Premium Incentive Overview: Research & Statistics

This article provides an overview of the premium incentive field, highlights the critical issues, and outlines the field's information resources, including publications, trade shows, and seminars.

STATISTICS

Research reveals that using merchandise and travel to motivate can be highly effective and cost-efficient. The Incentive Federation’s biennial “Survey of Motivation and Incentive Applications” aims to determine incentive users’ objectives, practices, costs, and results across all levels of American business. Results of the 2005 study include the following key highlights:

• Sales incentives and non-sales recognition/motivation programs are the most widely used incentive applications, followed by consumer promotions and lastly by dealer promotions.
  
  
• 83 percent of the respondents use merchandise and/or incentive travel in their sales incentive programs.
  
  
• 68 percent of respondents use merchandise and/or incentive travel in their consumer/user promotions.
  
  
• 72 percent of respondents use merchandise and/or incentive travel in their non-sales recognition/motivation programs.
  
  
• 49 percent of respondents report using merchandise and/or incentive travel in their dealer incentive programs.
  
  
• 24 percent of respondents overall say they have run online incentive programs. Among larger organizations, that number increases to 49 percent.
  
  
• Four out of five survey respondents (80 percent) believe that travel awards and merchandise awards are remembered longer by program participants than cash awards.

Merchandise incentives (the focus of this overview article) are used most often in programs to increase sales or purchases, or, in the case of employees, to improve productivity or quality of performance. The term premium usually refers specifically to merchandise used in an incentive program; the term incentive generally refers to anything that is used in an incentive program.

Businesses use incentives to: motivate employees to work toward a common goal; recognize performance; get people to make a purchase they might not otherwise make; reinforce a marketing message. Noncash awards such as merchandise are used to avoid the pricing or compensation issues raised by the use of cash.

Merchandise is also used in consumer promotions, such as gift-with-purchase offers, contests/sweepstakes, self-liquidators, and continuity programs. Nearly half of consumer promotions aim to build customer loyalty.

CRITICAL ISSUES

• Determine specific goals. What in specific terms do you want to accomplish: i.e., increase sales 10 percent in a given period? Specify what the increased sales would mean in profits. Develop a clear way to measure results.
  
• Determine how much to invest in your incentive program. Generally, companies are willing to invest 10-20 percent of their anticipated sales or productivity gains in the awards, communications, administration, etc., associated with the program. The number you select should depend upon your product's profit margins as well as a conservative estimate of anticipated sales gains.
  
  
• Identify whom you are targeting: consumers, salespeople, dealers/distributors, customer service employees, etc. Understand their demographics, tastes, lifestyles, through surveys, if possible.
  
  
• Determine what type of incentive award will get the attention of your target audience and will be clearly distinguishable from your usual compensation or pricing strategies.
  
  
• If it's an employee, sales, or dealer incentive, determine how you will measure performance.
  
  
• Make sure that what you are asking your target to do is reasonable in light of past performance or behavior.
  
  
• Determine market, morale, or other obstacles to achieving your goals.
  
  
• Determine precisely what merchandise award approach will reinforce your message, fit your budget, and be in line with the performance you want.
  
  
• Determine whether you will manage your program internally or use an outside agency.
  
  
• In selecting a merchandise supplier, make sure it can deliver the specific products you ordered when you request them, and at the price specified.
  
  
• Determine the tax implications. Merchandise can be taxable to recipients under certain conditions, and use of tax forms may be required
  
  
• Measure results of the program.

LEGAL/TAX ISSUES

In this field, the most critical legal issues involve games of chance and products packaged with food. Federal Trade Commission regulations bar companies from running lotteries, i.e. promotions that require consumers or the trade to pay in order to participate. An alternative entry vehicle must be offered with any sweepstakes or contest. Likewise, dealer incentive programs using elements of chance might be considered illegal if they require a purchase, but this occasional business practice hasn't seemed to attract the interest of legal authorities.

Many other elements go into making sure your sweepstakes is legal. Your rules should explain the nature of the random drawing and who will conduct it; they should clearly spell out any people (such as employees and customers) excluded from the promotion; clarify the geographic scope of the promotion, as well as any retailers who are involved. The rules should explain specifically the prizes and how people will be notified, as well as whether or not a cash substitution is permitted. They should disclose odds of winning, or state that the odds depend on the number of people who enter.

To further protect your company, the rules should explain how winners will be notified and what will happen if winners cannot be contacted. They should spell out under what circumstances an entry will be disqualified, as well as limitations, if any, on the number of entries permitted. Many sweepstakes are limited to adults, and should say so if they are, and many sponsors require an affidavit of eligibility. If so, this should be stated. Finally, the rules should address any sales or income tax liability, tell people how to find out who won, and require winners to provide the sponsor with the right to publicity, if desired.

The Food and Drug Adminstration has regulations regarding shipment of premiums in packages of food, and the use of any premiums with products associated with children require great care. Only thoroughly tested child-safe products should be considered. State agencies and the Federal Bureau of Alcohol, Tobacco and Firearms have regulations regarding use of sweepstakes/contests in the alcohol and tobacco industries.

Merchandise with a value of greater than $75 awarded to employees must be reported as income at its "fair market value" to the employee. As such, it can generally be deducted by the company as compensation. Business gifts of under $75 generally are deductible to the provider and nontaxable to the recipient. A 1099 form must be issued to employees for merchandise awards with a fair market value of greater than $600.

Employee Achievement Awards

There are certain types of awards that qualify for preferential tax treatment. According to the "Primer on the Federal Tax Treatment of Incentive Awards" prepared by George R. Delta, Esq., for the Incentive Marketing Association and available at www.incentivemarketing.org, the Tax Reform Act of 1986 still applies and provides, in general, that an employer may deduct the cost of "employee achievement awards," given to the same employee up to $400 in any year. If the incentive achievement awards are employee achievement awards made under one or more established, written plan or programs of the employer, the $400 deduction limitation is increased to $1,600 per employee (not $400 plus $1,600). Delta explains that if the incentive award qualifies as an "employee achievement award," it is not only deductible to the employer, buy it does not have to be included in the (taxable) income of the employee. Nor need it be included in employment taxes or the social security benefit base.

The Internal Revenue Code defines "employee achievement award" as an item of "tangible personal property" transferred to an employee by an employer for safety achievement or for length of service. It must be given as part of a meaningful presentation and cannot be the payment of disguised compensation. It cannot be given at the same time as the annual salary adjustment and it cannot be used as a substitute for a program of awarding cash bonuses. Delta concludes that "an award given to an employee for any other purpose (than safety or service) such as exceptional productivity, cannot be excluded from his or her income." That's why employers now try to emphasize incentive awards for safety and service. Tangible gifts of "nominal value" (defined as about $100) do not count in the total amount of incentive awards given under established plans in a single year. It is not cash or a gift certificate unless the (non-negotiable) certificate can only be exchanged for tangible personal property. It cannot be converted to cash. It is also not travel, vacations, meals, lodging, tickets to theater or sporting events, or stocks, bonds, or other securities. As a result, says Delta, "the fair market value of incentive travel awards given to employees is always taxable as additional income to them and deductible by the employer as compensation paid." He adds that many employers then reimburse the employees for the additional tax due.

TYPES OF SUPPLIERS

What type of supplier you use depends on your budget and what extra services you need.

Incentive representatives are sales agents for the 1,000 or so top consumer products companies that sell directly to corporate end-users and agencies, usually at wholesale prices (they are compensated by commission from the manufacturers). Each representative usually handles between 30 and 50 product lines and covers a specific region of the U.S. There are probably between 200 and 300 incentive representatives in the U.S. Incentive representatives are probably the least expensive source of merchandise incentives. Many belong to the Incentive Manufacturers Representatives Alliance (IMRA), a Strategic Industry Group of the Incentive Marketing Association, which offers a free directory of representatives in your area, call IMRA at 630-369-7786 or visit it online at www.imra1.org.

Advertising specialty distributors (also known as promotional products distributors) can obtain and sell just about any type of product from a key chain to a television. These companies act as middlemen and mark up the wholesale prices they receive from manufacturers depending on the added-value services they provide. These can include design, imprinting, communications, and fulfillment, depending on the company. The number of advertising distributors in the U.S. probably ranges from 15,000 to 20,000, but most are very small companies. Be careful to verify the capabilities of the distributor you are dealing with. These companies are the best to call for small corporate customers who will never spend more than $1,000 a year on merchandise, as well as for any size company looking to do a marketing campaign using advertising specialties. Keep in mind that there are a number of large promotional products distributors that can design and implement large scale incentive and promotion programs, but make sure you ask for specific examples before believing any claims. To find a promotional products distributor near you call the Promotional Products Association International (PPAI) at 888-426-7724 or use its online directory at  www.BuildAPromotion.com.

Incentive companies range from full-service agencies offering merchandise, training, communications, reporting, catalogues, gift certificates, travel, etc., to small shops offering specialized services. You will pay more for merchandise purchased through these companies in exchange for the full range of services you will get. A visit to the company will help you get a grasp of what services they can provide in-house, have to farm out, or simply cannot provide at all. You can find incentive companies through the online directory of the Incentive Marketing Association or in the directories of Incentive or Potentials magazines.

Promotion agencies range from sophisticated companies of 100 people or more offering a broad range of services to boutique shops specializing in one or a few specific types of promotion. You will not get the lowest prices, but you will get promotional support usually not available when buying direct from an incentive representative. There are probably over 1,000 companies calling themselves promotion agencies, but probably less than 100 have annual volume measured in the millions of dollars. You should make sure that the promotion agency you are considering has extensive experience in the use of merchandise in incentive programs. Promotion agencies can be found in the directories of Promo, Incentive, and Potentials magazines.

Consumer products manufacturers often have "special markets" departments specifically designed to handle the needs of corporate customers seeking volume orders of products for use in incentive programs, meetings, training programs, as gifts, or for other company use. If you are interested in a specific brand, call that company's headquarters and ask for its "special markets" department. You will probably be referred to that company's incentive representative in your area. It is generally best to deal with manufacturers that belong to one or both of the two associations listed below, since the personnel of such companies are most likely to understand corporate incentive needs, such as the need for drop-shipping of merchandise to recipients; wholesale prices; promotional slicks or transparencies, and the critical need to have the merchandise you selected when you want it. For a list of the leading companies, call Incentive Marketing Association at 630-369-7780 or visit its website at www.incentivemarketing.org.

Retail direct mail catalogues often offer gift certificate programs for the incentive business, with volume discounts available. If you want to offer gift certificates from one of your favorite catalogues, call the headquarters telephone number and ask for the corporate sales department. Volume discounts generally are available through corporate sales departments, along with drop-shipping services. When using gift certificates, it's important to clarify when your company will pay for them: when the certificates are purchased or when they are redeemed. (See Doc. 3060, Gift Certificates, for a list.) To obtain a list of incentive gift certificate suppliers involved in the corporate market, contact the Incentive Marketing Association at 630-369-7780 or visit its Web site at www.incentivemarketing.org. In addition, names of such companies are in a special supplementary section of Incentive magazine, as well as in the directories of Potentials magazine, The Motivation Show, and the Premium Incentive Show.

Fulfillment companies don't usually sell merchandise, but they will help you get it delivered to the recipient. They stock, pack, and send awards to your recipients, and many can provide complete reports for tracking purposes. For lists of fulfillment companies, check the directories of Incentive, Potentials, or Promo magazines.

SUPPLIERS

To find a supplier, go to #9520, Supplier Finder.

RESEARCH

There is a growing body of research in the field of premiums and incentives. The items listed below are a small but important sampling.

The Incentive Federation conducts a biennial survey of current users of merchandise and travel awards for motivation and incentive applications. It’s designed to determine incentive users’ objectives, common practices, costs, and results. The most recent "Incentive Federation Survey of Motivation and Incentive Applications" was conducted in 2005 and is available online at www.incentivecentral.org.

Incentives, Motivation & Workplace Performance, an academic study sponsored by the Society of Incentive & Travel Executives (SITE) Foundation looks at the positive impact of individual and team incentives on performance. Call 212-590-2518 or download an executive summary of the study from the SITE Foundation Web site. 

The Benefits of Tangible Non-Monetary Incentives, a study conducted for the SITE Foundation by Dr. Jeffrey Scott of the University of Waterloo in Southwestern Ontario, examines the psychological processes that tip the scales in favor of tangible non-cash incentives. Call the SITE Foundation at 212-590-2518 or download highlights of the study from the SITE Foundation Web site.

The Trouble with Money shows what happened when the Goodyear Tire & Rubber Company did a controlled experiment comparing cash and noncash incentives. It's available on the B. I. Performance Web site at www.biworldwide.com.

BOOKS

Sales Promotion Essentials, by Don E. Schultz, William A. Robinson, and Lisa A. Petrison, has several chapters that relate to planning premium programs.

Managing Through Incentives: How to Develop a More Collaborative, Productive, and Profitable Organization, by Richard B. McKenzie and Dwight R. Lee, shows managers how to apply proven motivators to help any size firm energize the work force, increase its profits, and meet the challenges of today's competitive global economy.

Incentives in Marketing & Motivation, by George Meredith and Robert P. Fried Ph.D., is a comprehensive text on the incentive marketplace. The content is illustrated and includes numerous case studies that reveal the breadth and potential of the incentive marketplace.

The Loyalty Effect, by Frederick Reichheld, does not address incentive programs specifically, but it's a landmark book on the power of employee and customer commitment.

ASSOCIATIONS

TRADE SHOWS & CONFERENCES

For a list of Industry Events, go to #9510, Calendar of Industry Events.

PUBLICATIONS

TO BECOME A PREMIUM SUPPLIER

If your company sells desirable consumer products that could be used as premiums, incentives, or gifts, you want to consider this market. Before moving ahead, talk to an expert to determine if this market is right for you. The best such advice is available from Jim Kilmetis, senior vice president, Selling Communications Inc. Reach him at 914-591-7600, ext. 229 or jkilmetis@sellingcommunications.com. For more information, go to http://www.sellingcommunications.com/Special_Markets_Consulting.518.0.html.