Bonus Binge: Variable Pay Outpaces Salary

With salary increase budgets expected to remain at 3 percent for 2017, employers are turning to variable pay to reward employee performance.

The percentage of organizations using variable pay vehicles, such as annual or quarterly bonuses based on individual, team and organizational goal achievement, rose to 84 percent in 2016, reports WorldatWork, an organization of total rewards professionals, in its 2016-2017 Salary Budget Survey. This number had been hovering around 80 percent for many years.

The August report reflects the results of a survey of WorldatWork members, most of whom work at large North American companies. Survey data was collected through May.

A combination of awards based on individual, business unit and organizational performance continues to be the most prevalent type of variable pay program.

Types of variable pay programs
The percentage of respondents who indicated that their organization uses all three (combination), or just one or two, of these awards; some employers offer multiple variable pay programs covering different employee groups:

Source: WorldatWork.

In deciding whether to offer a combination of variable pay programs or to provide awards only for organizational, business unit or individual performance, "There are several factors that may come into play," said Kerry Chou, senior practice leader in compensation at Scottsdale, Ariz.-based WorldatWork. "Probably the most important is answering the question, 'What do we want to accomplish with our variable pay programs?' In some organizations, different employee groups are motivated by different rewards strategies, so the same variable pay programs applied to all doesn't make sense. In other cases, a company may have an overriding culture of winning or failing together, in which case a common incentive program for all employees will support that."

Employers should keep an eye on the practices of companies with which they compete for talent, Chou advised.

Budgets and Payouts

Most organizations that have a formalized incentive program (an annual plan with pre-determined goals and objectives) will budget for it, "as it often represents a sizable cash expense," Chou said. For organizations that only provide incidental bonuses, such as sign-on or retention rewards, the percentage is lower.

"One concern with budgeting for bonuses is that a 'budgeted' item tends to be spent even if it wasn't absolutely needed," he noted.

All or Some?

Organizations that include all employees in their variable pay programs—from hourly workers through the executive suite—often "wish to promote teamwork and a sense that all employees contribute to the overall success," Chou said.

Variable pay program budgets and payouts: 2016-17
Respondents differentiated their current and planned variable pay awards, representing a percentage of base pay, by employee classifications:

Source: WorldatWork.

(In the above chart, the "mean" is the mathematical average while the "median" is the middle value after listing reported budget increase expectations in successive order. Outliers, or extreme values on either the high or low end, have the biggest effect on the mean and less effect on the median.)

Companies striving to be known as an employer of choice "often offer incentives to lower levels of employees to attract better talent or to reward high-performers above market pay rates," which aids in retention, Chou said. "Again, always check back with the objectives you want to accomplish to ensure your programs are in line," he recommended. "You may not want to offer incentives at certain levels of the organization if doing so would elevate your labor costs over what is necessary."

Separately, a Willis Towers Watson survey found that exempt employees are projected to receive annual performance bonuses that average 11.6 percent of salary in 2017, roughly the same amount companies budgeted for this year. Discretionary or incidental bonuses, generally paid for special projects or one-time achievements, for exempt employees are projected to average 5.6 percent of salary, slightly more than the 5.3 percent average bonus awarded in 2015.

"Incentives tied to individual and company performance continue to play a greater role in an employee's total rewards package," said Sandra McLellan, North America practice leader for rewards at Willis Towers Watson.

Related SHRM Articles:

Salary Budgets Expected to Rise 3% in 2017, SHRM Online Compensation, July 2016

Incidental Bonuses and Alternative Rewards Are on the Rise, SHRM Online Compensation, July 2016

Variable Pay Aligns Performance with Rewards, SHRM Online Compensation, June 2016

Variable Pay: Ready to Make the Leap?, SHRM Online Compensation, June 2016

Private Companies Typically Award an Incentive Pay Mix, SHRM Online Compensation, March 2016

Keep Incentive Pay Plans Simple but Challenging, SHRM Online Compensation, June 2015