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IRF Report: Non-Cash Rewards Can Help Address Inflation-Era Compensation Challenges

This Incentive Research Foundation Report suggests that a careful balance of non-cash-based incentives and recognition can help enhance employee experiences with fewer long-term fixed costs. 
IRFOrganizations looking for ways to enhance employee experiences while minimizing fixed-cost increases during a time of high inflation should consider more emphasis on properly designed non-cash incentive and recognition programs, writes Allan Schweyer, Chief Academic Advisor, in a report “Non-Cash Rewards in a Period of High Inflation,” published by the Incentive Research Foundation.
He writes, “One reason firms use one-off cash and non-cash rewards is to motivate and retain high-performing employees while avoiding permanent increases in costs via higher wages, salaries, and benefits – signing and retention bonuses may be the most direct example. A large body of research suggests that non-cash rewards are more effective motivators than cash in many cases, but little has been written about cash versus non-cash rewards in times of high inflation and low unemployment.” 
He elaborates, “Intuitively, one might expect that unless cash rewards have increased at the pace of inflation or better, recipients might look at them the same way they assess wages and salaries – as having eroded in value. In this case, the impact of the reward will diminish. Non-cash rewards more likely sidestep this issue and may be better received. Firms that offer merchandise, travel, and other non-cash rewards will likely pay more for them today than they might have two years ago, but effective sourcing should keep those costs below the overall inflation rate. More importantly, however, is the feeling that non-cash rewards can evoke beyond cash reward.
In 2004, he writes, “University of Chicago professors Christopher Hsee and Yuval Rottenstreich conducted experiments to test their hypotheses on the ‘psychology of value’ – how people feel versus calculate value. Hsee and Rottenstreich found that when people rely on feeling to assess value, the ‘scope’ – quantity of a thing (e.g., reward) – is significantly less important than when they calculate the value of a thing. In other words, when a person rationally calculates the real value of a reward, they care a great deal about quantity, but when they rely on feelings to assess the value of a reward, the importance of quantity drops off.” 
The researchers, he continues, “found that the more salient (affect-rich, or side effects of) a thing or reward, the more likely a person will value it based on feeling. This underscores the importance of presentation of non-cash rewards, for example, ‘selling’ a high-performer on the excitement or luxury of an experience or material item and presenting the reward in an affect-rich manner. Social psychologist and Nobel laureate Daniel Kahneman has drawn similar conclusions from his research. Based on ‘the sign and intensity of the emotional response to objects,’ Kahneman finds that valuations are scope-insensitive, in other words, the importance of quantity disappears.” 
Advises Schweyer, “Firms should always aim for a balance of cash and non-cash incentives, but in an economy that is highly unpredictable – even in the short term – remember that cash rewards are perfectly suited to evaluation by calculation. Consider rebalancing your incentive system to include more non-cash rewards that are geared to a person’s likes (to trigger feeling) yet novel enough that the recipient’s knowledge of the reward type won’t turn feelings into calculation.” 
Editor’s note: Another benefit of non-cash awards is enabling valued stakeholders to indulge in a luxury they might otherwise resist because of economic uncertainty. 
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