Americans are often viewed as the embodiment of overindulgence, yet the truth is many of us loathe spending money on what we perceive to be nonessentials. Indeed, behavioral economists Drazen Prelec and George Loewenstein state that consumers making purchases often experience an immediate "pain of paying," which can weaken the pleasure derived from consumption or even discourage consumption altogether.

Savvy employers turn this reluctance to indulge to their advantage by incorporating just such luxuries into workplace incentive programs.

"On the one hand, people want to indulge in extravagances, but on the other hand, they feel guilty.

What they really are attracted to are guilt-free indulgences -- when they can get something luxurious without taking money out of their pocket," says Ran Kivetz, the Sidney Taurel Associate Professor of Marketing at Columbia University Graduate School of Business.

Kivetz's extensive research into the choices people make when offered incentives resoundingly support his belief that non-cash incentives are more effective motivators.

In fact, when given the opportunity, many people will "precommit" to indulgence to ensure that the goal of having more fun and luxury is realized. In a series of studies in which thousands of respondents chose between a luxury item and a cash amount of equal or greater value, a significant amount of respondents (between 13% and 39%) selected the luxury over the cash (see "Is Cash King?"). When asked why, they replied, "If I chose the cash, I would probably spend it on something I need rather than something I would really enjoy," and "This way I will have to pamper myself and not spend the money on something like groceries."

The Psychological Edge

Interestingly, Kivetz and his colleagues discovered that people are more likely to desire or precommit to a luxury reward rather than a necessity when the requirements to earn the reward are increased. In other words, if you raise the bar in a sales incentive program, it's more likely to be well-received if the payoff is a non-essential item (i.e., something other than cash or gift certificates).

In two separate studies involving consumer loyalty programs (one for a car rental company, the other for a nationally recognized department store), participants were given the opportunity to join a program whose reward was either a one-hour facial or a Swedish massage that they were told had a retail value of $70, or they could join a program that offered a gift certificate for $70 to the participants' local grocery store. Participants in one of the field studies also had the option of not joining either program. (Remember, while Kivetz's field studies focus on consumer loyalty programs, the findings carry over to workplace incentive systems.)

In both studies, when program requirements to receive the reward were relatively low, a higher percentage of participants opted for the program offering the grocery certificate. When the program requirements were increased, participants' preferences shifted to the luxury offer rather than the necessity reward.

Less for Luxuries

What's more, Kivetz's research showed that the participants will work harder for hedonic luxuries than for necessity items and gift certificates. When the car rental loyalty program offering the luxury reward increased the program requirements from 10 to 20 car rentals, it did not significantly affect the number of people who would participate. However, when the program offering the grocery certificate made the same increase from 10 to 20 rentals, it significantly lowered the number of participants who said they were likely to join the program.

In a separate study, Kivetz gauged how many market research surveys participants were willing to complete for either a luxurious massage (a luxury) or a certificate for four unisex haircuts (a necessity). Respondents were willing to complete on average four surveys in return for the massage and only 2½ surveys for the unisex haircuts.

This is even more impressive in light of the fact that the same respondents were willing to pay, on average, $45 for the massage and $60 for the haircuts. Hence, they were willing to work harder for a reward that they attributed a lower value to because it was perceived as a hard-earned (and therefore deserved) luxury.

The lesson: an incentive program is likely to receive more buy-in from participants if the reward is a non-essential item. Luxury rewards are especially effective if the requirements to obtain the incentive are high to begin with or if requirements are increased (say from one program to the next).

"People are willing to work harder for hedonic luxuries. Once you put them in a monetary frame of mind -- when they start thinking about dollars -- they become more rational, more economical and less willing to work for it," Kivetz says.