Bonuses Often Awarded to Subpar Performers

Nearly 3 in 10 companies give bonuses to workers who don’t meet performance goals

By Stephen Miller, CEBS Sep 25, 2015

Thirty percent of U.S. companies plan to give bonuses to employees who fail to meet performance expectations, according to new findings from consultancy Towers Watson.

Additionally, employers increasingly say they are having difficulty retaining critical-skill employees, according to the Towers Watson Talent Management and Rewards Pulse Survey, fielded in August and September 2015 among 170 large and midsize U.S. employers.

These two findings are not unrelated. Companies are more likely to have a hard time holding on to high-performers with in-demand skills if these employees see too little difference between the incentive pay they receive and what’s being given to their poorer-performing colleagues.

Rewarding Underperformance

The survey found that:

Employers that pay bonuses to employees with the lowest rating typically pay them around 65 percent of their target payout.

Employees who far exceed performance expectations are in line to receive bonuses around 19 percent above the target amount.

“By design, many incentive pay programs allow managers to set individual employee bonus amounts,” Sandra McLellan, the leader of Towers Watson rewards, talent and communication practice for North America, told SHRM Online. “Over time, managers may stop thinking of the bonus as a performance-based pool, and employees may come to see it as something they are entitled to, even though the payouts were originally designed to be tied to performance.”

Talent Retention

Delivering substantial bonuses to weak performers raises questions as to whether companies are investing their bonus dollars effectively and holding workers accountable for performance—and that can affect retention, McLellan noted.

“Overall, companies indicate they are not having too much of a hard time attracting and retaining employees right now. But if you ask if they are having difficulties attracting and retaining high-performers or employees with certain critical skills, they say they are, and that keeping these employees is becoming more difficult,” McLellan said.

The number of U.S. employers having difficulty retaining critical-skill employees has risen sharply in the past two years as market competition has increased. The survey found that:

More than half of respondents (52 percent) report difficulty keeping critical-skill employees, compared with 41 percent in 2013.

66 percent also report having problems attracting critical-skill employees.

53 percent said their hiring activity has increased compared to last year, while 40 percent indicated that their turnover is rising.

Less differentiation on bonuses—and also less differentiation regarding base pay—might be exacerbating the problem, McLellan said, because “increasingly, there are alternatives for high-performers about where to go and work.” And that's leading to higher employee turnover among key talent.

Companies that are differentiating more among high- and low-performers, and that are funding higher bonuses for those who demonstrate higher levels of performance, report fewer problems retaining their top talent, McLellan pointed out. “If you follow the logic that your high-performers are driving your results, then that will affect company performance going forward.”

Underfunded Bonus Pools

Bonus differentiation also can be affected by the size of a company’s bonus pool, and the survey showed most employers are not expecting to fully fund their annual employee bonuses in 2015—marking the fifth consecutive year that annual bonus pools will be below companies’ targets:

U.S. companies’ average projected bonus funding for current-year performance is 89 percent of target.

Last year, these same organizations funded their plans at 93 percent of target level.

Since 2005, U.S. companies have fully funded their bonus pools only twice.

“In years where a bonus is underfunded, it’s usually because the company didn’t meet financial goals that would result in 100 percent funding, so it speaks to the performance of the business,” McLellan said.

On the other hand, he said, “if the company has a year where it exceeds its financial and key business expectations, then the bonuses may be funded above the target level.”

Differentiation within that pool for individual bonuses should be based on an employee’s performance, “but that becomes harder when there are fewer dollars to spend in years where the bonus doesn’t fully fund and there is less to go around,” McLellan remarked.

Recognition and Engagement: Other Views

“It’s important to implement programs to reward, motivate and engage your top performers, so you don’t risk losing them to competitors,” Lisa Mullen, Halogen Software’s manager of corporate HR, told SHRM Online. “When bonuses are spread out across an organization, it’s important not to forget about how powerful nonfinancial means of recognition can be for top performers. Recognition can be in the form of thank you e-mails, ‘employee of the month’ programs, and public recognition during meetings involving departments or the entire organization.”

This type of recognition “can be just as powerful as the monetary rewards because they provide top performers with the proper context explaining why they are being recognized and act as a way to further engage these employees, providing them with a platform to continue to be recognized for their high performance,” she noted.

Bonuses by themselves “only offer a short-term impact on worker satisfaction,” commented Stefanie Frenking, global executive recruiter and “feel good manager” at Spreadshirt, a custom T-shirt and apparel e-commerce firm. “A more prudent and affordable approach is building a long-term relationship with employees,” she said.

“Many small businesses have struggled to get the best talent. Most can’t offer stock options or big bonuses. But small businesses can make a deliberate decision to focus on workplace happiness, wellness and work/life balance, and that mission resonates with smart, motivated and talented workers,” Frenking advised.

“Meaningful employee recognition programs should include management training,” added Kevin Cronin, who serves on the board of directors of Recognition Professionals International, a professional association. “When supervisors, managers, department heads are trained in how to express ‘thanks’ for a job well done, it matters and has a measurable impact on retention, productivity, morale and even improved customer service.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.


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