Articles

Financial recognition: improve ROI with ‘mental accounting’

This article helps HR professionals use the behavioural science of ‘mental accounting’ to improve the effectiveness of financial recognition programmes.

You would argue blind that you’d value £1 the same way no matter where you held it.

But it turns out that we feel more or less willing to spend that £1, depending on things like how we got the money, whether it’s a coin or held digitally, and how it’s labelled.

The research behind this shows that we behave as if we have a set of imaginary coin jars in our heads. And we split our money between these coin jars.

Behavioural scientists call this ‘mental accounting’. And have demonstrated that which mental account we hold our money in affects how we spend it.

To illustrate this in practice, imagine two different scenarios.

In the first scenario, you get a letter from HMRC telling you that you’ve underpaid your tax in the previous year and owe £500 to make up the shortfall.

If you’re like most people, you are likely to be livid, knowing that you will have to find the cash – possibly by raiding your savings account.

In the second scenario, you get a letter from HMRC telling you that you’ve overpaid your tax in the previous year by £500, and are therefore the recipient of a £500 tax rebate.

If you’re like most people in this situation, you’re delighted to receive this ‘windfall’. You might even contemplate going straight out and buying yourself an expensive treat.

The interesting thing about these two situations – one that leaves you livid, the other delighted – is that in financial terms they leave you in exactly the same position. In the first, you’ve underpaid, are now making up the difference; in the second, you’ve overpaid and are being compensated.

But how we respond is governed by our mental coin jars. The first is labelled an unexpected debt, which needs to be dealt with; the second a bonus or windfall, which can be frivolously frittered away.

This is relevant to organisations. Let’s take financial recognition. We want these gifts to be impactful.

We might think that the best thing you can do to make a financial reward more impactful is to increase its size. But the research shows that several factors are at least as important to staff receiving financial recognition, including:

  • Who in the organisation the money comes from
  • When it’s given to them
  • How it is described and labelled (is it a ‘bonus’ or a ‘thank you?’)
  • Relative value compared to the rewards others get
  • Whether they are given instructions how to use it (‘this is for X’)

You can use the principles of mental accounting to increase the impact of your financial recognition by:

  • Doing it at a different time to payday
  • Presenting it in a tangible format, such as in cash within a card, ideally with a personalised note
  • Being clear that it’s a thank you for a specific action (“this reward is for X”)
  • Giving a suggestion on how to use it (“this is for you to do Y”)
  • Gifting an additional, smaller sum for peer recognition (“this is for a colleague who helped you achieve X”)

This helps deliver the biggest wellbeing boost to the individual, but also encourages people to think about rewards as a collective endeavour.

This article was written by Owain Service, CEO of The Cognition Company. He previously co-founded the Behavioural Insights Team and was Deputy Director of the Prime Minister‘s Strategy Unit. He is an Honorary Professor of Behavioural Science at Warwick University.