In the early 2000s, Microsoft wanted to shake things up. Increase profit and performance, reward high achievers, and penalise those who don't pull their weight. They created a program to weed out “bad” employees that was so toxic, ineffective, and harmful that it almost bankrupted them and marked the start of what analysts call Microsoft's “lost decade.” The name of the performance review system? Something called stack ranking.

Stack ranking sounds like a practice straight out of a corporate nightmare. It refers to ranking all employees from best to worst and eliminating the worst. Imagine you work in a team of 10 engineers; all are good at their job, but some are slightly better. Two of them will invariably be classed as “low-ranking” and fired – no matter how good they are overall or if their “weak” performance was due to factors beyond their control. In contrast, the “best” performers will receive massive bonuses. The only way to get ahead is to undermine your coworkers.

We have talked before about the danger of ranking employees. The practice created a culture of fear, paranoia, and office politics at Microsoft, decreased job satisfaction and performance, and led to thousands of qualified people leaving. Microsoft abandoned the policy in 2013.

Microsoft's stack ranking system is a fantastic example of why punishing employees will get you nowhere. When motivating a team, empowering people to do their best, and creating a productive work environment, rewards are a much safer bet.

Read on to learn the difference between different types of rewards, why they are so effective, and how to use rewards in a gamified workplace.

What Are Rewards in the Workplace?

Rewards are given to employees for achievements, contributions, or behaviours that align with the company's goals and values. They can be monetary – a year-end bonus, for example – but they don't have to be tied to money. In fact, financial rewards are often not the top priority for employees because people also thrive on recognition such as a heartfelt thank you note or a simple “good job.” Compared to monetary bonuses, recognition rewards are less tangible and work on an emotional level. Both types of rewards are needed to create a satisfying work environment.

HR professionals and employees alike love reward programs. More than 90% of HR managers believe that reward and recognition programs make employees more likely to stay. 88% of workers see rewards and recognition as important factors influencing job satisfaction. Employee engagement and performance are 14% higher in organisations with reward programs than those without. Frequent rewards also decrease turnover, help attract new talent, and create a productive work environment.

However, when it comes to rewards and recognition in the workplace, there is room for improvement. Only 4 out of 10 employees feel their workplace effectively rewards them for their good work. A lack of recognition is one of the most common reasons employees quit.

Why Are Rewards in the Workplace So Effective?

Rewards are everywhere: from the lollipop that paediatricians used to give children to big annual bonuses for CEOs. Why are they so effective across industries and demographics?

1. Rewards make us happy

When we receive rewards or recognition, our brain releases dopamine, a chemical influencing pleasure and motivation. This dopamine release creates a positive association with the rewarded behaviour, reinforcing it and increasing the likelihood of its repetition.

2. Rewards provide a sense of achievement

Rewards are external motivators that help us to work towards a specific goal or complete a task. Receiving a reward or recognition signals to our brains that the job is completed and provides a satisfying conclusion. They also create a sense of anticipation and excitement.

3. Rewards modify our behaviour

Often, but not always, our behaviour is driven by external factors. Rewards and recognition reinforce desired behaviours such as task completion speed, compliance with safety regulations, or living company values. By recognising and rewarding those who perform in a desired way, companies can reinforce these behaviours and create a positive work environment.

4. Rewards increase collaboration

Don't think of rewards as something that values individuals over the collective. Yes, rewards and recognition let people know they are doing a good job, but they are also very effective tools to support collaboration and teamwork. Design your reward system to encourage employees to work together and lift each other up.

There can be downsides to implementing a reward system: unclear reward metrics might confuse employees and leave them feeling unfairly treated. Reward and recognise employees for the wrong behaviour and rewards might feel pointless. Over- or under-rewarding can decrease motivation.

If you have never implemented a reward and recognition system at your workplace, you should create a strategy to ensure that your rewards align with your goals and objectives.

How to Use Rewards and Recognition in a Gamified Work Environment

To be effective, a reward has to fulfil three conditions:

• The receiver must be interested in the reward
• The reward has to be given after the desired action is completed
• The performance that is rewarded must exceed usual standards

Remember that rewards must be fair, transparent, and aligned with organisational values and objectives. Rewards and expressions of recognition are also ineffective if they are given all the time or don't vary. A survey found that a once-weekly expression of praise works best for employee engagement, with younger workers needing more positive recognition than Gen X or Baby Boomers. It's not difficult to recognise an employee for their excellent work. A simple “thank you” or “good job” goes a long way.

Keep the following strategies in mind when creating a reward system:

1. Create a fair and meaningful reward system

Make sure that your reward structure is transparent and that rewards are achievable, fair, and meaningful. Examples of such rewards are points that can be redeemed for prizes such as a free lunch, an extra day off, or a fun activity. Ensure that people know what to do to receive a reward by implementing an easy-to-understand point system or setting milestones connected to rewards.

2. Reward milestones and achievements

To be able to offer rewards for milestones, you first have to define them and communicate them clearly and effectively. If possible, use a system that clearly displays milestones and empowers people to reach them.

3. Create a supportive culture

Keep Microsoft in mind as a “that's-not-at-all-what-we-want”-example. A little friendly competition has never hurt anyone, but you don't want rewards to create a cut-throat environment where employees compete for a day off or a bonus or feel they can never measure up to their colleagues. Ensure you reward and recognise teamwork and collaboration and encourage your employees to nominate each other for rewards.