Preference reversals in evaluations of cash versus non-cash incentives

Abstract

Data are presented from six experiments that demonstrate preference reversals for cash versus non-cash incentives. When given a hypothetical choice between cash and non-cash incentives, participants chose the cash incentive (joint evaluation, JE). However when asked to evaluate them separately (separate evaluation, SE), participants gave higher ratings to the non-cash incentive; these findings were replicated with “real” monetary incentives. Preference reversals were partially dictated by the type of non-cash incentive offered: they were observed for hedonic non-cash incentives but not for utilitarian non-cash incentives. Preference reversals were caused by two factors: a shift in the dominant attribute under consideration and the presence of a value-seeking attribute that provides information about the rational choice. Specifically, participants consider the affective characteristics of the incentives during SE and the fungibility of the incentives during JE. Additionally, employees receiving rewards from an incentive program reported that recipients of non-cash awards would enjoy their reward more and would be more likely to tell their friends about it.

Introduction

Is it better to reward an employee with a gift for their hard work? Or, should you instead reward the employee with the cash value of that gift? According to rational economic theory, an employer should always provide cash incentives, because employers will never be able to perfectly predict the preferences of all their employees. Furthermore, cash should always be favored because it is inherently more fungible than any non-cash incentive. Indeed, when Incentive magazine asked employees to indicate their preference among the following awards: $1500 cash, a travel award worth $1500, or a merchandise award worth $1500, 79% of the respondents chose to receive the cash (Hein & Alonzo, 1998). However, a study conducted by BI Performance Services and Goodyear Tire and Rubber Co. found that in a comparison of sales performance, the group of salespeople receiving non-cash incentives outperformed those receiving cash incentives by a margin of 46% (Alonzo, 1996).

In an effort to explain these puzzling results we performed six experiments. We demonstrated that employee preferences for incentives are not stable; they are influenced by the evaluation mode and the luxuriousness of the non-cash incentive. Specifically, when the cash and non-cash incentive are evaluated separately, the non-cash incentive is preferred. However when cash and non-cash incentives are evaluated jointly where one can be compared with the other, the cash is preferred. We suggest that such preference reversals are caused by two factors. First, the observed preference reversal can be explained by the evaluability hypothesis: responses elicited in joint evaluation (JE) differ from those in separate evaluation (SE) (Hsee, 1996, Hsee et al., 1999). Hsee and colleagues argued that the two modes highlight different dimensions upon which the stimuli are evaluated. In SE, responses are based on the easy to evaluate dimension, which in our studies is the affective value of the incentives. Responses in JE are based on the difficult to evaluate dimension, in our studies this is the fungibility of the incentives, which is not at all apparent in SE.

Second, the different evaluation modes either mask or highlight the presence of a “value-seeking attribute” that provides information about rational behavior (Hsee, 1999). Choosing the cash award in JE represents the more rational choice, one that is easily justified based on the advantageous fungibility of the cash.