The Hindu Business Line : Non-cash incentive makes better sense

One of our friends, a motivational strategist, is an expert at introducing incentive systems in mid-sized North American companies. One system that he introduced in a company was an “all-expense paid family vacation to Las Vegas” if a salesperson exceeded the sales target by 25 per cent. You may wonder as to whether an “all-expense paid trip” is worth more to a salesperson than giving cash incentives.

After all, cash can be used in a manner that the receiver thinks fit. Besides, it is true that giving a gift — as incentive or otherwise — is certainly worth a lot less to the receiver than it costs the buyer. So, why then was the consultant successful with his incentive system? As it turns out, behavioural economics can throw some light on the subject.

If you are like most others, then deciding which tie or dress to wear to the office everyday itself can be stressful! Think of what would happen if your company were to give you Rs 5 lakh as incentive for exceeding your sales target. What would you do with the money? Your spouse may want you to invest the money for your child’s college education. You may strongly feel that you deserve to splurge the money, having worked hard to exceed the sales target.

Cash incentive can put you in a spot

But what if you are slapped with a large unanticipated bill after you splurge your cash incentive? You may then regret wasting your money on luxury goods and services. So, giving cash as incentive puts one in a spot — you are unsure how best to spend the money.

Giving non-cash incentive takes away this problem. It may sound irrational to the traditional economists. After all, the receiver can use cash to buy goods from which he or she can derive the greatest utility value. Behavioural scientists, however, understand the working of the human mind. Providing “all-expense paid trips” are, hence, popular in companies. Besides, you can brag about your Las Vegas trip to your colleagues! Can you do that if you get Rs 5 lakh as cash incentive?

(The author is a Chennai-based financial analyst.)

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