Big returns for awards bucks - rewarding employees with cash

HR Magazine, June, 1994 by Bill Leonard

Many employers think cash is the best way to reward an employee, and cash awards can be very effective, "but only if it's enough money to grab the employee's attention," said Jerry McAdams, vice president, performance improvement resources, Maritz Inc. of Fenton, Mo.

Research has shown that cash awards must be between 3 percent and 5 percent of base pay before employees take notice and appreciate the award.

"I tell clients that if you are planning awards of 1 percent or less of base pay, then you are just wasting your time. It's just not enough bang for your buck," said McAdams.

A mixture of cash and noncash awards seems to work best, says McAdams. Noncash awards may actually have less monetary value, but they have a high recognition and memory value. McAdams calls it "trophy value."

"If you receive a $500 award, what are you going to do with that money? Probably use it to make a house or car payment, and poof it's gone," he said. "But if you get a nice girl, like a wide-screen television, every time you turn it on, you'll probably remember where it came from and why you got it."

McAdams said that a good combination of small and big awards can also work well. Buying lunches and tickets to movies or sporting events is a small gesture, but it gives employers great leverage in helping to improve performance.

"But always make sure the employee knows why he or she is receiving the award, no matter how small, and be certain they are recognized and congratulated for their good work," he added.

DO AWARDS IMPROVE PERFORMANCE?

The main goal of an award program is to improve performance--an objective all businesses want to achieve--but it is much easier said than done.

"Performance is such a broad term," said Kathleen A. McNally, Ph.D., a consultant with The Wyatt Co. in Washington, D.C. "How are you going to define it and measure it?"

Before ever installing any kind of employee-award plan, an employer has to ask some basic questions, McNally says, such as "What do we really want? Why do we want it? and How will we judge the success of this plan?

McAdams agrees with McNally that employers have to examine their objectives carefully before designing any kind of performance-reward program. McAdams helped to found the Consortium for Alternative Reward Strategies Research (CARS), which has conducted some "groundbreaking research," according to McNally.

According to the 1992 CARS study, "Capitalizing on Human Assets," the top reasons companies gave for installing performance-reward programs include:

* To improve business performance.

* To foster teamwork.

* To improve performance/reward links.

"Attract and retain, usually the primary objective of compensation plans, is pretty near the bottom of the list of the top 15 reasons," McAdams said.

Once employers set performance improvement as a goal, they have to define how performance will be measured. As McNally said: "Defining the measurement is critical, because if you can't measure it, then you can't manage it."

According to McAdams, an employer needs to keep performance measures simple and select only "what's important." A complicated and convoluted measurement system will lead to a complicated and convoluted awards system.

"If it isn't clear why employees receive awards, then it's just not worth having a reward system in place," McAdams said. "The message and the goal have to be relatively simple to get the best results."

THE VALUE OF REWARD SYSTEMS

Employers do get a "bang for their buck" with well-designed reward systems, according to a new study by CARS that has been completed and scheduled for release in May. The SHRM Foundation partially funded the study, which was also sponsored and published by the American Compensation Association.

McAdams said the study revealed that companies earn an average of $1.34 for every dollar paid to employees through a reward program.

"In other words, companies are getting a 34 percent return on their pay-outs for awards," he said. "The employers are realizing this return through improved performance and productivity. The findings stunned me, but it clearly shows that reward programs can work pretty darn well."

Bill Leonard is a staff writer for HRMagazine.