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A third of employers pay bonuses for workers who don’t meet expectations
While star performers are expected to receive significantly larger pay raises and above-target annual bonuses in 2015, employers are differentiating less for performance compared with previous years, new research by Towers Watson suggests, and some continue to provide annual bonuses to employees who don’t meet performance goals.
Moreover, companies are falling short in communicating to employees about their base pay and annual incentive programs, the consultancy found.
Towers Watson Data Services reports that U.S. employers are planning to give pay raises that will average 3 percent in 2015 for their exempt nonmanagement (e.g., professional) employees—just barely ahead of inflation, and only slightly larger than the average 2.9 percent increase workers received in each of the past two years. The findings are in line with other recent salary budget forecasts for next year. Meanwhile, annual bonuses are expected to fall short of target, the fourth consecutive year employers are unable to fully fund their annual incentive pools.
Base salary increases and variable payouts for top achievers will outpace the raises and bonuses everyone else can expect in 2015, a recent survey by Mercer showed. However, the extent of differentiation between high-performing employees and others has declined over the past few years, according to Towers Watson’s findings, which reveal that:
• Exempt workers who received the highest performance ratings were granted an average salary increase of 4.5 percent in 2014, about 73 percent greater than the 2.6 percent increase given to workers receiving an average rating.
• Three years ago, the best-performing workers received raises that were 80 percent greater than raises given to average workers.
The survey also noted that pay differentiation for annual bonuses is narrowing:
• For 2015, the top 10 percent of employees are expected to receive bonuses that are 25 percent larger than those given to employees who met expectations.
• In 2010, those same top performers received bonuses that were 30 percent larger than those of workers who met expectations.
• Almost one-third (30 percent) of employers plan to give bonuses to workers who failed to meet performance expectations, an increase from last year, when nearly one-fourth gave bonuses to employees with the lowest ranking.
“Despite awarding better-than-target bonuses and higher merit increases to their best performers, many companies are still not providing enough differentiation in their incentive programs for them to be effective,” Laura Sejen, managing director of rewards at Towers Watson, told SHRM Online. “This is a missed opportunity not just for recognizing top performance and improving the employment deal for this segment of the workforce, but also for creating incentives for improved productivity across the entire employee population.”
Tight Budgets Challenge Managers
By way of explanation, Sejen noted that “The decrease in differentiation in recent years is partly attributable to the ongoing modest budgets for salary increases and the below-target funding of annual incentives. The lack of desired pay-for-performance differentiation is often not so much a matter of plan design as it is the way managers are executing their decisions on pay. Specifically, in the era of limited resources for rewards, many managers are challenged to effectively differentiate merit increases or bonus awards. Managers may not have been given the tools or training they need to effectively execute these pay decisions.”
-------------------------------------------------------Managers are challenged to effectively
differentiate merit increases and
Failure to Communicate
“Simply offering a competitive salary and annual bonus is not enough to win the war for talent,” added Sejen. “Employees believe that employers are falling short in how pay decisions are made and that there is much room for improvement.”
As evidence, she noted these findings from the Towers Watson 2014 Global Workforce Study:
• Only one-half of employees believe they are paid fairly compared with other people in similar positions in their organizations.
• Fewer than six in 10 employees say their company does a good job of explaining their pay programs.
• Less than half report a clear link between pay and performance.
• Only one-half say their managers are effective at fairly reflecting performance in their pay decisions.
Meanwhile, employers give themselves middle-of-the-road ratings on the effectiveness of their base pay programs, although they believe they are more effective at delivering annual incentives. According to the Towers Watson 2014 Talent Management and Rewards Survey:
• Only 35 percent of U.S. employers say their employees understand how base pay is determined.
• A larger number, 61 percent, say employees understand how their annual bonuses are determined.
• 38 percent of employers feel managers at their organizations execute their base programs well.
• 53 percent indicate that managers execute their annual incentive programs well.
The Towers Watson Data Services Salary Budget Survey was conducted in June and July 2014, and includes responses from 1,090 U.S. companies. The Towers Watson Global Workforce Study, covering 6,014 full-time U.S. employees in large and midsize organizations across a range of industries, was fielded during April and May 2014. The Towers Watson Talent Management and Rewards Survey was conducted from April to June 2014 and includes responses from 337 U.S. companies.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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