Have you noticed that your $50 gift cards aren’t getting the same WOW factor as they used to? Are your employees becoming increasingly more entitled and less appreciative? Do you think that more is better when it comes to giving employee’s rewards?
Many mangers and CEOs are frustrated because they spend thousands or even hundreds of thousands of dollars on employee rewards and they don’t see any measurable impact. They are often the same managers who don’t base their rewards strategy on over a hundred years of research dedicated to studying human behavior, motivation and reinforcement. This research has found that when it comes to rewarding employees, bigger isn’t always better, cash might not be the best option and the timing of the reward can be more important than the value of the reward.
Effective employee reward systems can significantly increase work performance. They can motivate employees to increase their work quality and quantity and to align their performance with organizational objectives. They can therefore be a very powerful influence on employee behavior, motivation and performance and should be an integral component in any company strategy.
Prevalence of Reward Programs
Reward programs are common in the U.S. and represent a significant contribution to employees’ compensation. A recent survey found that 78% of U.S. companies use rewards to motivate their employees and that these companies spend approximately $1 billion each year on rewards (Incentive Federation, 2003).
Rewards can often represent a significant amount of an employee’s income: on average, 5% to 10% of total compensation for sales jobs and call center jobs are based on rewards. Reward programs are not only prevalent in the U.S., they are also an integral component of company compensation plans. Therefore, managers should devote a considerable amount of resources into developing a rewards program that will have the biggest impact on employee performance.
Current Reward Practices
Current reward practices can shed light on what types of rewards companies use as well as the effectiveness of each type of reward. Below are results from a survey of 165 U.S. executives who were asked about their current employee incentive compensation plans.
Results from this study indicate that there is a discrepancy between the most frequently used reward types and the most effective reward types. It is therefore imperative that managers and executives scrutinize their rewards programs and measure the effect they have on the employees and the company.
Impact of Reward Programs
The impact of employee rewards programs in the workplace can be significant. In an analysis of 437 companies, those with rewards programs had greater employee productivity, higher profits, better cash flow, stronger stock market performance and a greater stock value than companies without rewards systems. In general, reward systems have a positive effect not only on employee performance, but company performance as well.
However, not all reward programs are effective. Ineffective reward systems can decrease employee motivation, increase skepticism and contribute to opposition in the workplace. Thus, managers should understand what constitutes an effective reward system, what behaviors to reward, when to reward and how to shape employee behavior using rewards.
Types of Rewards
The type of reward given to an employee can have a significant effect on their degree of motivation and subsequent performance. There are two types of rewards:
Extrinsic — rewards that come from outside the employee
Extrinsic rewards can be very effective at increasing performance. One meta-analytic review of 45 studies found that the average effect of extrinsic reward programs on all work tasks was a 22% gain in workplace performance. These gains are significant and can have a major impact on the overall performance of the company.
There are three main types of extrinsic rewards:
- Financial — monetary Monetary rewards are typically the most effective in increasing employee performance. In a meta-analytic review of the effect of rewards, work related performance increased 27% with monetary incentives, which was double than the average non-monetary gain (13%).When considering how much to give as a monetary reward, the amount doesn’t have to be huge in order to have an impact. One study found that rewards as low as 3% of the employee’s total pay increased performance. The impact of even low monetary rewards has been found to be long lasting. High levels of performance were maintained over three years when workers earned only 3%-9% of their total pay in rewards. Thus, even smaller rewards will influence employee performance.
- Material — products or goods Examples of material rewards are providing a company car, vacations and goods to employees. Work performance gains resulting from material rewards have been estimated to be 13%. Although material rewards do not have as large an impact on employee performance as monetary rewards, they do have a significant effect and should be included in employee rewards program.
- Social — praise, recognition and positive feedback Social rewards also lead to an increase in employee performance. When giving social rewards the timing is critical: immediate feedback and recognition has more of an effect on performance than delayed feedback.
Intrinsic — rewards that come from within the employee
Examples of intrinsic rewards are an increase in self-esteem, self-satisfaction and gaining a sense of accomplishment from work. An employee who derives pleasure from work and experiences a sense of competence is said to be intrinsically motivated. Intrinsic rewards also increase performance in the workplace.
Employee Response to Reward
There are individual differences in response to reward type. Some employees will be more motivated by social rewards (e.g. praise and recognition) than cash rewards. It is therefore important to understand the motivational factors of each individual employee and distribute rewards based on employee preference and their resulting degree of motivation.
Research on individual differences can shed light on employee preferences for reward types. The majority of employees prefer cash rewards; however, many employees will perform better in pursuit of non-cash rewards of similar value. Thus, balancing cash rewards with non-cash rewards can be an effective workplace reward system strategy.
Effective employee reward systems can motivate employees, increase their work performance and encourage them to align their performance with the company’s objectives. It is therefore critical that managers understand what constitutes an excellent employee rewards program, how to implement it and when to make necessary changes. Doing so can have a major impact on the company’s climate, culture and bottom line.
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