Free rewards can be costly

Non-monetary award programs, done badly, could negatively impact an employer’s bottom line: Study
By Melissa Campeau
|Canadian HR Reporter|Last Updated: 03/06/2017

Could your low-cost employee reward program actually be hurting your bottom line? Yes, according to a recent study out of the United States.

While popular belief holds that reward programs such as “Employee of the Month” and “Top Sales Club” are inexpensive ways to subtly motivate workers, researchers at the University of California, Riverside found they might actually be reducing organizations’ overall productivity, if not implemented with care.

“These programs don’t bear the costs of traditional incentive or compensation systems, so a lot of organizations see them as having very few downsides,” says Timothy Gubler, assistant professor of management at the university’s School of Business Administration, and lead on the study Motivational Spillovers from Awards: Crowding Out in a Multitasking Environment.

Up until now, research in this field has focused mainly on the unintentional downsides of programs that tie monetary reward with performance. Studies have found such programs can result in diminished intrinsic motivation, can cause workers to lose focus on any tasks not part of the financial reward system, and can result in workers “gaming the system” to win at all costs, according to the study.

Non-monetary award systems (such as gift cards or a worker’s name on a plaque as employee of the month), on the other hand, have long been considered free from these negative side effects, says Gubler, and many employers use programs like these in the hope of encouraging loyalty, friendly competition or building employee self-confidence.

However, the costs of non-monetary awards programs can actually be quite high, according to the study by Gubler, Ian Larkin, assistant professor of strategy at the University of California, Los Angeles, and Lamar Pierce, associate professor of organization and strategy at the Olin Business School at Washington University in St. Louis, Miss.

Their research shows seemingly innocuous programs can still upset the status quo and negatively impact workers’ perception of fairness, leading to reduced engagement and productivity.

The study data

The researchers studied data gathered from an industrial laundry plant in the United States that had recently implemented an attendance award program. In an effort to boost efficiency and overall productivity, a manager instituted a program in which the names of all employees with perfect attendance (those who arrived to work on time, each day, with no unexcused absences) would be entered into a random draw at the end of the month for a $75 gift card.

When the researchers reviewed the data from a 12-month pre-award period and a nine-month award period, the program had been successful in one sense: “The program did improve the attendance and punctuality of the workers who were not previously punctual,” says Pierce.

The program, though, had several unintended consequences. First, workers responded to the very specific rules of the program and began gaming the system.

“For example, the rules stated that employees were on time if they were less than five minutes late,” says Pierce. “So, as the program was implemented, the data shows a spike in the number of people showing up four minutes late… We see them starting to call in sick more often the morning of work in order to avoid being late, as well.”

Researchers also found that when employees lost eligibility — meaning they could no longer qualify for a “perfect” month of attendance because they had arrived late for just one shift — they reverted back to their previous poor attendance behaviour.

Demotivated workers

The biggest costs, though, were what happened in terms of demotivating workers who previously were on time and always there, says Pierce. For those employees who had never had a problem in this area, their attendance actually got worse.

“The thing about punctuality and good attendance is that you already have a number of employees who provide that,” he says. “Those are the employees who are intrinsically or pro-socially motivated (driven by the intent to benefit another) to be on time anyway.”

The intrinsically or pro-socially motivated employees take pride in their attendance and view it as contributing something to the organization, says Pierce.

“They had good attendance before the program and they weren’t being recognized for it, and now suddenly they saw management rewarding all the people who were not doing this before,” he says. “There was a sense of ‘Hey, this isn’t fair to us.’”

Plant managers heard employees with good pre-program attendance expressing optimism about winning the monthly draw for the award, found the study.

“These were the people that usually came on time anyways, so were always in the hunt (to win),” said one manager.

However, gift card winners tended to be from the high-tardy group of employees, found the researchers, which may have deepened feelings of unfairness among the more internally motivated workers: “Senior corporate management took our results as confirmation of their belief that employees shouldn’t be rewarded for things that they are expected to do anyways, as it creates fairness problems among workers.”

Productivity issues

The awards program — or extrinsic motivation — tended to “crowd out’” the intrinsic motivation in those employees who were internally motivated and who were already performing well.

“Most importantly — and this is where the big ROI hit is — these people became less productive,” says Gubler.

Researchers measured workers’ daily productivity in the factory during the program.

“The ones who had been pro-socially and intrinsically motivated to be on time before the program was implemented had a drop in productivity once they saw their tardy coworkers being rewarded for the things they had already been doing.”

The researchers suggest these employees were unhappy because of concerns about a lack of fairness and equity. “That has a bottom-line cost for the company,” says Gubler.

In the case of the laundry company, workers with above-average pre-program attendance lost eight per cent efficiency in daily laundry tasks after the program’s introduction.

Overall, the award program cost the plant 1.4 per cent of daily productivity.

Positive potential of award programs

Despite these findings, the researchers aren’t suggesting employers discontinue award programs altogether.

“Reward programs can work,” says Pierce. “They can be very effective and important tools to help organizations motivate employees but, like any other important tool, they aren’t costless. You still need to implement them correctly.”

The main problem is that organizations underestimate the real cost.

“You need to think carefully about how these programs are designed,” he says. “In order to think about how effective a program is going to be, you need to think about all the different costs.”

A key point is to avoid targeting and rewarding just the worst performers, says Gubler.

“These programs are similar to compensation,” he says. “They are a way to provide employees with a reward or benefit similar to monetary compensation and in designing them, you have to realize they’ll be viewed that way by staff.”

Employees naturally engage in social comparisons and a sense of fairness is important, says Gubler.

“If you do something that benefits one class of employee, especially if they’re the employees who were the worst offenders before you implemented the program, this can make people very angry.”

To handle that challenge, “you could provide an award to more than just one individual, or you might find other ways to compensate your best performers, perhaps separately from the program,” he says.

Making a point of singling out the intrinsically or pro-socially motivated top performers is also a good idea, according to Pierce.

“If I were to implement this type of program, for example, the first thing I would do is go back and look at people who had historically perfect attendance in the last year,” he says. “And then when I announced the start of the award program, I would add that first I want to recognize all the people who, over the last year, have been leading the charge on this initiative… For the most part, that’s all that people want: Some recognition for their contributions.”

Part of complex system

Reward programs are not standalone, say the researchers, but are one element of a larger compensation and motivation mechanism.

“Managers often want to move one lever without thinking about what happens to all the other ones,” says Pierce. “Incentives and pay are not the sole components of labour costs. Labour cost is a function of wages and productivity.”

“If you have to increase wages by 10 per cent, but that increases productivity by 20 per cent, your costs just went down.”

Reward programs can seem like a low- or no-cost way to boost productivity, but the calculation is in fact, more complex, he says.

“Managers can be so focused on cost-cutting that they think only about the wage component of labour costs and not the productivity component.”

This research brings the actual costs of reward programs into better light, says Pierce.

“Our main message isn’t that awards systems are necessarily bad or costly,” he says. “They’re a great tool for a manager, just like wages and a number of other components, but there is no free lunch and there are no simple solutions.”

Melissa Campeau is a Toronto-based freelance writer.

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