Cash Incentives vs. Merchandise Incentives

Executives who are charged with planning corporate incentive programs often face the basic question: What should we offer as awards? Cash, or tangible incentives such as merchandise, travel, gift certificates, etc.

Proponents of cash incentives argue that cash is easy to give. Cash is easy to administer and employees can use it for anything they want. Also if you survey employees as to what their preferences are most will say: “Show me the money”.

In contrast, those who would recommend tangible incentives will tell you that cash is a poor motivator, pointing out that it has little or no trophy value. Most people don’t like to talk about how much they earn and the money often ends up being spent on every day necessities or paying off overdue bills. They’ll also argue that cash incentives quickly become confused with salary and bonuses and therefore become another yearly expectation. When you try to end a cash program, you get resentment and disillusionment because in effect you’ve cut their pay. Keep it going and your incentive investment gets lost in the compensation/benefits equation.

What direction is correct? Unfortunately there is little if any research that exists which might show a clear set of principles that managers could use as a guideline. Many factors beyond cash or tangible awards influence whether an employee is satisfied and ready to give 110% to the job. The argument continues as to whether or not the employer is doing their all to intrinsically motivate that employee first, before he/she can be motivated to be receptive to an extrinsic award. What this boils down to without going into great detail about the philosophies of motivation is that no reward will inspire people if their basic needs are not met or if they get little satisfaction from the work process.

What is being suggested here is that a company needs to define whether it wants to compensate (cash) or to reward and recognize (merchandise) or do both for its incentive participants..

So that we are clear, here is Webster’s definition of both. Compensation is “that which is given or received as an equivalent for services, debt, want, loss, suffering," etc. Recognition on the other hand is defined as “acknowledgement and approval, gratitude," etc.

Even though the distinction between compensation and recognition is clear in theory it is easy to get them confused in practice. This occurs because most organizations develop incentive and performance strategies without determining whether they want to compensate employees or recognize them. So it is evident that we must first define what it is we want to do.

While the above is the expression of many corporate incentive managers, here are a few others that you’ll rarely hear discussed:

1. Cash has no shelf life. It comes and goes. A 19” color TV sits in the living room for years.

2. Cash is 100% redeemable. There is absolutely no breakage. Every dollar issued is spent. For every dollar equivalent (points) issued in merchandise incentive programs there is at least a 30% breakage. (Never redeemed.)

3. Because every dollar of cash is used, the income tax liability for a company is higher. For merchandise, the tax liability is less because the income tax is only for redeemed merchandise.

4. In addition, the income tax liability for merchandise is only for the “net tangible value” (NTV) of the merchandise. If an item is valued at $100 the actual tax liability is on the NTV, which is around $80. The NTV is the value of the redemption less fulfillment, handling and shipping costs. In most incentive programs this runs about 20%.

5. The savings in breakage and tax liabilities in merchandise programs are normally in excess of the cost of administration. In cash programs there is no offsetting tax liability reductions and breakage to offset the administrative cost.

6. Points in a merchandise program offer instant gratification. Cash checks need to be processed and delivered and therefore lose the gratification value.

7. A cash program cannot: offer a constant visual motivator such as the online merchandise catalog; or provide an online personalized account page that tells each employee how well they are doing on a 24/7 basis; or offer a platform to recognize each outstanding achievement, or act as an instant communicator.

8. A corporation can obtain as much motivation and improved performance from $600 in merchandise incentive awards, as they can from $1,000 in cash/debit card awards. According t o recent studies* of three major incentive programs, where homogeneous groups were offered either cash vs. merchandise related awards results were analyzed; merchandise groups averaged outperforming their cash group counterparts by 70-80%.

*Study of 6,500 likely incentive users, Ralph Head Assoc. LTD

9. Finally, it is difficult to move away from cash programs once you’ve introduced them. When you discontinue a cash program, it is perceived as a compensation benefit reduction rather than the end of an incentive program. This becomes even more difficult if there is a low paid environment.

For a more detailed discussion about cash vs. merchandise contact Arnold Light, President of the Light Group 914.3970800 or contact him through our online form.