Four out of five companies will dole out gifts or bonuses to employees this holiday season. Most companies feel obliged to give their employees gifts -- they don't want to be seen as behaving like Scrooge.

Unfortunately, corporate gift giving is not for the faint at heart. The decision process can be riddled with stress. It's hard to select a gift that will be seen as meaningful to employees. Many employees are left dissatisfied -- in 2004, several Google employees whined about the 'cheap' holiday gift they received, a $200 LG smartwatch. 

Cash Isn't King 

Some companies go over the top in terms of holiday gifts. In 2014, for example, Buzzfeed gave each of its employees a $350 Apple Watch that hadn't even hit the market. 

Most companies, however, default to cash. In 2010, Google gave its employees a $1000 "holiday bonus". It turns out that gifts of cash have little more impact than lumps of coal.

Indeed, one study published by German and Swiss researchers found that gifts are far more motivating than cash. As part of the study, one group was gifted with a water bottle worth about seven Euros. The other received seven Euros in cash. Productivity among employees who received the water bottle increased by 25 percent -- an increase that more than offset the cost of the bottle itself. In contrast, productivity among those who received the cash remained stagnant. 

Why are gifts more motivating to employees? It's counterintuitive. Case in point: When offered the choice between the aforementioned water bottle and seven Euros, 80 percent of subjects opted for the cash. While cash is more practical, in-kind gifts convey the notion that an employer has taken time to hand-select an item. Employees feel more valued, with the result that they are more satisfied. Productivity increases as a result. 

Unfortunately, it's difficult to hone in on a one-size-fits-all gift that will appeal to all employees -- we're still a ways away from offering corporate registries. The solution? Gift cards. 

The Power of Gift Cards 

Gift cards offer the best of both worlds. On one hand, they give rise to the same productivity increases associated with traditional gifts. In a 2012 survey conducted by BambooHR, 70 percent of HR personnel reported that gift cards are effective in terms of optimizing employees' engagement in the workplace. On the other hard, they don't require fretting about which personalized gift to purchase. 

One reason why gift cards are much more effective than cash is because they compel employees to treat themselves to something specific. Whereas cash gifts typically go straight to the bank -- to paying bills and other expenses, gift cards are used up on specific tangible items, or else are wasted. The opportunity to treat oneself without feeling guilt or remorse -- an opportunity that uniquely is afforded by gift cards -- speaks to why 8 of 10 employees prefer gift cards over other incentives. 

But there's still a decision factor associated with gift card giving in selecting the merchant. Starbucks gift cards are not likely to appeal to Peet's loyalists. If you select a particular merchant, chances are that some employees will be left dissatisfied and won't end up redeeming the cards. Studies have shown that it takes longer for recipients to redeem gift cards designated for a restricted range of product categories or for a particular store, assuming the cards are redeemed at some point. 

Don't Close The Loop 

What, then, is the solution? Open loop gift cards.

In contrast to closed loop gift cards (like Starbucks cards) that are limited to a particular retailer or set of retailers, open loop gift cards (like Visa, MasterCard, and American Express cards) are redeemable at any merchant. Not surprisingly, according to several studies, open loop gift cards are growing more rapidly than closed loop ones. 

Given the increase in the number of Millennials in the workforce, the time is especially ripe this season to offer open loop gift cards. While older employees are partial to gift cards for specific merchants, millennials prefer to receive open loop gift cards (58 percent compared to Gen Xers at 42-43 percent and Boomers at 30 percent according to a survey by Bankrate).

Not all gifts are treated equally. If you want to be on your employees' 'Nice List' this year, opt for open loop gift cards. 

Published on: Nov 16, 2017
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.