While conventional wisdom is that “cash is king” when it comes to sales contest rewards, using noncash rewards such as gift cards also can be effective in motivating sales employees. We conducted a study at 54 independent home furnishing retailers to test the performance effects of gift card rewards compared to cash rewards. The findings suggest that companies may want to consider using gift cards rather than cash as rewards in sales contests because gift cards are particularly effective at motivating poorer-performing sales employees.
Sales employees competed in two consecutive three-month sales contests in which the top salespeople won a reward. At some retail locations, sales employees competed for cash rewards. At other locations, employees competed for gift cards of their choice from a list of local restaurants and retailers.
At the end of each month, sales employees received feedback, including their own total sales and their relative ranking in the competition up to that point. Winners were announced shortly after the end of the third month of each sales contest.
While we found no difference in sales revenue in the first contest between sales employees pursuing cash vs. gift card rewards, employees pursuing gift card rewards in the second contest had significantly higher sales revenue. Overall, incentivizing sales contest winners with gift card rewards compared to cash rewards led to higher sales revenue over the course of both sales contests.
Perhaps more surprising, it wasn’t the performance of the contest winners that explains these results. Rather, it was the employees who didn’t win the first sales contest. These employees were less likely to give up in the second sales contest when pursuing gift cards rather than cash rewards. Put simply, gift card rewards were more effective at sustaining the motivation of the poorer-performing sales employees.
A DIFFERENCE IN PERCEPTION
The study was inspired by the competing perspectives offered by traditional economic theory vs. psychology theory in terms of what motivates employees. The economic intuition behind the conventional wisdom for using cash rewards is straightforward: Sales employees should value cash rewards more than gift card rewards because there are no constraints on how cash can be used.
While this perspective is widely held by managers, emerging evidence suggests that it isn’t the predominant way employees actually value different types of rewards such as cash and gift cards.
Psychology theory offers two complementary explanations for why employees might work harder to earn gift cards than cash rewards. The first explanation relates to the widely observed phenomenon that employees tend to view cash rewards as simply “more salary” and that they’re less inclined to view noncash rewards in this way. Employees tend to comingle cash rewards and salary because the two are often paid to the same account and are typically used first to meet important needs such as living expenses.
Conversely, gift card rewards are thought to be distinct from salary because they limit employee spending to products and services that are often highly desired but aren’t necessities (such as dining out). This in turn makes gift card rewards more vivid and memorable than cash rewards.
Additionally, psychology theory suggests that sales employees value a potential reward not in absolute terms but, rather, relative to other similar financial outcomes.
As a result, the larger the value of those other financial outcomes, the less valuable a reward will appear. In our study, since sales employees likely consider a cash reward to be a financial outcome similar to cash salary, its perceived value will be less than the perceived value of a gift card reward.
For example, assume sales employees earn a cash salary of $4,000 per month on average and could earn a reward (either cash or gift cards) of up to $400 in a three-month sales contest. Employees are likely to compare a $400 cash reward against their monthly cash salary of $4,000, resulting in a smaller perceived value.
In contrast, a $400 gift card reward, when valued against other similar noncash receipts from their employers (which could be as low as $0), is likely to have a larger perceived value. It’s this difference in perceived value that can lead to greater effort when employees are competing to be rewarded with gift cards.
RISK AND REWARD
The second explanation for the effectiveness of gift card rewards relates to the emotion they generate. A big challenge with sales contests is that poorer-performing employees sometimes give up competing when they believe that they can no longer win the contest. From the employee’s perspective, there’s risk in choosing to continue competing in sales contests since there’s no guarantee that greater effort will lead to more sales revenue. Moreover, there’s no guarantee that generating more sales revenue will enable them to win the contest.
Yet people tend to disregard the low likelihood of winning a contest when the outcomes from winning will lead to a positive affective or emotional response. To the extent that gift card rewards in a sales contest are associated with greater positive emotion because they’re more vivid and memorable than cash rewards, this suggests that poorer performers eligible for gift card rewards are more likely to disregard the low likelihood of winning. As a consequence of anticipating a positive emotional response from winning a contest, poorer-performing sales employees eligible for gift card rewards are less inclined to give up compared to poorer-performing sales employees eligible for cash rewards.
For more details, check out our complete study in “The Effects of Tangible Rewards Versus Cash Rewards in Repeated Sales Tournaments: A Field Experiment” (The Accounting Review, November 2017, pp. 165-185). You’ll see that the increasing use of gift card rewards instead of cash rewards to motivate sales employees may have merit. The evidence suggests that employees are less inclined to view gift cards as additional salary and are more likely to disregard the low likelihood of winning a sales contest when they are performing poorly. So when thinking about how to motivate your sales employees, consider challenging conventional wisdom by offering gift card rewards instead of cash.
This new quarterly column is a collaboration between Strategic Finance and the Management Accounting Section (MAS) of the American Accounting Association (AAA). It will describe recently published management accounting research studies from top academic journals and summarize them for the benefit and use of practitioners.