North American employers do not expect to fully fund their annual employee bonuses in 2013, marking the third consecutive year and seventh time since 2005 that their bonus pools for annual incentives will be below target, according to a survey from consultancy Towers Watson.
Additionally, one in four organizations will pay bonuses to workers who fail to meet performance expectations, raising the question of whether employers are receiving a good return on their investment in these plans.
Towers Watson's Talent Management and Rewards Pulse Survey, conducted in June and July 2013 among U.S. and Canadian organizations, found that North American companies’ average projected bonus funding for current-year performance is 87 percent of target. That is the same as 2012’s target level and below 2011’s 95 percent target level. Since 2005, North American employers have been able to fully fund their bonus pool only twice: in 2006 (102 percent) and 2010 (111 percent).
A Good Return on Investment?
“Employers continue to take a conservative approach to funding their bonus pools while the strength of the economy remains both uneven and uncertain,” said Laura Sejen, global rewards leader at Towers Watson. “While the vast majority of employers have some type of annual incentive plan, the way some incentive plans are designed and viewed by employees raises the question of whether employers are getting a good return on their investment in these programs.”
Indeed, the survey found that:
- About one-fourth (24 percent) of North American respondents will award some incentive payout to employees who fail to meet performance expectations (the lowest ranking possible).
- Nearly two in 10 (18 percent) fail to set differences in target payouts based on employee performance.
Most companies offer incentive programs as a way to recognize and reward employees for achieving results at different levels of the business, including their individual performance. Funding for incentive pools is generally based on how well the company performs financially.
Other recent research suggests that employees don’t perceive annual incentive plans as effective. Fewer than half of the employees who participated in Towers Watson’s 2012 Global Workforce Study agreed that there is a clear link between their job performance and their pay or that high-performing employees in their organization are rewarded for their performance.
“Some employers are not distinguishing enough in payments made to top and average performers,” Sejen said. “Companies may need to take a hard look at the design and delivery of their incentive programs to ensure they are meeting their objectives within the total rewards portfolio.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
Designing and Managing Incentive Compensation Programs, SHRM Toolkits, June 2013
Incentive Pay Tips and Pitfalls Shared, SHRM Online Compensation Discipline, June 2012
SHRM Online Compensation Page
SHRM Salary Survey Directory
SHRM Compensation Data Center
SHRM Metro Economic Outlook reports