Stéphanie Lluis is an associate professor of economics at the University of Waterloo.
What does money buy? Any goods and services I want, whenever I choose to buy them.
What does a gift card buy? An item specific to a particular store. For the holder of this currency, a gift card is clearly not as beneficial – what if I'm not interested in buying chocolate or Pampers diapers right now?
But for employers, who are increasingly using gift cards and other inexpensive perks in lieu of actual raises (the trend was detailed in a recent Washington Post story), I see several advantages: lower cash expenses, potential sales increases if the gift cards are to be used for the company's own products, or better deals for the company when it sends customers with gift cards for a client's merchandise.
Over the years, perks like a company car or non-monetary long-term rewards such as a good pension or health insurance plan have become an important part of compensation and an effective tool for what human resource professionals call ARM (attraction, retention and motivation). But we may be going too far in the use and customization of these rewards. Actually, I'll go further still, and say that the idea that they can substitute for pay raises is likely wrong.
The value of a non-monetary reward depends on the worker's present circumstances and individual preferences. This year, I'm stuck redoing my basement, so I would value a gift card from Home Depot. But would you prefer that over actual extra money, which can buy you the same thing, or anything else?
Employers also compensate using paid time off. Can it be a more valuable reward than a pay increase? In this case, possibly. One thing money doesn't buy is time, which is what the employer is offering, with no loss in pay. However, I often see people literally forced to use their year-end accumulated days off before a certain time. Is it that spontaneous leisure days are difficult to enjoy relative to a planned holiday?
To work and accommodate individual preferences, these systems require a "cafeteria-style" type of rewards, which surely imposes extra management costs on the employer's part. Indeed, in Australia, it is possible to hire a consultant specializing in the management of incentive rewards. Should North Americans go down the same road?
If you sit in my upper-year labour economics class, you will hear the principles of how and why incentives work. If well designed, non-monetary rewards do incentivize behaviour – sometimes more strongly than money.
Indeed, they can work as early as childhood. Some parents still offer money to their children in exchange for the completion of chores, but when outside money sources are available – say, generous grandparents – the incentive effect of a dollar reward is weakened. Some parents are turning to another currency, screen time minutes, which are cheaper than cash. For kids, these minutes can be an even more valuable commodity. Still, new problems have emerged. Unlike money, minutes of screen time can't be saved; they have to be used at specific times. So for motivational purposes, the timing and frequency of the reward matter as much as the nature of the reward.
There is also the matter of the reward's permanency. A merit-pay increase and a $100 gift card are very different – the latter seems more like a temporary reward measure during bad economic times, very different in dollar value but also in motivational effect.
Merit pay and bonuses are both performance-based incentive pay schemes, but they have different objectives. Merit pay is used to reward productivity improvements that have a long-term impact on the company (the 1-per-cent pay increase to your salary compounds every year) while the bonus is a one-time reward based on a one-time performance improvement standard that was met. It is re-earned only when the standards are met again.
So at the individual level, the nature, the timing and the frequency of the reward are all important factors to consider when optimizing incentives. Also at the society level, choosing non-monetary rewards over pay increases may have long-term effects on consumption and savings behaviour.
In sum, while some non-monetary rewards may be superior to a dollar pay raise (think about a tax-free pension plan account or a health insurance plan the employer can offer at a cheaper group rate than what you could buy), non-monetary rewards are not obvious substitutes for a pay increase. I would tell workers to understand what the reward is compensating them for.
To employers, I would recommend keeping in mind that while economic shocks affect hiring and compensation decisions, they can also alter the effectiveness of incentive plans and workplace organization strategies.
To employers, I would recommend keeping in mind that while economic shocks affect compensation decisions, they add uncertainty to employees' task environment and can alter the effectiveness of incentive plans.