North American employers do not expect to fully fund their annual employee bonuses this year, marking the third consecutive year and seventh time since 2005 that their bonus pools for annual incentives will be below target, according to a new survey from global professional services company Towers Watson (NYSE, NASDAQ: TW). Additionally, one in four employers will pay bonuses to workers who fail to meet performance expectations, raising questions as to whether employers are receiving a good return on their investment in these plans.
The Towers Watson Talent Management and Rewards Pulse Survey found that North American companies' average projected bonus funding for current-year performance is 87% of target. That is the same as last year's target level and below 2011's 95% target level. Since 2005, North American employers have been able to fully fund their bonus pool only twice - in 2006 (102%) and 2010 (111%).
"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%) of North American respondents will award some incentive payout to employees who fail to meet performance expectations (the lowest ranking possible). Additionally, nearly two in 10 (18%) fail to set differences in target payouts based on employee performance. Most employers offer incentive programs as a way to recognize and reward employees for results achieved at different levels of the business, importantly including their individual performance. Funding for incentive pools is generally linked to how well the company performs financially.
Other recent Towers Watson research shows that annual incentive plans are not perceived by employees as being effective, are not a key driver of sustainable engagement and are not a strong source of attraction and retention. In fact, 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.
"It appears that some organizations are simply paying for status quo, treating their annual incentive plans as an entitlement program rather than one that should reward employees for their performance and contribution to their organizations. Add to that the fact that some employers are not distinguishing enough in payments made to top and average performers. 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," said Sejen.