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3 Lessons from Edward Deci on Why Cash Is Not King for Employee Motivation

Recognize This! – Cash is the currency of compensation, not motivation.

I’ve written often about why cash not a good method for motivating employees (including my post yesterday as well as these older ones on cash bonuses incenting employees to quit and even sue).

Edward Deci, a human motivation psychologist at University of Rochester, is one of the experts in the space who gives the evidenced-based reason for why. This recent article in CNBC includes several excellent points from Deci, which I’ve sorted.

3 Reasons Cash Fails as an Employee Motivator

1) Employees feel like they’re being coerced or controlled, losing their self-motivation.

“Employees need autonomy and respect in order to feel motivated. When money is used as bait, it can undermine empowerment. In those situations, Deci says that employees feel controlled and lose their self-motivation. An office that demands grueling hours in exchange for quarterly bonuses might convince employees to do the work, but it will likely be lower quality.”

2) Employees begin to expect the reward as an entitlement.

Says Deci: “Unless you’re extremely careful with how you use rewards, you get people who are just working for the money… We need to compensate people fairly, but when we try to use money to motivate them to do tasks, it can very likely backfire on us.”

3) If cash is the goal, employees often focus on the end result and not the means to get there.

“‘If the activity is an instrument to the reward, then they’ll try to do it as easily as they can,’ Deci said. At the extreme, think of Enron employees inflating stock prices or Wall Street brokers selling bad mortgages.”

Cash compensates, it doesn’t motivate. Because cash is the currency of compensation, when you use cash for anything else (especially at lower value levels), people quickly come to think of it as part of compensation – not a true “bonus.” That’s why this final piece of advice from the article is critical to understand:

“As a leader, emphasize the broader goals, such as the company’s mission, and pay attention to how your employees reach their goals. Reward the people who embody your values most fully, and be clear that those are the behaviors you want to reinforce.”

Does your organization use cash as a motivator? Do you see these three pitfalls? What others have I missed?

Employees Want Immediate Gratification More than Long-term Value

Recognize This! – Annual cash bonuses fail for two key reasons.

I’m sure the title of this post is no less shocking to you thank it is to me. This is the finding of Mercer’s latest “Smart Benefit Choices” survey, summarized well by John Hollon in TLNT. (For those strapped for time, I recommend John’s summary of the global findings over the full research as he teases out the key points in a more digestible way.)

But it’s not the details of the research I want to focus on today. No, the overall finding is much more interesting to me at this time of year when leadership is planning annual bonuses.

The annual bonus is a well-intentioned benefit, usually cash based, given at the end of the year to mark achievements throughout the year, and closely linked to a major gift-giving holiday. Yet the annual bonus fails to accomplish the primary intent of leadership for 2 reasons:

1) It’s delayed.

Why do employees want immediate gratification? Because they want to know that what they do has greater value, meaning and purpose. Waiting to reward employees for excellent effort or achievement at the end of year means you as leadership have missed out on the opportunity to recognize and reward employees in the moment. Why does that matter? Simply put, you’ve missed the opportunity to reinforce those desired behaviors and encourage the employee to repeat them again and again.

2) It’s usually cash-based, and therefore rapidly becomes an entitlement.

When the annual cash bonus becomes, well, just that, then employees expect their annual cash bonus. This is, of course, not at all the intent of the annual award, and yet annual cash bonus programs nearly always turn into entitlement expectations as employees have come to perceive (and rely on) the annual bonus as part of their salary. I’ve heard and read more stories than I care to count of parents telling children, “Christmas will be smaller this year because Mommy or Daddy’s bonus wasn’t what they expected.”

In the case of employee recognition and reward, instant gratification plays an important two-fold role:

It’s always a surprise, never an expectation.
It reinforces in the moment what matters to you the most so the employee is encouraged to do it again and again.

Do you have an annual cash bonus program? Are you getting from it everything you expected and need?

Cash Is Not the Currency of Employee Recognition

Recognize This! – Mixing cash with employee recognition confuses the intentions and outcomes of a recognition program.

Let me be clear. Cash is not the currency of employee recognition.

Let me be equally clear. Cash IS the currency of compensation. And unless you have your base pay and compensation structured appropriately, no amount of recognition, praise or feedback will ever be perceived as sufficient or good by employees.

Ann Bares, author of the Compensation Force blog (and editor of the Compensation Café blog where I am a contributor), makes this point well in a post earlier this week:

“We must get cash compensation right – and do the communication and information sharing necessary for employees to understand how this critical baseline of the relationship is set and managed. If we fail this, if employees believe that there is a fundamental imbalance at the core of employment exchange, chances are good that our efforts to provide sound feedback and express genuine appreciation will fall on deaf (or at least highly skeptical) ears.”

What are the consequences of getting this wrong? Employees think, “Gee, I’m glad you appreciate what I do and I got a nice note, but I’m still paid25% less than my colleagues in the same role who I know for a fact slack off half the day.”

Once you do get your cash compensation right, then why can’t cash also be the currency of recognition? It’s simple. Because cash is the currency of compensation, it quickly becomes an expectation and entitlement when used for recognition. That’s why we see the tremendous disconnect with annual bonus programs and people threatening to quit or even sue if they don’t get their expected annual bonus.

Instead, the currency of recognition is tangible and of economic value, but not cash. Strong recognition requires timely and specific messages of thanks and praise, along with a means to choose a reward for oneself that is personal, meaningful and culturally appropriate. But it is not cash.

What “currency” does your organization use for employee recognition and reward?

Recognition Gone Wrong: Gaming Recognition

Recognize This! – Showing each other appreciation for work well done and in alignment with company values and objectives is not a game.

On a near daily basis, I read lots of examples of employee recognition and reward practices, some good and some bad. And then some days, I see examples of the very good and the very bad.

One the very bad scale of things is this example advocating for gamification out of the UK:

“By linking your reward scheme to a game of chance, not only do you have the right to reward at a much lower level, but you also have the right not to reward when the agent ‘loses’.

“Employing this type of gaming psychology in your reward scheme you will find that you can suddenly afford to be really generous with your cash rewards. This is because you are using a game of chance and your actual cash cost is much lower than by handing out cash rewards which are not linked to a game of chance.”

This is a very poor plan for recognition for at least two reasons:

It turns recognition into a game of chance, automatically creating losers. The response in employees’ minds is confusion: “Wait a minute. I thought I was being recognized for something good I did. Why am I now a loser?”
It’s cash-based. The author of this article is clearly trying to come up with a lower cost way for recognizing employees. If she simply converted her program away from cash rewards – which do nothing but create a sense of entitlement and can never satisfy employee needs for self-actualization and esteem – she could save 50% of costs easily. (For more reasons on why cash isn’t a good award choice, check out this post from Paul Hebert on his i2i blog.)

Recognition gone right instead focuses on reinforcing in the daily work of all employees what is most important to your organization (your core values and strategic objectives). And there are countless low-cost ways of doing so that don’t involve gaming the system or creating “losers” out of what should be a celebratory moment.

For 10 low-cost ideas that really work, check out this article, which includes timeless and proven advice including this idea:”

“Tell them: An often overlooked gesture, telling your staff specifically what you value in them is important. Seemingly small things are fair game to be called out – always on time for meetings, or making deadlines. ‘Thank you’ isn’t enough. Instead, fill in the blanks of ‘I value xxxx about you because xxx.’”

Have you ever had a recognition moment turn into a loser in a “game”?

Recently on Compensation Cafe: Executive Comp, Bonuses, Productivity, Trends in Recognition & More

Today’s post is a quick catch-up on my recent Compensation Café posts. Be sure to click through for the full story.

Executives Would Give Up Incentives for a Little Recognition (27^th June 2012)

PwC recently published a quite comprehensive report, “Making executive pay work: The Psychology of Incentives”, on the premise that executive compensation practices are flawed as evidenced by the massive increase in executive pay packages as compared to average employees for seemingly little in return. The key findings of the report are quite interesting, especially the design recommendation: “Money is only part of the deal – and recognition matters as much as financial incentives. Pay is as much about fairness and recognition as it is about incentives. Simpler plans can achieve the recognition benefit with less discount to perceived value.”

If I Don’t Get a Bonus, I Don’t Want the Job (14^th June 2012)

Many decades ago, compensation was “a day’s pay for a day’s work.” Then in the mid-20th century, benefits including pensions, medical and insurance got added to the mix. Now, things that used to be bonuses, like …erm… bonuses, are part of a “compensation package.” I get it. I understand this. What I don’t understand is when a set “bonus” becomes an expected entitlement.

Do Incentives Actually Cause Failure? (4^th June 2012)

New research suggests the idea of an incentive is a good thing, but once employees get that idea in their heads it can, in fact, hurt their performance. There are instances where incentives can be good for a big goal or a long-term project such as hitting annual sales targets. But for day-to-day encouragement of employees, recognition is a better approach.

Your Total Rewards Investment Is a Waste, Unless… (17^th May 2012)

Do you have a Total Rewards strategy? Do you communicate your Total Rewards strategy to all employees in a way that gives them a true sense of your organization’s total investment in them? If you answered “no” to the second question, then by default the real answer to the first question is also “no.” No matter how well defined or constructed your Total Rewards program is, if your employees don’t know about it in terms that matter to them, then your Total Rewards strategy doesn’t really exist.

Productivity Stretched to the Limit: What Next? (7^th May 2012)

During the last several years, employee productivity sky-rocketed as employer actions taken during the recession forced longer hours, more work and therefore, more productivity from the average employee. But that can’t last. At some point employers will have to start hiring again to keep pace with a rebounding (if slowly) economy. And that time is now, according to the latest US productivity numbers. Click through to read about what you can do now.

7 Key Trends in Rewards & Recognition (25^th April 2012)

The Incentive Research Foundation recently issued a detailed report that compiles and categorizes research from 46 different sources into its “2012 Trends in Rewards & Recognition” report. In this post, I highlighted seven key trends below with excerpts and my own thoughts.

Recently on Compensation Cafe: Executive Comp, Bonuses, Productivity, Trends in Recognition & More

Today’s post is a quick catch-up on my recent Compensation Café posts. Be sure to click through for the full story.

Executives Would Give Up Incentives for a Little Recognition (27^th June 2012)

If I Don’t Get a Bonus, I Don’t Want the Job (14^th June 2012)

Do Incentives Actually Cause Failure? (4^th June 2012)

Your Total Rewards Investment Is a Waste, Unless… (17^th May 2012)

Productivity Stretched to the Limit: What Next? (7^th May 2012)

7 Key Trends in Rewards & Recognition (25^th April 2012)

Can You See How Your Employees Live Your Values & Report on It, Too?

Recognize This! – Can you see how your employees are living your company values? LSI can.

I had the honor and privilege of joining Katie Scott, LSI’s director of compensation, for a webinar hosted by HCI yesterday. In the “3 Steps to Accelerating Engagement: The LSI Success Story” webinar (available for replay here), Katie went through their ambition for strategic recognition and the results they realized in just a few short months.

Global Recognition Works

A strongly engineering focused company, LSI is growing globally very rapidly with a very diverse employee population, including a large percentage of employees in India and China. Since one of the questions I’m frequently asked is “does recognition even work in Asia/Pacific countries,” I asked Katie if this was a problem for LSI.

On the contrary, LSI had universal acceptance of the program, though Katie pointed out one area of resistance. Managers with longer tenure were more wedded to their former version of “big bang” recognition – infrequent recognition with a fairly significant cash reward given only for extremely above and beyond behaviors.

Since the new “Catch the Spark” strategic recognition program is more focused on every day appreciation and recognition of employees who live LSI’s values in their daily work, LSI continues to work on re-educating these managers on the power and importance of frequent, timely recognition with much lower-value non-cash rewards.

Non-Cash Recognition Works Better

This approach to non-cash recognition is critical and was a key internal selling point for Katie and her team when presenting their goals for a new recognition program to their executive team. Katie shared a story about that executive meeting. When she was explaining why cash is not king in strategic recognition, one of the SVPs in the meeting said she had just given her subordinate, “Pam,” one of the standard $200 cash awards under the old recognition program (which was distributed through payroll in the regular pay slip). The SVP asked Pam, “What did you do with your reward?”

As is typical, Pam replied, “I didn’t even realize I received it.”

As I’ve said before, cash is transactional, recognition is emotional. They cater to two very different parts of our minds and psyches. Non-cash rewards that don’t disappear in a pay slip create a “stickiness” by creating an emotional, meaningful connection.

Impressive Program Results

The results LSI has achieved in just a few months are very impressive:

On target to touch 75-80% of employees with recognition in the first year (which is best practice)
Awards distribution is a perfect picture with the highest volume of awards being distributed at the lowest award level, which allows for more frequent, timely recognition with no increase to the program budget (again, this is best practice).
“Catch the Spark” has become part of the lingo of LSI and is heard frequently in hallways and meetings when discussing the good work people do.
And LSI is able to see how their employees are living the company values. I’ve included below one chart from the presentation. As Katie said: “Being able to show the executive team a pie chart like this that clealry illustrates our number 1 value being lived every day by our employee is customer success – how great is that?”

I do encourage you to watch the entire webinar to hear Katie discuss in more detail how the dynamic program UI catered to their very engineering-oriented culture, how the global rewards structure and multi-lingual platform catered to the unique needs of all employees around the world, and how the measurement and reporting tools directly in the program are driving behavior change.

Can You See How Your Employees Live Your Values & Report on It, Too?

Recognize This! – Can you see how your employees are living your company values? LSI can.

Global Recognition Works

Non-Cash Recognition Works Better

As is typical, Pam replied, “I didn’t even realize I received it.”

Impressive Program Results

The results LSI has achieved in just a few months are very impressive:

On target to touch 75-80% of employees with recognition in the first year (which is best practice)
Awards distribution is a perfect picture with the highest volume of awards being distributed at the lowest award level, which allows for more frequent, timely recognition with no increase to the program budget (again, this is best practice).
“Catch the Spark” has become part of the lingo of LSI and is heard frequently in hallways and meetings when discussing the good work people do.
And LSI is able to see how their employees are living the company values. I’ve included below one chart from the presentation. As Katie said: “Being able to show the executive team a pie chart like this that clealry illustrates our number 1 value being lived every day by our employee is customer success – how great is that?”

Bonuses, Plans, Crop Circles, Results & Everyday Heroes on Compensation Cafe

It’s time once again to share my posts on Compensation Cafe. Please do click through and share your thoughts and comments on the original posts.

3 Reasons Why Bonuses Are Simply “Too Much” (February 23, 2012)

In which I highlight for me three ways in which the bonuses are simply “too much.” (1) Too much weight given to bonus vs. base pay; (2) Too much of a gap between the total compensation for those at the top vs. those in the trenches; and (3) Too much complexity that only encourages negative repercussions.

Do You Have a “Plan” or a “Strategy” (March 7, 2012)

In which I look at the difference between a Total Rewards plan and a strategy based on a Strategy + Business article defining a strategy as one focused on understanding who the target customer is, what the value proposition is to draw in that customer, and what the essential capabilities are to deliver that value proposition. Without clear and coherent answers to these three questions, you may have an exciting vision, a compelling mission, clear goals, and an ambitious strategic plan with many actions under way, but you won’t have a strategy.

3 Employee Total Rewards Best Practices Learned from Crop Circles (March 21, 2012)

In which I share the three lessons I learned after digging into why crops are planted in circles instead of squares or rectangles (hint: to maximize irrigation). (1) “Sacrifices” made for better results often create unexpected opportunities for more yield in the end; (2) Some employees thrive under different conditions than others; and (3) It’s necessary to leave room for resources that “fuel” productivity. Do you think “outside the square” for how to best utilize your recognition and total rewards resources for your employees?

Are You Paying Employees for Results or Knowledge (April 3, 2012)

In which I examine what you pay employees employees for after you have them on board – their results or their knowledge. A workplace that focuses on results as the primary means of measurement for reward concerns me in that there is potential to lose sight of these three key contributors to success: 1) Unique knowledge contribution; (2) Efforts contributing to progress; and (3) Hidden contributors to ultimate success.

Don’t Forget Your Everyday Heroes: Recognizing the Middle 80% (April 12, 2012)

In which I extend the discussion started by my Compensation Cafe colleague, Stephanie Thomas, about the importance of recognizing the vast majority of your “middle tier” employees – those who grind out the work every day and make it possible for your stars to shine.

Valentine's Day, Mistakes, Bonuses, & Seats at the Table at Compensation Cafe

A few of my colleagues teased me that I didn’t write a post about “loving your employees” on Valentine’s Day earlier this week. Indeed, I did! But the teasing reminded me I haven’t shared with the Recognize This! community my recent posts on Compensation Café.

3 Reasons Valentine’s Day (and Poorly Designed Employee Rewards) Often Goes Badly (14th February 2012)

Valentine’s Day is certainly not a beloved holiday by many. Yet it persists, year after year. The same is true for poorly designed employee recognition and reward programs for similar reasons: it’s a Hallmark holiday, appropriate gifts are prescribed, and it can create the opposite of the desired effect.

You Made a Mistake? Great Work! (2^nd February 2012)

Sometimes, mistakes move us forward. Smart businesses (and business leaders) know that. But what are the ingredients of a good mistake? I add my own ingredients to the “two prime ingredients of a brilliant mistake” offered in an Inc. magazine article, suggesting a truly brilliant mistake also requires:

A culture in which people are expected to be curious and to pay attention to mistakes – to the “what just happened” moments – and make out of them what they can.
A commitment to recognize and reward mistakes, not just successes.

Yet Another Reason to Rethink a Bonus Culture (24^th January 2012)

In this post, I discussed recent research highlighted by Dan Pink that found raising the issue of money makes people more single minded and harder working, but also makes them less likely to help others. I question if the trade-off is worth it – especially when I keep in mind the research showing that hearing a simple “thank you” made the recipient 100% more likely to help again in the future.

Who Needs a “Seat at the Table” When You Can Do This? (11^th January 2012)

The articles, posts and discussions around “HR getting a seat at the table” are too numerous to count. In this post, I recount the approach of Randy MacDonald, senior vice president of HR at IBM, in taking HR beyond administrative functions to truly strategic, transforming the culture of IBM in the process.

Appreciation Shouldn’t Ever Be Put on Layaway (28^th December 2012)

I was powerfully moved by reports in the U.S. before Christmas of people going into stores and paying off the layaway balance of perfect strangers, in some cases making Christmas possible for many families. In those stories, I saw three clear lessons we can all learn from and apply in the business world:

Do something nice.
Inspire others to do the same.
Inspire others to do even more.

I greatly enjoy participation in the Compensation Café community and learn from my colleagues in every post. I recommend it highly to those interested in HR, management and leadership.

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