The Effect of Tangible and Intangible Noncash Rewards on Performance and Satisfaction in a Production Setting

In the current economic environment, cost-effective ways for managers to motivate employees are increasingly important for all types of organizations. (1) As managers look for ways to improve employee performance using rewards other than cash, they need to understand the implications of the type of alternative or additional incentive system they adopt. In this article, we will examine how noncash rewards interact with cash awards and affect a manager's ability to influence a worker's task performance and perceptions of task attractiveness, which is a dimension of job satisfaction. Many organizations use noncash incentives--both tangible (i.e., a physical item the employee can hold and/or consume) and intangible (i.e., a statement of recognition)--to encourage employee effort and enhance morale. These rewards take many forms, such as employee-of-the-month rewards, celebrations of specific achievements, token gifts such as a mug or pen with the company logo, lunch with the boss, and simple recognition for a job well done. Although their use is widespread, academic research has focused primarily on the effectiveness of cash rewards. (2) A review of such research found 131 published studies that explored how various forms of incentive schemes with cash rewards affect the task performance of their participants. (3) Some of that research shows that cash incentives are not always the best option to increase performance. (4) We conducted an experiment that involves cash and noncash incentives and found that both types of incentives affect task performance and task satisfaction in a production setting. The nature of the relationship is complex and involves interactions among the types of incentives. We will first review motivational theories, develop our hypotheses, and then present and discuss our results. Theoretical Development We begin by defining our construct of motivation in terms of standard agency theory. We then form our predictions based on agency theory and the complementary theories of self-determination and motivation crowding. The standard agency model assumes that both principals (employers) and agents (employees) are utility maximizers. (5) The agent's utility increases as the wage increases and decreases as the level of effort increases. Specifically, the increase in the agent's expected utility caused by an increase in pay because of a cash-incentive scheme must be greater than the cost to the agent of the additional effort necessary to affect the likelihood of the performance outcomes that the principal desires. As long as the expected increase in utility because of higher compensation is greater than the expected decrease in utility because of higher effort, the agent is motivated to exert higher effort. Once the marginal benefit to the agent of additional effort equals its marginal cost, the agent's motivation to work harder decreases to zero and effort levels off. From the perspective of the standard agency model, therefore, we expected noncash incentives to affect motivation and, therefore, effort in the same fashion as cash incentives. When the increased utility the agent expects from receiving the noncash reward is greater than the cost of any additional effort required to earn the reward, the noncash incentive will motivate the agent to increase effort. In stark contrast to the assumptions of agency theory, there is substantial experimental evidence that external rewards decrease performance. (6) Two primary theories-self-determination theory (SDT) and motivation crowding theory--address the empirical evidence that extrinsic incentives decrease performance. SDT argues that two psychological characteristics affect an individual's level of motivation: a sense of autonomy at work and a sense of competence from working on a task. Incentives can affect these self-perceptions so that the expected utility from an incentive is reduced. …