Cash vs. Non-Cash Rewards

Apr 1, 2001
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HR Magazine, April 2003Tracy Michaud, HR manager at the Hitchcock Chair Co. in New Hartford, Conn., has same simple advice: "Never underestimate the power of a ‘thank you.’" After all, a tangible expression of thanks or of reward can be an excellent way to encourage higher performance and promote valued company behaviors.

Like many things, however, the concept of providing incentives and rewards is simple, but the execution can be difficult. For example, a crucial question facing Michaud and other HR professionals is this: Are cash rewards the most effective ways of saying thanks to your employees?

It’s a significant question for employers that have suffered through the nation’s current economic woes and are strapped for cash; it’s especially important to Michaud, whose company seeks to provide positive rewards even while it considers layoffs for the first time in its 200-year history.

Fortunately for Hitchcock Chair and other employers, cash is not the only—or even necessarily the best—way to motivate workers. In fact, while cash is the epitome of a flexible award—it can be turned into almost anything—it does have significant limitations. For example, employees must pay taxes on any cash awards they receive, which diminishes the value of the award. Some employers “gross up” awards to make up for the amount lost in taxes, but this raises the cost of the award.

Other problems: Cash doesn’t reinforce brand loyalty, says Michaud. And employees may come to expect a regular cash payout. “Cash bonuses become an entitlement, and you lose the bang for the buck,” says Michaud.

Motivating Factors

The most compelling reason for using non-cash rewards, however, may be purely based on efficacy: Simply put, cash is not always king when it comes to incenting and rewarding employees.

“Many times, cash alone isn’t enough to motivate people,” says Karen Hessian, a marketing director at Carlson Marketing, a Minneapolis company that helps employers build strategies to maximize and measure employee performance. Hessian has a good handle on helping employers decide on what’s best for them: She designs incentive systems for a living.

When trying to decide between cash and non-cash awards, Hessian suggests looking at these two factors:

The behavior being rewarded. Do you want to award employees for the effect of their performance on the bottom line, or on how they live company values?

“Performance-based awards—exceeding sales expectations, for example—can be rewarded with hard cash,” says Hessian. “You’re rewarding performance that translates into economic benefits for the company.”

value-based awards are more subjective. They acknowledge behavior such as teamwork or traits such as ability to build morale. And they don’t have to be cash-based to work effectively.

For example, Hitchcock Chair, says Michaud, has a value-based award program called “You’re A Star,” which rewards people “who are caught doing things in the spirit of the company.” Employees nominate their colleagues for points by filling out a two-part form; the top part goes to the employee being rewarded, the bottom part to HR.

At the annual company outing, employees put their “You’re A Star” points into drawings for prizes such as a weekend at a bed and breakfast or a Hitchcock rocker.

Because employees nominate each other, the prize encourages employee interaction, which can pay its own rewards.

“Sometimes the people who are being recognized are amazed,” says Michaud. “For example, there was a production scheduler who noticed that an assembler had expedited bed rails for an upcoming order. When the assembler got a ‘You’re A Star’ award, he said, ‘I didn’t even know Donna knew my name!’ ”

The recipients. “You have to make sure you understand your employees and what motivates them,” says Hessian. To do this, look at both demographic and psychological factors.

“An entry-level customer service employee with a lower income level might have more basic needs and might prefer cash,” says Hessian. But established sales reps earning higher incomes might prefer something with trophy value that enhances their self-esteem.

To delve into these psychological factors, ask employees what types of behavior they’d like recognized, and how. A survey takes out the guesswork, and employees will appreciate the fact that you asked.

Options and Alternatives 

If you discover that cash isn’t your best bet in rewarding and incenting your employees, there is an array of options you can tap. Again, it depends on what employees value most. In some cases, tangible gifts such as trophy-type prizes, wearables or gift certificates work best.

Some organizations offer a selection of rewards and allow employees to choose. That’s how it works at Minneapolis-based The Carlson Companies, where employees redeem their points for a variety of rewards, including gift certificates or even family vacations. (The Carlson Companies, which operates hotels and restaurants such as Radisson Hotels and TGI Fridays, purchased its incentive program from its subsidiary firm, Carlson Marketing.)

“Giving employees a choice is an important engagement tool,” says Charlie Montreuil, vice president of human resources at The Carlson Companies. He describes the program as “an internal currency that employees receive for several different reasons, such as peer-to-peer recognition, supervisors recognizing employees or service anniversaries.”

The Carlson point program replaced an earlier one that used pins and certificates—rewards that rank pretty low on the flexibility scale. “In the first year of the point program, participation tripled,” says Montreuil. “The flexibility rejuvenated the program.”

It has been so popular that Carlson is considering allowing employees to redeem points to purchase days off. “We surveyed employees, and we found that people value time off more than anything else,” says Montreuil. “It’s the ultimate reward.”

Factoring in Overtime

Whether you settle on cash or some form of non-cash reward for workers, you should be aware of the potential effects a reward program can have on overtime. In some situations, employers may have to count cash and other awards as part of an hourly employee’s regular wages, in which case HR will need to recalculate the overtime earned by that worker.

Generally, an employee’s regular pay rate includes all “remuneration for employment,” and that may include awards, explains Amy Jantz, an attorney with WorldatWork, a Scottsdale, Ariz., association focused on compensation, benefits and total rewards. (For more information, see “Recalculating Overtime.”)

Employers bear the burden of showing that an award was not such remuneration, so it helps to know the ropes. Here are some tips:

Reward for doing one’s regular job, only better. If an award is given for the quality, quantity or efficiency of work done on the usual job at the usual time, it’s definitely remuneration for employment. In such cases, the employer determines the hourly rate by allocating the amount of cash, or the cost of the merchandise, over the period during which it was earned.

Reward for doing work outside the regular job. Prizes awarded for activities outside the scope of the usual job may be remuneration, depending on several factors.

The first is this: Did the employee compete for an award outside of normal working hours, off premises or beyond the scope of his customary job? If so, then several other factors must be considered. These include: the amount of time the employee spent earning the reward, how closely his efforts mesh with his regular work duties, whether the employee’s efforts to earn the award include work typically done by other employees for employers and whether the employer encouraged the employee to participate.

Reward for suggestions. Generally, rewards for suggestions aren’t considered remuneration if all of the following are true:

  • The amount is unrelated to the employee’s earnings and is, instead, based on the value of the suggestion to the company.
  • The suggestion is derived from effort outside an employee’s usual job.
  • Employees aren’t required to participate and aren’t given specific assignments to work on.
  • There’s no time limit for filing a suggestion.
  • The employer doesn’t know that an employee is working on the suggestion.

What’s included

Items that generally aren’t considered “remuneration for employment” include:

  • Gifts, but only if the amount of the gift is not dependent on the employee’s hours worked, production or efficiency.
  • Discretionary bonuses paid in recognition of work, but only if one of the following is true:
    • The employer controls both the fact that the payment will be made, and the amount, and the payment is made near the end of the applicable period.
    • The payment is made under a bona fide profit sharing plan or thrift or savings plan, and the amount isn’t calculated with regard to hours of work, production or efficiency.
  • Stock income, such as income derived from employer-provided stock options, stock appreciation rights or bona fide employee stock purchase programs.
Diane Cadrain is an attorney and has been covering workplace legal issues for 20 years. She is legislative affairs director of the Human Resource Association of Central Connecticut.​
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