While many companies use financial compensation to reward employees, there are times when these rewards lose their effectiveness. Here is when to consider ditching the bonus for a simple pat on the back.

While companies are comfortable with giving financial rewards to employees, they often get stuck when it comes to giving meaningful, genuine recognition. Yet recognition is often the more powerful reward, since it speaks to the employee in the language of meaning and personal context, rather than generic gift cards.

What speaks even more volume is creating reward programs with a social component. This approach brings the department or larger organization into the celebration of an employee’s accomplishments, resulting in the most powerful path to building a culture of recognition tied to accomplishments and employee growth.

Related: 6 Ways to Get the Best From Your Team

Rewards vs. recognition – when each makes sense

For the purpose of this discussion, rewards can be thought of broadly as some form of compensation. Compensation may include salary, bonuses, stock, options or even deferred compensation. The point is there’s a formal agreement between the manager and the employee that some level of effort is required, some work product is expected, certain behavior is appropriate and results are desired.

This system works pretty well for most of us, most of the time, but there are times when financial rewards lose their effectiveness. Say your business isn’t growing due to economic or competitive pressures and you don’t have the resources to periodically review and up-level the rewards system. Many employees will find this a disincentive to keep performing at the same level. They may leave for greener pastures, they may develop bad attitudes, become resentful or cynical, even sabotage the workplace with ill-timed comments to customers.

While rewards are a necessary part of the world of work, they are not sufficient. It’s important to get them right and keep up with the market, or you’ll see retention fall and employees disengage. But it’s not the whole ball game.

Related: Effective Employee Management? Look to the Golden Rule.

This is where recognition comes in. In many cases it’s more powerful (assuming your rewards programs are in reasonable shape) to give an employee recognition when he or she excels. Recognition can be as simple as a shout out in a group email or as subtle as a heartfelt handshake. The difference here is it takes an emotional action on the part of the manager to recognize the actions of the employee.

Here are a few times when recognition makes sense:

  • When the person is well-compensated but has done something above and beyond the call of the job
  • When the person makes an effort to set a fine example, say by mentoring a struggling employee
  • When the employee invests him or herself at an emotional level to the success of the organization.

Building a culture of recognition

It’s difficult to build a culture of recognition but it can be done. Christine M. Riordan, writing in the Harvard Business Review, talks about how companies can ‘foster a culture of gratitude." Certainly gratitude is a component of recognition: If someone helps you reach your sales goal, you’ll feel not only that you hired the right person but also grateful for their contribution to your company. Recognition is, I’d argue, bigger than gratitude alone. Recognition is a celebration of shared values and a shared sense of purpose, clearly communicated and widely understood. If you don't convey the purpose, mission or how to achieve the goals correctly, many things can go wrong in the organization. (McKinsey Quarterly goes into this more in depth.)

Employee recognition has (at least) five attributes: it’s in the moment, in context, appropriate, authentic, and it’s aligned with the employee’s notion of value.

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When financial rewards backfire – and what to do to remedy the situation

We’ve all seen rewards systems based purely on financial rewards backfire. It happens with dismaying frequency when your culture lacks a recognition component. Remember the last time you gave Jim a bonus for hitting a goal, only to find out later that Jim’s team did 90 percent of the work? Remember when you instituted raises after a two year freeze, citing everyone’s hard work? You lost 30 percent of staff within six months. Bet you didn’t see that coming.

Money isn’t everything. To fix a situation where monetary rewards have created friction, you’ll first need to check in with all your managers to get the lay of the land. Find out who’s unhappy, then go to them and ask open questions about what’s bugging them. Then acknowledge the error and fix it. It might mean giving Jim’s team bonuses (after having a few words with Jim about how he handled it), but in other instances you may be able to bring the ship aright with recognition: stand up in front of the group, admit you made an error, and recognize each player for his or her contribution.

Financial rewards put a price on doing the right thing; recognition gives the same action value. I’ll take value every day. In a healthy work culture, value should be the yardstick used to measure accomplishment and determine appropriate recognition.

Related: One Excuse You Should Never Give Your Employees