Companies in the U.S. are falling short in the delivery of their base pay and annual incentive programs, according to new research, and are not differentiating pay for their best performers as much as in recent years.

The research, from the professional services company Towers Watson, found that many employers continue to provide annual bonuses to employees who don’t meet performance goals.

Only 50 percent of employees believe they are paid fairly compared with other people in similar positions in their organizations, researchers found, and only 40 percent reported they saw a clear link between pay and performance. Fewer than six in 10 employees (59 percent) said their company does a good job of explaining their pay programs, and only 50 percent of employees said their managers are effective at fairly reflecting performance in their pay decisions. 

“Pay really matters to employees when they make decisions about whether to join or stay with a company,” said Laura Sejen, managing director of rewards at Towers Watson, in a statement. “But simply offering a competitive salary and annual bonus is not enough to win the war for talent. Employees believe that employers are falling short in how pay decisions are made and that there is much room for improvement.”

For their part, employers gave 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 survey, 35 percent of U.S. employers said their employees understand how base pay is determined, while 61 percent said employees understand how their annual bonuses are determined. Roughly four out of 10 (38 percent) said managers execute their base programs well, while 53 percent indicated that managers execute their annual incentive programs well.

In a separate survey, Towers Watson Data Services found that U.S. employers are planning to give pay raises that will average 3 percent in 2015 for their exempt non-management employees, including professionals. That is only slightly larger than the average 2.9 percent increase workers received in each of the past two years.

Meanwhile, annual bonuses are expected to fall short of the target, the fourth consecutive year employers are unable to fully fund their annual incentive pools. However, while star performers are expected to receive significantly larger pay raises and above-target annual bonuses, employers are differentiating less for performance than in previous years.

Exempt workers who received the highest performance ratings were granted an average salary increase of 4.5 percent this year, approximately 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 the raises given to average workers.

The survey found that pay differentiation for annual bonuses is narrowing as well. 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. Nearly 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,” said Seien. “In fact, it appears that the extent of differentiation has declined in the past few years. 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.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access