V. DISCUSSION AND CONCLUSIONS
We employ a quasi-field experiment to compare the effects of tangible versus cash rewards on
employee goal-setting, goal commitment, and performance. Company management implemented a
cash-based reward system at two call centers of their choosing and a tangible reward system at three
others, where all employees self-selected a goal from a menu of three choices. Consistent with
mental accounting and economic theory, employees eligible to receive tangible rewards selected
less-challenging goals. Further, in keeping with our psychology-based prediction that the hedonic
experience arising from tangible rewards increases goal attractiveness, we find that employees
eligible for tangible rewards were more committed to achieving the self-selected goal. Ultimately,
average performance was better among those receiving cash rewards, due to the significant positive
effects on employee goal selection.
In supplementary analysis, we find that for employees with a reasonable expectancy of goal
attainment (i.e., excluding the bottom 5 percent of June performers) cash rewards had significant
direct effects on performance. Also, cash rewards were positively associated with the change in
performance over the previous month, with this effect fully mediated by the impact of reward type
on goal selection. Our only evidence consistent with tangible rewards being associated with better
performance than cash is a higher rate of goal attainment among employees who selected the
moderate goal.
Our study makes several contributions to the goal-setting and incentive-contracting literatures.
First, we build on limited prior research examining the performance effects of tangible versus cash
rewards. The only studies in this area that we are aware of employ lab experiments and provide
mixed evidence on the effectiveness of tangible rewards (Jeffrey 2009; Shaffer and Arkes 2009). To
the best of our knowledge, we present the first archival evidence comparing the goal-setting and
performance effects of cash versus tangible rewards. The majority of our results support cash
rewards as leading to better performance in a setting where employees were able influence the
difficulty of their performance goals. Given the increasing use of tangible rewards in practice and
the largely unsubstantiated claims about their motivational advantages, we believe this is an
important finding relevant to designers of performance management systems (Aguinis 2009;
Incentive Federation Inc. 2007; Jeffrey 2009). Second, we extend the goal theory framework of
Locke and Latham (1990) by demonstrating that reward type influences the difficulty of
self-selected goals and individuals’ commitment to attaining them. While prior studies show that
linking monetary rewards to goal attainment can affect goal-setting behavior, ours is the first that
we are aware of to show reward type also matters, holding constant the reward’s monetary value.
Relatedly, the menu of goals with rewards increasing in goal difficulty used by the Company
represents a unique form of participative goal-setting, which has received minimal attention in the
management accounting literature (Webb et al. 2010). Our results show that, consistent with the
menu of contracts literature, the Company’s approach induced an effective ability-based sorting of
employee ‘‘type’’ regarding goal selection, which does not appear to have been substantively
attenuated by reward type. Finally, we illustrate a unique application of mental accounting theory in
a setting involving goal-setting and performance-based rewards that has been of considerable
interest to management accounting researchers for a considerable time (Luft and Shields 2003).
While a few accounting studies have employed mental accounting theory, to our knowledge it has
not been used in the context of participative goal-setting (e.g., Fennema and Koonce 2011; Jackson 2008; Jackson et al. 2010). We find strong support for our mental accounting-based prediction and
hope this will provoke others to consider the applicability of the theory to similar settings.
Like all studies, ours is subject to limitations that provide opportunities for future research.
First, we only have access to data regarding the impact of reward type on goal-setting behavior for
one month. It would be helpful to evaluate the extent to which our findings generalize to
multi-period settings where employees repeatedly work under the types of reward schemes used at
the Company. For example, there may be a novelty factor associated with tangible rewards such
that the differences relative to cash rewards that we document in goal selection and goal
commitment diminish over time. Second, Company management assigned centers to reward
conditions based on our input as to factors (e.g., employee characteristics, center management style)
that should be as similar as possible across locations. Although our analysis of the available
employee demographic measures and other data (hours worked, prior-month performance) suggests
the centers were highly comparable, the lack of random assignment limits our ability to make causal
inferences and we cannot completely rule out the possibility that unobserved center differences
influenced goal selection and commitment. As such, future research employing lab experiments
would be helpful in establishing the robustness of our results in a more controlled setting. Third, the
maximum reward value in our setting was $1,000 but there is evidence that organizations are using
tangible rewards (e.g., travel) well in excess of that amount (Jeffrey et al. 2011). It is unclear
whether the higher commitment to tangible rewards that we document would generalize to higher
value rewards, or whether beyond some threshold, cash becomes more attractive because of its
fungibility. Future research would be helpful in evaluating this possibility. Finally, Company
management imposed limits on the number of process measures we could collect in our survey
regarding the mental accounting and affective responses generated by the different rewards. Future
research is needed in developing a more comprehensive set of process measures that would permit a
fuller understanding of the basic mental accounting and affective response differences we observed
in our setting.