CIPD - Non-cash incentives

Pay and reward

April 2009

This factsheet gives introductory guidance. It:

defines and sets out the rationale for the use of non-cash incentives
summarises the differing types of non-cash incentives used by employers
considers links with employee recognition schemes
explores the pros and cons of non-cash incentive schemes
examines the issues involved in setting up and running programmes
includes the CIPD viewpoint.

It may be useful to read this factsheet in conjunction with our factsheet on cash bonuses and incentives.

Go to our factsheet on bonuses and cash incentives

Definition and background

Non-cash incentives are a means of incentivising higher performance among employees by the awarding of prizes or ‘gifts’ – such as merchandise, travel or retail vouchers – linked to some performance measure (such as volume of sales).

While the incentivisation industry is more highly developed in the USA, it is also growing in popularity in the UK. Typically found in customer-facing industries, schemes may be based on the use of a single prize to be won by the highest-performing individual employee (the most successful salesperson of the year wins a trip abroad, for instance). Alternatively, they might encompass a range of awards recognising different levels of achievement (for example, every employee reaching a given target receives a particular item of merchandise).

It is helpful for the purposes of this analysis to differentiate between the following:

non-cash incentives (sometimes known by other terms such as performance improvement plans). These are forward-looking, formal schemes that aim to directly affect employees’ future performance. They are often formulaic in that they set in advance the targets required to achieve a particular reward outcome – in effect ‘if you meet this particular objective you will receive this particular prize as a direct result’.
employee recognition schemes. These are retrospective (in other words, they recognise past performance rather than aiming to directly incentivise future efforts) and may be informal and discretionary – that is, they may be made without the use of any formal or informal goals or targets.

While it is the former issue that is the main subject matter of this factsheet, it also touches on the latter as the two issues are to some extent interlinked. Indeed, a number of companies derive benefit from tying together all forms of recognition and related elements (non-cash incentives and employee recognition schemes, length of service awards and staff suggestion scheme awards, for instance) into a single mechanism that can be branded and linked to company values and culture.

Rationale

Cash may not be the most effective means of motivating employees, it is argued by advocates of non-cash incentive schemes. While adequate cash remuneration may in this analysis be seen as a ‘hygiene’ factor that deters employees from seeking alternative employment, it does not necessarily motivate them to ‘go the extra mile’ in their current role. And whereas employees often spend cash bonuses on essentials (groceries or utility bills, for example), the receipt of a gift or prize is arguably more memorable and exciting, hence the greater incentivisation impact.

Types of non-cash incentives

The main types of non-cash incentives may be broadly divided into the following categories:

merchandise, such as ipods, mobile phones, perfumes, camcorders, bottles of champagne or watches.
activities/special events, such as meals out, hotel spa accommodation/treatments or hot air ballooning trips – which may be provided for an individual employee (or an individual plus a partner or friend) or could reward teams (team meal out, for instance).
travel, for example, an all-expenses paid trip to Australia
retail vouchers, which are often obtainable at a discount to ‘face value’.
the awarding of points under a points-based system that may be converted into a range of awards.

It is worth noting that under some stricter definitions, the latter two categories might not be regarded as ‘non-cash’ items.

Links with recognition schemes

Although not the focus of this factsheet, it is also useful to briefly consider the main types of employee recognition schemes as these are sometimes used in conjunction with (or instead of) non-cash incentives.

Unlike non-cash incentive programmes, as already noted, recognition schemes may operate on quite an informal basis, indeed some experts believe it is best to have a completely informal system to help ensure that awards are perceived as a special ad hoc reward rather than becoming something that is expected. The impact on the employee is greater when the award is unexpected or made at the suggestion of colleagues, it is argued.

Recognition schemes also differ from non-cash incentives in their capacity to focus on more intangible aspects of performance that cannot easily be incorporated into formal targets.
Michael Armstrong¹distinguishes three broad categories of recognition schemes: day-to-day recognition, public recognition schemes and formal recognition schemes.

Brief definitions and examples of differing recognition schemes include:

day-to-day recognition: simple acts of recognition such as saying thank you or sending a hand-written note.
public recognition schemes: including employee of the month schemes and the recognition of featured employees in company magazines.
formal recognition schemes: these methods could include the retrospective awarding of similar gifts to those used within formal non-cash incentivisation programmes. They could also encompass non-financial measures – as opposed to non-cash measures, which inevitably have some financial cost – such as time off (informally giving an employee the day off, for example).

Coverage of non-cash incentive schemes

According to our 2009 reward management survey:

A|most one fifth (17%) of all employers use non-cash incentive schemes (compared with just under one third, or 31%, using recognition schemes).
These types of scheme are more popular among private sector organisations and large employers.
The average number of non-cash incentive scheme per employer is 1.77 (slightly higher than the 1.64 recorded for recognition schemes).

Broken down by sector, non-cash incentive plans are used by the following proportions of employers:

Private sector services: 24%
Manufacturing and production: 21%
Public services: 17%
Voluntary sector: 8%

See the full results of our reward management surveys

Non-cash programmes in the US

While little detailed empirical work has been undertaken in the UK on the operation and efficacy of non-cash incentives such as prizes and gifts, it is useful to note the findings of international research programmes on this matter – particularly in the US where this model of incentivisation is more highly developed.

According to a US survey² of 235 managers conducted in 2005, covering both non-cash incentives and recognition schemes, the leading non-cash tactics were found to be: employee recognition (used by 83.8% of survey respondents), gift certificates (65.5%), special events (63.4%), merchandise awards (57.0%) and email/print communications (50.6%).

Pros and cons of non-cash incentives

The benefits of using non-cash incentives include the following:

Affordability: For employers, non-cash incentivisation programmes may be more affordable than alternatives such as cash bonuses. Even during difficult economic times, employers still need to motivate staff – but may not be able to afford high cash bonuses, let alone substantial increases in direct basic salary costs with the inevitable add-ons in terms of pension contributions and other costs. Moreover, given that cash bonuses may need to be set at fairly substantial levels to have a significant incentivisation effect for employees, it may also be possible to achieve a greater impact with the same budget if non-cash incentives are used. Indeed the return on investment is often disproportionate with employees placing particularly high value on relatively low cost recognition awards.
Simplicity: There is a potential simplicity in the use of gifts or prizes when compared with cash incentives or bonuses – as the latter may involve complex formulae or encompass multiple targets that may seem remote or confusing to an individual employee. By contrast, it is very easy for a sales employee to understand that, say, selling so many insurance policies will result in the receipt of a new flat-screen television.
Psychological impact: On a psychological level, one fundamental advantage for non-cash incentives is that it is acceptable for employees to speak openly with pride about the winning of gifts in a way that would be considered by many to be socially unacceptable it they were seen to be ‘bragging’ about cash bonuses. Indeed many companies restrict personnel from sharing information on bonus levels with their colleagues. The use of non-cash incentives can in this way help with personal and public recognition and reinforce the impact and value of the award.
Employer branding: There is potential for reinforcement of positive employer branding via the use of non-cash incentives, as the provision of an item such as a camcorder provides a constant reminder of the employer and the achievement – whereas the receipt and use to which a cash bonus is put is often quickly forgotten. For more on employer branding, see our factsheet on that topic.
- Go to our factsheet on Employer brand

On the downside, drawbacks may include:

Lack of credibility: Such prizes may not be taken as seriously as cash. Caution needs to be exercised in identifying appropriate incentives according to the company culture and workforce profile.
Lack of employee awareness: Employees may be less conscious of the value of non-cash incentives over “hard cash”, which could have a detrimental impact on recruitment and retention, as a competitor’s cash-based reward policy might seem more generous. This issue could be tackled by the use of effective communications to explain the value of the programme, for instance by the inclusion of a reference to non-cash incentives in total reward statements where these are produced.

Choosing and delivering rewards

Rewards provided under non-cash incentive programmes need to fit well with corporate image but also be able to meet the needs of a potentially wide range of employees.

Employees often prefer a gift of their own choice hence one popular method is the use of points or voucher systems. Many specialist providers can produce company branded brochures or online shopping platforms.

Voucher systems offer certain advantages such as greater potential for employer branding by means of a well-designed certificate. More information is available in publications from industry body the UK Gift Card and Voucher Association (UKGCVA), formerly known as the Voucher Association³.

It is alternatively possible to set up an automated system so that employees can log their progress towards points totals on line, with different levels of targets achieved translating into different levels of points. These points can then be redeemed into a gift of the employee’s own choosing. An additional benefit of this type of system is a potential positive retention effect as employees may be anxious to remain in their post to accumulate all the points required for a particular prize.

Technological advances have brought with them new ways of delivering incentivisation awards. For example, where gifts are chosen from a department store or similar supplier, it may be possible to set up a system whereby winning employees are given their own code to type in and choose gifts.

On the downside, however, vouchers or points systems may seem rather more impersonal than a gift or prize that is selected for the employee.

It may also be possible to customise or personalise incentives in other ways, for example if someone enjoys the theatre the reward could take the form of theatre tickets.

Setting up and running schemes

As well as the issue of choosing rewards, there are a number of other practical issues for employers to consider when setting up and running a non-cash incentive scheme, including the following points.

Planning scheme objectives and budgets

Managers should decide on the objectives of the scheme and set a clear budget for the programme. This should help ensure that a robust evaluation is possible and help keep programmes on target to meet their aims. It is also important to appoint someone with overall responsibility for managing the scheme.

Setting and communicating employee targets

It is important to set, and communicate, clear and achievable objectives, as there is unlikely to be a positive impact on motivation if employees do not understand how to achieve the awards or believe the criteria are unattainable. There should also be a clear and prompt line of sight between the achievement of an objective and receipt of the award so making of awards preferably needs to be close to the event (for example, some firms run weekly events or competitions). For more on communicating with emplotees, see our factsheet.

Go to our factsheet on employee communication

Branding rewards

It is widely recognised that many people would prefer to avoid having a gift with a company logo on it (for example, a company-branded watch). One way round this is for an accompanying communication such as an award certificate to feature the employer branding prominently rather than the gift itself.

Selecting a supplier

It is worth noting that numerous suppliers of non-cash incentives are in operation. Such organisations often provide a wide-ranging service encompassing not only employee non-cash incentive programmes but also other employee schemes such as recognition and team-building activities, together with programmes aimed at clients or customers such as customer loyalty schemes or client hospitality programmes.

Bearing this in mind, employers need to allow adequate time and resources to weigh up the options available and choose the most appropriate supplier. A 2006 report from Incomes Data Services⁴ includes a checklist to help with choosing a supplier together with a directory detailing 32 suppliers of non-cash incentive awards. More information on suppliers can also be found in the journal Incentive and motivation⁵.

Tax implications

Employers need to consider the tax implications of implementing a non-cash incentive scheme as awards over a certain level are subject to income tax. To avoid ‘tarnishing’ the impact of the gift by landing the employee with an additional tax liability, it may be possible for employers to arrange payment of any tax or national insurance owing on behalf of employees. Detailed information on the tax implications of non-cash awards can be found in guidance from HM Revenue and Customs (see Useful contacts below).

In addition, the UKGCVA has produced a factsheet setting out detailed information on the tax and national insurance background surrounding voucher incentive schemes⁶.

CIPD viewpoint

The use of non-cash incentives can be effective in motivating employees within the context of a wider reward strategy that is closely aligned with business strategy. For such schemes to succeed, employers must clearly communicate to employees the value and mode of operation of such schemes and ensure that line managers are fully engaged with the process.

Useful contacts

HM Revenue and Customs

References

ARMSTRONG, M. (2007) A handbook of employee reward management and practice. 2nd ed. London: Kogan Page.
PELTIER, J. et al. (2005) Awards selection study phase 1: preliminary insights from managers. Evanston, IL: Northwestern University, Forum for People Performance Management and Measurement. Available at: http://www.performanceforum.org/fileadmin/pdf/
awards_selection_study_phase1.pdf
See, for example, UK GIFT CARD AND VOUCHER ASSOCIATION (2004) Motivation plan: a 9-step guide. Available at: http://www.ukgcva.co.uk/downloads/
factsheets/fs_motivation.pdf
INCOMES DATA SERVICES (2006) Employee recognition schemes. HR study plus, 820. London: IDS.
Further information is available at http://www.incentivemotivation.co.uk
UK GIFT CARD AND VOUCHER ASSOCIATION (2004) Tax and national insurance on voucher incentive schemes. Available at: http://www.ukgcva.co.uk/factsandresearch.html

Non-cash incentives