Abstract
In the aftermath of the great recession, progressive HR executives represent a key partner to executives looking to do more with less. As the need for increasingly agile and cost- effective reward structures expand in strategic importance, top business leaders and consultants are turning more and more to non-cash rewards and recognition. Research shows that top-performing organizations are using travel, merchandise and gift cards to augment current reward structures and impact near-term success. And they are doing so with great success. By following eight basic events in the design and implementation of non-cash reward and recognition programs, all organizations can build a cost-effective reward portfolio that captures key talent and, most importantly, business results.
By now, most organizations have made (and continue to make) significant adjustments to counter the impact of the recession and the uncertain recovery that has followed. In an ambiguous and often tumultuous business environment, financial forecasts are still being restated and growth targets lowered. On the spending side—with up to 70% of a company’s total cost structure being attributed to payroll—head counts have been reduced while salaries and bonus have been frozen or eliminated altogether. As companies juggle growth aspirations with the reality of the day, “do more with less” has become the corporate mantra. Because people matter and cost so much to companies, no discipline is under more pressure to deliver than human resources (HR).
The Critical Talent Need
A business’s dependency on distinguishing itself though the actions and attitudes of its employees is not new to the C-suite. Recently the professional services firm PricewaterhouseCoopers surveyed more than 1,200 CEOs from around the world and asked them: What worries you most about achieving growth expectations, and where do you intend to make the most changes across your businesses to assure that you met those growth targets?
An overwhelming majority of CEOs cited potential talent shortages as their biggest fear. They also ranked the need to create and sustain an adequate talent pipeline as a top priority. Even as stubbornly high unemployment rates continue to grip some developed nations, 83% of those CEOs surveyed said they plan to make proactive changes to their people management strategies.
With the majority of CEOs intensely focused on attracting and keeping top talent, HR departments are expected to play a major role in doing so as well. When it comes to people resources, CEOs expect (and need) their HR and compensation teams to address these issues. As illustrated in the same PricewaterhouseCoopers survey, global business leaders are looking for their internal partners to devise total reward initiatives that give the company a clear and competitive edge in the battle to win over and keep the best and the brightest talent available. Of all the tools and techniques at their disposal for doing so, CEOs are expecting HR to use noncash rewards at an increased rate. When asked how they plan to change their people strategies moving forward, 63% of CEOs said they intended to use more nonfinancial rewards to motivate their employees. In fact, of all the possible remedies available to them, noncash was ranked as the strategy of choice.
HR as Noncash Advocate
However, since not every executive is as “tuned in” to the potential business benefits noncash rewards and recognition elements represent, it is up to professionals on the HR side of the business to make a stronger case for noncash. That dialogue should be central to HR’s conversation at the strategic planning table.
The Center for Effective Organizations at the University of Southern California has suggested that the HR function should be updated and realigned to meet the strategic needs of today’s talent-driven economy. This approach essentially posits that HR itself has to speed up and change its current organizational structure, processes, tools and overall outlook to add newer levels of value to today’s companies.
As the HR community aspires to become a more strategic function within the organization, it is incumbent on these HR teams to understand how new research and emerging thought leadership can support the broader use of noncash incentives within compensation plans. With business success so contingent on access to top talent and so much money already invested in salaries and bonuses, recalibrating the mix of cash compensation with additional noncash reward elements must be part of this new thinking.
The Emerging Utility of Noncash Rewards and Recognition
A number of recent studies by respected thought leaders (in and outside of the rewards and recognition industry) have all weighed in on the practical effects and strategic importance of including noncash compensation within the total compensation formula. For instance, global management consulting firm McKinsey’s paper, Motivating People; Getting Beyond Money, confronts an “old-economy” notion that cash is the be-all and end-all of employee motivation. McKinsey found that noncash motivators (including praise from immediate managers) were often more effective than the three highest rated financial incentives of cash bonuses, increased base pay and stock options.
How so? McKinsey cited the promotable nature of noncash—something the rewards and recognition industry has been speaking to for decades—as the main reason these elements are more effective, and therefore more efficient, in aligning the personal interests of employees with the strategic direction of the firm. McKinsey’s conclusion was clear: Companies that wish to focus employees on critical business outcomes and connect their related behaviors with the goals of the organization have an effective but underutilized utensil in their compensation tool box.
The Benefits of Noncash
As HR looks to do more within the organizations by moving beyond engagement to supporting the business agendas across the organization, linking employee behaviors with the brand’s promise and/or positioning the firm to be more nimble and adaptable in the face of constant change have become top priorities. Noncash rewards represent an increasingly useful and relevant compensation device. A recent survey titled Trends in Employee Recognition and published by the nonprofit association World at Work indicated that 79% of all companies already using these tools do so to focus employees on “above and beyond” behaviors that celebrate individual effort in support of the greater mission of the company.
The potential utility of noncash awards also holds true for organizations looking to ignite sales and sharpen customer focus. A recent study by the research organization Aberdeen Group and distributed by the Incentive Research Foundation (IRF) highlights the importance of Rewards and Recognition as a Vital Compensation Component. The study underscored the competitive advantages companies can gain when they venture outside the traditional realms of compensation. After comparing various sales force compensation techniques used by organizations achieving “best in class” stature across major business indicators (e.g., quota attainment, revenue growth and deal size) against companies that lagged in those same metric categories, the study found that the compensation techniques that worked most effectively across top-performing firms included a mix of noncash awards.
This finding becomes even more noteworthy when we consider that the annual corporate revenues (measured year over year) for companies that included rewards and recognition in their mix outpaced those businesses that did not by as much as 6%. In a marketplace that’s constrained by anemic growth, that number represents a significant financial advantage.
The Utility Is Universal
In the Aberdeen study, the most common variable that successful companies shared was not their size, or their business model or even their industry category. It was their utilization of noncash rewards. Organizations that implement noncash reward and recognition programs outperformed rivals that did not, and did so across key revenue indicators like revenue per full-time sales employee and quota attainment. Across all sales segments, including individual as well as teams, the numbers outpaced competitors. New hires also did better in comparison. Companies with noncash programs got more deals done while also shortening sales cycles, and that allowed them to recognize more revenue and do so faster.
Best in class organizations also took a broader approach to applying noncash incentives. They did this across an array of performance-related goals ranging from product SPIFFs (Sales Performance Incentive Fund) designed to rid excess inventories to behavioral-based initiatives that rewarded reps for demonstrating steps to success during the various stages of each sales cycle.
These top-performing companies were found to have another thing in common: They were more than twice as likely to experience the desired level of success when they partnered with an outside incentive or recognition partner that supplied the professional services associated with designing, developing or implementing their plans.
How Noncash Awards Are Used: The Solution Mixture
With noncash rewards and recognition representing a significant opportunity for companies to get better business results, it begs the questions: How are organizations using them? What audiences are they targeting? What reward elements do they favor?
To find out, the IRF and the Incentive Federation recently polled nearly 200 designers and managers of noncash award programs. The study confirmed that noncash incentives serve a dual role; they help firms control spending across the compensation mix and they also serve to better motivate employees and channel partners in an economy clouded by austerity.
Just a few years ago, before the great recession changed corporate thinking, cash would probably have been seen as the most cost-effective and compelling method of delivering employee awards. But this joint IRF–Incentive Federation study, The Use of Awards in Organizations, illustrated a notable shift in that mind-set. While cash remains a viable part of the compensation formula, it is being supplemented by noncash components across the board. The study showed a balance of noncash award elements playing a prominent role within most compensation plans and confirmed that the most progressive modern-day compensation offerings do indeed include a mix of cash as well as noncash elements, including travel, merchandise and debit and prepaid gift cards.
The Mix Within the Mix
Few organizations are using a single noncash reward type. Ninety percent of all organizations that use travel or merchandise within their noncash award portfolio are also using other types of rewards.
Why the balance? Program sponsors cite different reasons for using the various award types. Gift cards got high marks for being easy to use and consistently “flexible” in how they are applied and utilized as award components. Merchandise (redeemed through a catalog) is viewed as the most effective choice for companies looking to create a tangible reminder of the employee’s accomplishment—something suppliers of these awards would call “trophy value.” This perspective runs in tandem with a previous study, 1 which suggested that merchandise is preferred as an award because recipients can discuss receiving it more readily with colleagues, family and friends—part of the promotable nature that McKinsey recognized. And finally, in their quest to provide a unique experience, build deeper loyalty to the company and establish a more enduring and emotional connection, program owners continue to cite travel as the award vehicle of choice.
Proper Design Is Imperative
Now more than ever, the thoughtful design of incentive and recognition programs is critical if organizations are going to use them as tool to drive necessary outcomes. Thoughtful design is also the key to avoiding unintended consequences, such as perception of unfairness and overlaps in resources. To that end, the IRF’s milestone study, Incentives, Motivation, and Workplace Performance: Research and Best Practices, laid out the eight critical steps necessary for diagnosing the appropriate design, prescribing the appropriate program and providing a strategy for implementation. The model, called the PIBI (performance improvement by incentives) model, offers mangers a tool that provides guidance for identifying the areas of relevance to performance improvement, step-by-step procedures for implementation and troubleshooting to ensure desired results.
In the PIBI model, the eight critical events that must occur if any noncash reward effort is to be successful include
Assessing the gaps between company’s goals and employee performance
Selecting the most appropriate program to close the gap (quota-based incentive program or nomination-based recognition)
Ensuring the program boosts the value employees assign to work goals by providing rewards, communication and support
Training to make sure people do the right things that contribute to success
Supporting the program through careful attention to the ways rewards are given, how the rewards are distinguished from compensation and the fairness with which awards are disbursed
Guaranteeing incentive awards have a positive impact on emotion and organizational spirit
Measuring motivational outcomes
Analyzing the program against the performance objectives and costs, with information recycled to adjust future programs
Summary
There is a growing realization on the executive floor that today’s businesses have become more dependent on their employees to distinguish the company in what has become a very competitive and talent-dependent global marketplace. Because of that reliance, many in the C-suite are also expecting HR to develop and deploy reward strategies that help their companies attract and retain the best workers available. And the majority of chief executives indicate they feel that noncash awards should be a bigger part of the total compensation mix.
Within the portfolio of noncash choices (travel, merchandise and gift cards), some elements are perceived in certain circumstances as having more effect than others. On average, cards are viewed as more flexible, merchandise is looked upon as more memorable and travel is seen as more motivational. Their impact on results will depend on the makeup of the audience and the parameters of the budget. Companies looking to include these award elements would be wise to reach out to any of the professionals that supply such service for their advice and counsel. Companies that do are twice as likely to get the expected return as those that develop programs on their own.
HR will need to make an effective case for noncash elements and to demonstrate that it knows more about where and why it can be used for maximum effect. Recent studies have confirmed that noncash is more promotable than cash and has broader utility than pay alone. For an organization looking to focus all of its employees on outcomes that drive revenue and sustain growth, it is a tool worth using.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
Notes
Bios
). She previously was the managing consultant of the Employee Engagement Practice, where she also held leadership positions in Solution Management, Product Development and Business Technology Solution Management. Prior to that, she was a senior consultant with Ernst and Young. She has also coauthored the chapter “Nonmonetary Awards: Experiential, Tangible, and Cash Equivalent Awards” in the fifth edition of the Compensation Handbook.