ceived value of the awardover cash.

The editors wish to thankScott Jeffrey for his tirelessefforts in providing thehypotheses and secondaryresearch set forth in thisdocument and in the larg-

er body of work from which it was taken.For reprints of this article or the full,unedited version of this report, please con-tact the SITE Foundation.

Dr. Scott JeffreyScott Jeffrey is an assistant professor inthe Department of Management Sciencesat the University of Waterloo inSouthwestern Ontario. He received hisPh.D. in Managerial and OrganizationalBehavior at the University of Chicago’sGraduate School of Business.

Dr. Jeffrey performs research onincentives and participant motivation, aswell as how goals are formed and howthose goals affect job performance. Healso studies the cognitive and motivation-al processes associated with judgmentand decision-making.

Dr. Jeffrey has taught OrganizationalBehavior, Negotiation, Human ResourceManagement, and Competitive Strategy.To reach Dr. Jeffrey, contact him via e-mail at sajeffre@engmail.uwaterloo.edu.

Thus, cash lacks the trophy value and socialreinforcement attributes which increase theperceived value of the award over cash.

Copyright, 2003All Rights Reserved. The SITE Foundation