“Caution: cash bonuses dilute easily, but non-monetary rewards live on”

It may be common practice at your company to award employees bonuses to recognise outstanding performances or exemplary behaviour. In certain professions, they account for a significant portion of the remuneration, as is the case for sales representatives and traders.

This also applies to executives who receive stock options and other free shares when the company achieves certain performance thresholds. The all-around champion in this field is undeniably Elon Musk, who received a $23 billion payout in stock options on the strength of Tesla’s record revenue and profits in the first quarter of 2022.

Awarding premiums and bonuses is generally seen as a good way to align individual and corporate performance. More generally, it is also considered to be a simple and effective way to reward those who achieve the best results. Most companies, and almost all public services, use this system. For example, according to official statistics 23.6% of the gross salary of French civil servants consists of bonuses and allowances.

However, bonuses have a major drawback: they are soluble. Once the cash reward enters your bank account, it loses its specific meaning, and is spent in exactly the same way as the rest of your income. The bonus intended to honour your achievement simply ends up in the common fund for your daily expenses. Once the reward becomes money, it loses its exceptionality.

Managers at Google used to reward their most creative project leaders with a bonus of $10,000. However, they quickly realised that instead of highlighting the exceptional nature of the achievement, the bonus erased it. Google now offers rewards such as family trips that create amazing experiences employees will remember for years to come.

While Google employees continue to say that they would prefer cash bonuses, those who receive non-monetary rewards have much higher levels of satisfaction.

It is interesting to note that while Google employees continue to say that they would prefer cash bonuses, those who receive non-monetary rewards have much higher levels of satisfaction. After five months, the satisfaction level drops by 25% among those who received money, but not among those who went on a trip.

In the end, it is important to remember that cash is fungible. The joy it brings will quickly fade, but the memories created by an equivalent non-cash reward will last forever. So if you want to honour employees, opt for trips, event tickets, and gifts instead of bonuses, and the rewards and satisfaction will last much longer.

However, another more fundamental question remains: is promising cash and non-cash rewards really the best way to boost performance? Are you more motivated by the promise of a reward? The answer is no. But that is an entirely different story.

This was previously published in French by Xerfi Canal.

---

This post gives the views of its author, not the position of ESCP Business School.