Incentives and Rewards: A Closer Look

Author: 
Tim Houlihan

In my conversation with Jana Gallus from UCLA’s Anderson School of Management, we examined the ways that precision impacts the effectiveness of rewards. Her research points to important aspects of how rewards, the signals they send and their efficacy are affected by precision. In short, more precision is better for rewards used with incentives, while less precision is better for rewards used with recognition.

By precision, she’s referring to specificity or how the reward aligns with an exact amount or value. As an example, a highly precise reward could be a $50 Amazon gift card or $500 cash. A less precise reward is 100 points to be used in a rewards catalog, especially if the value of the points is somewhat disguised. A highly imprecise reward is a day at the spa or a dinner for two or a trip to Hawaii.

Incentives

Good incentives rely on high degrees of precision to generate motivation. That’s a key reason why the classic do-this-get-that model in incentive design is so standard and so effective. One unit of an explicit reward is earned for every one unit of an unambiguous result. For instance, $500 cash is received for every $100,000 in new sales during the quarter above and beyond the basic commission rate.

That’s highly precise, and it’s easy to calculate and to determine the effort required to earn. That level of precision decreases friction for reps to get involved.

As common as monetary, or cash-based, rewards are – as well as the precision they bring to incentives – their effectiveness is limited. One of the most effective reward tools is a non-monetary point system. This powerful device is optimal for the above-and-beyond incentives that are outside the commission plan. Above their comp plan, a rep might earn 1,000 points for every $100,000 in new sales during the quarter. Points are ideal when they don’t have an explicit or precise monetary value. Though points are slightly less precise than cash, they are actually more effective as long as the comp plan is competitive.

Good incentives with reasonably precise rules and rewards allow sales managers to send positive signals about the company’s priorities and transparency.

Reps Benefit From Incentives

Sales managers aren’t the only ones who benefit from good incentives – reps benefit on two levels as well. First, reps benefit from the precise and transparent nature of the measurement and tracking, whether they are stack ranked or not, being motivated by social proof or peer pressure.

Second, assuming the rewards are non-monetary, the bragging rights and social signaling that accompany the earnings. It’s culturally acceptable in most countries to say, “I won 10,000 points from the incentive,” than it is to say, “I won $1,000.” Points may be a weak proxy for the exact value of the reward (which is good), but they also act as a reliable proxy for success once the award is achieved.

Gallus notes that explicit rules help reps make decisions about how much effort they want to put forth. An assumption is that the rewards will be right-sized for the culture and the effort. George Loewenstein and his colleagues found that while it’s easy to skew the value of the reward too low (which negatively impacts results), it’s also possible to create a choking effect on motivation by using rewards that are too high in value for the effort. Sales managers should go for the “Goldilocks Effect” of awards that are not too big and not too small to maximize results.

To ensure the point about creating incentives with high precision values and rules, here’s an example of the opposite. Imagine offering an incentive like this: “The good sales reps this quarter will earn between 10,000 and 100,000 points.” Reps will disengage for two reasons: (1) the “good sales reps” term is vague and lacks measurability, and (2) the reward levels lack specificity. Without more precision in the rule and the reward, a reps’ first question might be, “If I win, will my reward be on the lower end or the higher end of that scale?” Without precision, the incentive – as a tool to deliver motivation – fails.

When using rewards for incentives, the best designs incorporate highly precise descriptions and rules to earn them.

Recognition

The opposite is true for recognition. The best rewards in recognition come with less precision. Where the incentive works best with a particular and measurable reward linked to a highly precise and transparent rule, recognition is most effective when the rewards are less precise.

In our personal lives, we often take a bottle of wine as a host or hostess gift when we attend a party at someone’s home. The first thing we typically do when we buy the bottle of wine is to take the price tag off. We don’t want to send a signal of precision with the bottle, so we remove the exact value of the wine. In other words, it’s just uncool to give someone a gift of a bottle of wine with a price tag on it.

Also, in the case of the wine-as-a-thank-you, it’s given prior to experiencing the party. In this way, the gift giver hasn’t evaluated their experience at the party, then gone to the wine shop to pick out a wine of appropriate value. The whole idea of “I think this party was worth a $15 bottle of wine,” is counter to our cultural approach to recognition. Such precision would negatively impact the value of the gift. To go a step further, Gallus refers to how we wouldn’t reward our spouse for helping clean the house with two carrot cakes, because one carrot cake, regardless of effort, would be enough.

In business, recognition is rarely done in advance of the act. So let’s consider two ways recognition can be doled out to a sales team after the effort.

First, establish the reward and the rule to earn it in advance of the effort. This approach can act as a motivational tool. A President’s Club honor is reserved for the highest-performing reps. Everyone should know how to earn and nature of the reward; however, President’s Club is mostly about recognition for the top performers.

Precision and Imprecision

Rewards such as President’s Club can mix precise and imprecise facets, and at the same time, have exact rules to earn. The most successful President’s Club awards are clearly and transparently measured on how to win: being included says the rep is among the most elite group in the organization. But the rewards must have at least a single component of imprecision for it to work as recognition.

The best (and delightfully imprecise) reward for a President’s Club recipient is travel. Travel is one of the best motivators because of its vivid and experiential nature, and it can be “reconsumed” through stories and pictures for decades. However, travel is also a meaningful reward for recognizing top performance because it is imprecise.

In a terrific paper on the subject, Scott Jeffrey compared the motivational qualities of two similar rewards – a trip to Hawaii and a $5,000 trip to Hawaii. In both cases, the trip’s actual cost to the firm was $5,000. However, by framing the value of the trip in precise numbers ($5,000), the motivational effect of the reward was lessened. Dr. Jeffrey found higher motivational power from promoting the prize as just “a trip to Hawaii.”

The second is to recognize a rep after the effort has been made. Imprecision is also key to making this scenario successful for the recipients and for continued motivation.

A sales manager who catches a rep doing something right should recognize them. A few words of praise can go a long way, but there are times when a tangible reward might be appropriate. An example of effective recognition sounds like this: “Why don’t you and a friend spend a day at your favorite spa and bring me the bill.” This is an imprecise reward. When considered rationally, reps aren’t going to spend greedily on their spa day experience. Their social contract with their boss and their company is more important than the most expensive service. They want to stay employed, so there’s minimal risk to the firm. More importantly, it is significantly more rewarding than telling the rep to “take your friend to the spa and spend up to $100 on the company.” This reinforces Jeffrey’s approach to give them “a free trip to Hawaii” and not “a $5,000 trip to Hawaii.”

Sales managers can also benefit from using non-monetary points. Points that lack explicit dollar values are imprecise and allow the rewards to have a more powerful effect of recognition.

In Action

When designing incentives and recognition programs, it’s essential to line up the precision of the rule and the precision of the reward with your objective. Incentives are best when the rules and the rewards are precise with transparent reporting and clear paths for the maximum number of reps to earn. Recognition is most effective with low-precision rules and rewards (except for high-performers guilds like President’s Club).

The most successful rules and rewards align with the strategies of the business and help reps focus on what’s important. In other words, ensure that the rules and rewards do not increase friction and noise for the reps in their daily work. Instead, let the rules and rewards used for incentives and recognition be a clear pathway to the company’s values and strategic initiatives.

And the most effective rewards for recognition are built with very imprecise values and a mix of specific and inexact rules to earn. Sometimes the best recognition is informal, meaningful, and catches the rep at the crescendo of their effort. Like when the sales manager and rep leave a highly productive meeting with a client and the rep is wiping their brow with relief that all their preparation paid off. That’s when the sales manager should say, “Hey, Lisa, you did a great job in there. All your prep work allowed the client to make some good decisions today. Why don’t you and your partner go out for a nice dinner on the company this weekend? Just bring me the bill on Monday.”

Rewards earned for incentives should be precise, but that doesn’t mean they need to be cash or explicitly monetary in nature. Incentives are most effective at engaging the emotional drivers of motivation when they are tangible and non-monetary. The further away from the dollar sign, the better when it comes to rewards of all kinds. Reps will dig deeper and work harder for an indulgence than they would the amount of money required to buy it.

In my work with clients, we’ve had the chance to compare precise rewards to imprecise rewards. In one case, the reps who were given additional cash for their effort performed about the same as the control group. At the same time, reps who were offered physical goods in the same values as the cash group (items like slow cookers and binoculars) performed 47% better than the control group.

As Gallus notes, rewards improve performance and they also enhance the loyalty the reps feel for the company and their boss. Sales managers can’t buy loyalty, but they can earn it by using rewards thoughtfully.

And the best way to generate positive results with your rewards is making sure the precision matches the method: increased precision for incentives, reduced precision for recognition.

Tim Houlihan is chief behavioral strategist at Behavior Alchemy, LLC, blending applied behavioral science with experience and knowledge. He is also the co-founder of the podcast Behavioral Grooves.