Companies who don’t leverage the power of behavior economics within their incentive plans are operating at a major disadvantage. They are ignoring the very real (and very actionable) lessons learned from the fields of psychology, neuroscience and sociology. In essence, they are disregarding the role emotions play in their employees’ decision processes. As a result, they are underutilizing the motivational forces that can come to bear across communications, goal setting and reward offerings.

Behavioral economics isn’t new. The smartest businesses have been applying it across their consumer audiences for years. Through elaborately designed marketing efforts, they have been using it to make purchases seem more attractive to prospects. Using what they know about how people make decisions, advertisers use behavioral economics to motivate consumers to spend more and in the process grow more personally connected to the brand’s identity.

So what’s the connection to incentives? The “counterintuitive” findings that constitute this science have proven again and again that people don’t always operate in a logical manner. In fact, we often surprise economists (and marketers alike) by the choices we make. Companies that get what behavioral economics is teaching them are outperforming marketing rivals and prospering at higher rates. Once you understand how and why people make the decisions they do, you too can apply variations of the same principles within your reward programs.

Over the next couple of weeks I will share a couple of key insights that every program sponsor and planner should learn from this discipline. Understanding them will help you defend your strategies at a senior level. More importantly, it will help you build better (and more motivating) programs. Let’s start with the biggest counterintuitive finding of them all: that employees are actually motivated more by non-cash currencies than they are real money.

Employees justify spending money but not points

One of the more interesting aspects of behavioral economics is the reality that not every transaction gives us gratification or makes us feel good about ourselves. Sometimes it just depends on how we acquired the items in the first place.

People use money to buy what they “need.” When they crave something (but don’t really need it) such as a luxurious vacation or the latest electronic gadget, they think long and hard about spending money on it.

Purchases made with cash always carry the burden of justification. The interpretation of “need vs. want” becomes the barrier to gratification. In the long run, we will always have some lingering doubt about anything we buy that we really didn’t need. That dissonance can breed a negative association with rewards purchased with cash bonuses, something that’s inherently demotivating.

People are accustomed to spending their hard earned income on things they need. But they will always hesitate before spending money on items that seem extravagant. Even when we really want those items, we still struggle to justify spending cash money on them.

That’s why non-cash awards are so much more effective. They eliminate the psychological barrier that needs to be overcome before people can feel good about rewarding themselves. Responsible individuals, the very type of people you want working for you, don’t always feel comfortable splurging their hard earned cash on things they don’t really need. Non-cash doesn’t have those same emotional hurdles. Substitute points for reward dollars and your employees will no longer be emotionally restrained from obtaining what they really want. They will be more motivated to work hard so they can obtain the items that inspire them, and do so without the guilt.

Behavioral economics teaches us that. Look for another lesson in my next posting.