Incentives are used in retail to help employers encourage employees to perform at their best and engage in preferred behaviors. One of the simplest types of incentives is employee recognition, in which a team, peer, or manager recognizes and acknowledges an individual's work, either privately or publicly. This can be verbal recognition, at the simplest, and can involve monetary or non-monetary rewards. Other common incentives used in retail include monetary perks, such as cash rewards and bonus checks, and non-monetary gifts and prizes. Some retail outlets can also have point-based reward programs, in which sales can be incentivized through company stock payouts, discounts on company stocks, paid vacation time, movie or concert tickets, games, or sweepstakes.
Depending on the type of retail store, an employee discount program can also be considered an incentive program, as discounts can help to attract new talent, increase employee retention and loyalty, and increase productivity. Many employee discount programs are also designed to encourage employees to purchase a company's products, which allows those employees to either sell them better or, in the case of clothing retail, act as live models for the clothing.
Employee reward management includes both extrinsic and intrinsic rewards. Extrinsic rewards are tangible rewards—such as financial rewards, pay raises, bonuses, and benefits—whereas intrinsic rewards are psychological rewards an employee receives from doing meaningful work and performing well. Many research models studying motivation historically have held that intrinsic rewards are not as highly thought of as extrinsic rewards. Extrinsic rewards remain important; however, day-to-day motivation and people remaining in their jobs have been found to be more strongly driven by intrinsic rewards.
Intrinsic rewards tend to be best used in work environments where employees can use their intelligence and experience to direct work activities to accomplish organizational tasks and add value through innovating, problem-solving, and improvising to meet customer needs. These can be realized in retail environments, but increasingly, retail organizations prefer standardization in approaches and problem-solving rather than offering an employee a chance to exercise their own problem-solving and innovative thinking. However, in the case where a retail environment allows them to self-manage and get engaged in their work, they receive some intrinsic rewards, including the following four rewards:
- Sense of meaning—This reward involves the meaningfulness or importance of the purpose the individual is trying to achieve and gives the opportunity to accomplish something of value, either to the individual or to the larger organization.
- Sense of choice—This refers to an employee feeling free to choose how to accomplish their work and use their best judgment to select the work activities that make the most sense to them and perform them in ways they see appropriate.
- Sense of competence—With this, an employee feels they are handling their work activities well and their performance meets or exceeds personal standards and they are achieving high-quality work.
- Sense of progress—An employee is encouraged in their efforts and feels their efforts are accomplishing something that is moving their organization in the right direction.
Some research has been done to develop and refine a measure of intrinsic rewards, and the measure has been used for research, training, and interventions at other organizations. This measurement model breaks each reward into three levels—high, middle, and low. In the high range, around 25 percent of a normal sample, employees experience the above four intrinsic rewards most intensely with energized and engaged employees. The middle range, around 50 percent of a normal sample, sees employees experience the same rewards to a moderate degree, somewhat positive, but otherwise limited, in which employees tend to find their work reasonably meaningful but only when they stop and think about it. And low-range, around 25 percent of a normal sample, sees employees experience dissatisfaction with many aspects of their work and feel the work is meaningless or pointless, are unable to make or influence decisions about how to do their work, and are unable to make much headway through their work.
One study into incentive programs compared a partial commission program with offering a higher wage, pension plan, and other benefits and found that the employees offered the latter package over commissions (even though commissions could, in theory, provide more take home than the higher wage with a benefits package) were found to perform better. This led the researchers to conclude that there is a relationship between monetary compensation and employee performance. The researchers recommended that before a retail employer engages in an incentive program, they should implement a competitive wage policy and also implement a policy in which employees' wages can increase based on their performance.
Another study found increasing retail workers' wages above the minimum wage, rather than potentially harming a business's ability to hire or retain employees, actually increases productivity. According to the study, this productivity increase was due to two reasons. First, paying wages above the market rate can motivate current employees as they find they have more to lose. Especially as finding an equivalent salary at a similar job for another company will be hard, and that will motivate current workers to do well at their job in order to remain at their job, reducing churn and increasing productivity.
Despite reported increases in employee engagement, a study worked to investigate the relationship between incentives and employee engagement, satisfaction, and trust, through 1,293 workplaces in the United Kingdom. These interviews were with senior managers, while the investigation also gathered employee data through questionnaires distributed to 13,657 employees. The analysis showed that performance-related pay or performance-based pay was positively associated with job satisfaction, organizational commitment, and trust in management. Whereas profit-related pay showed negative effects, with some profit-related pay programs resulting in employees being less committed and reducing trust in management. The study investigated several incentive-pay schemes, and of them, only performance-related pay was positively associated with people feeling positive pressure to work harder to obtain a personal reward. However, some employees reported the positive influence to offset some job satisfaction measures.
In a study by Genesis Associates, 85 percent of workers surveyed felt more motivated to do their best when incentivized. This study found that increased motivation led to increased employee retention, loyalty, and engagement, with 73 percent describing the office atmosphere as good or very good during an incentive period while increasing a company's overall profits during an incentive period.
Incentives have been proven to help employee performance and retention while also increasing a business's sales. Statistics show that 90 percent of business leaders believe engagement strategies, of which incentives are one, positively impact their business, while only around 25 percent of businesses have such a strategy in place. This is supported by organizations with higher-than-average levels of employee engagement realizing 27 percent higher profits, 50 percent higher sales, and 50 percent higher customer loyalty levels with 38 percent above-average employee productivity. This is further supported by 77 percent of employees reporting they would work harder if they were recognized, and at least 39 percent of employees reporting feeling underappreciated at work.
A 2010 meta-analysis conducted by the International Society of Performance Improvement (ISPI) found that incentive programs (with an emphasis on properly constructed programs) typically increase performance anywhere between 25 to 44 percent. This study argued for individual over team incentives, concluding that incentives can increase employee persistence by 27 percent and mental effort by 26 percent on existing tasks, while further eliminating social loafing. According to the researchers, for an incentive program to be properly constructed, it has to account for psychological factors that drive human behavior, extending to the following:
- Current performance is inadequate
- The cause of inadequacy in performance is due to a deficiency in motivation
- The desired performance can be quantified
- The goal is challenging but achievable
- The desired behavior does not conflict with organizational goals
An earlier study, conducted in 2001 by the Society of Incentive and Travel Executives (SITE), found that only 8 percent of workers surveyed would have achieved sales goals without an incentive program. SITE's findings echoed those of the 2010 ISPI study, finding similar performance increases, and posited additional conditions for the success of such programs:
- Long-term incentives are more powerful
- Incentive programs structured with employee input work best
Incentive programs have been shown to help employee retention, motivating an estimated 66 percent of retail employees to stay at their job. This is important, as a 5 percent increase in employee retention has been shown to generate a 25 to 85 percent increase in profitability while reducing employee training costs. Further, organizations that offered at least one recognition program reported a low turnover rate, from 0 to 5 percent, compared to organizations without a recognition program. Further, increasing employee positivity through recognition programs increases customer loyalty, with 41 percent of customers reporting loyalty to a brand or company because of positive employee attitudes, while 68 percent of customers report being deterred from visiting brands or stores with negative employee attitudes.
As noted by Daniel Kahneman and Angus Deaton, in their research on the link between income and emotional well-being, employees need to have an income that is capable of covering their basic needs—shelter, groceries, and transportation—and after that, employees may be motivated by incentive programs. However, an incentive program cannot motivate the employee to perform. For these, as pointed out by the writing and research of Dan Pink, helping top-tier employees fulfill their basic needs is more motivating than developing cash incentives. Further, as noted in a 2019 study by Steve Ford, when employees find their salary is competitive relative to peers, pure cash incentives do not serve as a strong motivator for those top-tier employees, while a non-cash incentive can prove more influential on their performance.
Employee retention in retail is often not considered as important, as these jobs are often not considered skilled employment. Especially as consumers are more knowledgeable about what they want to purchase as they enter a store, the role of the employee may seem to be diminished. And this is reflected in a study by WorldatWork, which saw the average turnover for hourly store employees at around 65 percent. But the departures and replacement are not cheap, as replacing a retail employee, with an assumed hourly wage of $10 per hour, costs an average of $3,328 for hiring and training, and that increases as the hourly wage increases. Increased employee retention not only reduces those churn costs but can further strengthen customer relationships as they see familiar faces.
Employee incentive programs have been shown to increase annual revenue by three times compared to companies that do not use additional incentives, while those companies with the incentive program, or some other employee engagement program, report a 64 percent increase in the level of employee engagement. A lack of employee engagement, however, results in disengaged workers, which costs the larger economy around $300 billion per year, with a further estimated $11 billion lost to employee turnover. When compared to a company without an incentive, companies that engage workers have shown an average of 200.6 percent, while those incentive programs have shown a reported 79 percent success rate in achieving an established company goal—so long as an appropriate reward was offered—and well-structured incentive programs have shown a 44 percent increase in employee performance.
One study, conducted at 193 shops and including 1,300 employees at a given retail chain, tested the effectiveness of team incentives. The test was run in response to intensified market competition, and the firm in question offered a bonus to teams for surpassing sales targets. The team bonus was chosen in this case because the retail chain was not set up to measure individual sales performance and relies on flexible task allocation among employees. On average, the bonus was able to increase sales and customer visits compared to the control stores by 3 percent and increased employee wages by 2.3 percent. The bonus was highly profitable for the retail chain, generating for each dollar in bonus paid out an extra $3.80 of sales and $2.10 of operational profit. The study not only showed the benefit of the team sales bonus on overall sales but further suggested that team bonuses allowed for complementary individuals in a team to improve overall operational efficiency, without a focus on sales to the detriment of operational needs.
Team-based incentives can include providing group incentives for store managers, particularly when retail chains are geographically dispersed as multiunit organizations. One such study collected data from seventy-five stores in a US-based retail chain that changed its incentive plan for store managers from being purely dependent on store performance to being dependent on both store and corporate performance, and the studied effect on store performance saw a decrease in both manager and store performance. This study showed that any team-based rewards in retail have to be focused on store-based performance and suggested that more store-focused incentives increased performance, whereas the suggestion of corporate-performance incentives becomes too nebulous and abstract to motivate and incentivize store managers and employees, as it places too much out of employee and manager control.
Developing a team-based or individual incentive structure can largely depend on the retail business. For example, in car and furniture stores, sales are typically commission-based. However, in stores where there may not be a commission and individual incentives are used for increased sales performance, the increased incentive to sell can have deleterious effects. This can include creating a pressured sales environment that can make customers—especially those browsing—uncomfortable, cause increased competition between employees, and cause employees to ignore non-sales tasks that are necessary to keep a store running.
In contrast, team-based incentive programs have been shown to motivate all team members to work together to make sales, have reduced potential conflict between team members, allow entire teams to make sales without pressuring customers (let alone following them around to collect a sales commission), and ensure that employees will engage in non-sales related activities, such as spending time on stocking, cleaning, and organizing activities to keep a store together. Team-based incentives can align more closely with a retail organization's long-term goals, such as increasing repeat patronage and customer satisfaction. Further, team incentives can help cover the unequal skill distribution, which may occur over various shift periods, where top sales personnel may only work thirty-five to forty hours a week, while a retail store has a one hundred-hour week.
Meanwhile, team-based incentives can cause a free-rider concern, where a single or group of employees may be unwilling or otherwise disengaged in sales and meeting sales targets, especially if they are assured that the other employees of a team will make up for their laziness. These problems can be handled by a manager or by a sales team, either to positively encourage the employee to work as part of a team or to otherwise punish the employee for their lack of engagement.
When designing or choosing an incentive program, the question is utilizing cash incentives or non-cash incentives. Cash incentives include bonuses, cash prizes, profit-sharing, pay raises, retirement fund contributions, paid education or training, gift cards, and paid time off. Whereas non-cash incentives can be travel packages, cruises, electronics, or some other thing. Although non-cash incentives have a cash value, they offer a different type of reward. When asking which is better than the other, it can be difficult to assess. One study found that when given a choice, two-thirds of employees would take a cash incentive over a non-cash incentive. As noted above, this could also be because retail employees' salaries or wages may not be enough to cover their basics.
One study that paired monetary incentives with recognition (which are sometimes thought of as substitutes for each other) found the two incentives paired together had a positive impact on performance. The individual incentives isolated from each other showed a 13 percent increase in performance, while the combined incentives showed a 32.5 percent performance increase. This suggested that, while there is a linear relationship to incentive structures in that they increase overall sales performance, there are factors between cash and non-cash incentives, which can further impact the results of the study.
One study looked at a company in which their retail sectors were split, with one group receiving cash incentives and the other receiving non-cash incentives of equal value. The results showed the group with the non-cash incentives increased their sales by 46 percent more than the cash incentive group, and the non-cash incentive group improved the mix of products sold. One respondent to the study, a professor Ariely, theorized that the ability to visualize the tangible, non-cash reward created an emotional response in the salespeople, whereas cash does not offer the same emotional punch.
In another experiment, a single retailer attempted to explore the difference between cash and non-cash incentive rewards. In this field experiment, employees were placed into a repeated tournament setting that held two consecutive tournaments. The top retailers in each tournament received either a cash reward or a tangible reward. In the first tournament, the study found no significant effect of reward type. But in the second tournament, those eligible for non-cash rewards significantly outperformed those eligible for cash rewards, suggesting those losers from the first tournament increased their efforts in the second tournament far more than their counterparts competing for cash rewards.
Another type of non-cash reward is a points system, in which points relate to a specific type of reward or reward choice. This was found to outperform cash in motivating employees, as employees were found to be more likely to plan for the use of the reward points and demonstrated greater word-of-mouth, with both variables being significantly related to satisfaction with reward use. The points group and cash group had similar levels of reward satisfaction, and both groups reported significantly higher reward satisfaction compared to a group of gift card recipients. Both cash and points groups outperformed the gift card group.
There tends to be an assumption that cash is widely preferred to non-cash incentives, which some research has held up. But non-cash incentives have also been proven to offer greater benefits to employee performance. One explanation of this is that cash is often firmly viewed as compensation and is the baseline of the business arrangement between a company and an employee, and therefore is the epitome of a business transaction. Whereas non-cash rewards are viewed as vehicles of celebration, and they can generate an enthusiasm that cash cannot deliver. Further, that celebration and reward can impact the sense of friendly competition, team pride, and community in a company. But in all of these explorations between cash and non-cash, the result remains that recognition for hard-working and high-performing employees is important.
Building an incentive program can be individual. Some studies have found that some employees prefer monetary incentives—as noted above, in the two-thirds who chose cash incentives over non-cash. While others prefer the experiences or objects offered by non-cash incentives. But in all cases, incentives can be a crucial component in keeping teams, especially remote teams, productive and engaged. Further, incentive programs can correct the effects of brewing negativity and create an attraction for new hires and existing teams. In all cases, the employer or developer of an incentive program should understand their employees and their organizational values and goals and use these to develop their incentive program, as it can further incentivize the culture and environment an organization wants to cultivate.
Another important part of any incentive program, as explored in a 2018 Cornell University study, is that people need to be rewarded, instantly and frequently, regardless fo reward type. The study found those who were rewarded more closely to the completed task and more frequently were more interested and determined to complete those tasks at work—which is more capable with cash rewards and offers a potential benefit to cash reward programs. The same research found that after the rewards were removed, during a non-incentivized sales period, for example, the same people continued to be engaged and interested in their work. This, according to the study, showed the positive relationship between near-instant or instant rewards on long-term job satisfaction, which is why incentives continue to provide organizations and boost productivity regardless of whether they are cash or non-cash incentives.
Building an appropriate incentivization program can be useful for company transformation. Studies have found that generous and specific incentives can help drive and sustain performance improvement. This means the incentivization has to be generous enough to support employees changing or adapting behaviors to new behaviors, while they have to be specific to the behaviors the program wants to instill in the company culture. This requires the organization or company to know exactly what changes it wants to make, and when developed in such a way, studies have found these incentive programs to be the most effective transformation tool. When paired with the 2018 Cornell University results, this shows that generous and timely incentive returns can sustain those changes for a long time. The research offered seven principles to maximize the benefits for an organization:
- Tie incentives directly to transformation outcomes within the control of participants
- Encourage outperformance rather than just good performance
- Use the incentives program to encourage broader participation
- Include performance metrics beyond financial impact
- Ensure payouts are made soon after the initiatives are completed
- Tailor the program to the organization's strategy and culture
- Keep the design simple, yet precise
In the development of any incentive program, the details of the program can present some problems for the employer. One such problem can be selling one product over others. This can be damaging for a retail outlet, as they may push a single brand based on an incentive for selling that brand, and therefore may not show a customer the best product for their needs or use case. This tends to be more of a problem in spiff-based, or commission-based sales, and changing sales incentives to overall figures from device-specific problems can solve this issue. Although often these programs are developed to sell through a single product.
Second is that incentive programs can be seen to reward strong employees over weak, further increasing the cases of haves and have-nots in a store. This is seen where a top salesperson may be seen to exhibit an innate drive to succeed, while the rest of the team is happy to have a job and may be less interested in customer interactions or sales. However, in this case, team-based incentive programs can solve these problems.
Thirdly, some sales incentive programs, especially when focused on commission-type sales incentives, can ruin customer service. This occurs when sales staff hound and push customers to make a purchase as employees are incentivized to make a sale over good customer service. This means employees can come off as fake and pushy and more interested in a sale of an incentivized item than interested in what the customer wishes to purchase. However, as noted, team-based rather than individual-based sales incentives can solve this problem.
