The Performance Effects of Tangible versus Cash Rewards: The Mediating Role of Categorization

Abstract

Organizations spend billions of dollars annually on performance-contingent tangible rewards such as vouchers and merchandise, yet prior research reports inconsistent support for the performance benefits of tangible rewards over cash rewards. We conduct two studies to better understand the performance effects of tangible versus cash rewards. The results of an experiment with a real-effort task (Study 1) indicate task performance increases the more participants categorize performance-contingent pay separately from salary. We also find whether participants differentially categorize cash versus tangible rewards separately from salary depends on the framing of compensation components as either additional wage or a bonus. The results of a free-sort task (Study 2) indicate graduate business students are more likely to mentally categorize tangible rewards differently from salary than they do cash rewards. Collectively, our results inform practice on the importance of distinct categorization of rewards when selecting the type of reward to offer employees, and also inform theory by highlighting an important obstacle to testing the relative effectiveness of cash versus tangible rewards using lab experiments.