ARLINGTON, VA, February 4, 2016 — Despite embracing the concept of pay for performance, a surprisingly large number of North American employers say their programs aren’t doing what they are designed to do — drive and reward individual performance — according to a survey by Willis Towers Watson (NASDAQ: WLTW). The survey results come at a time when a majority of companies are fully engaged in their annual performance review and pay decision cycles.
"Employers continue to make significant investments of time and money in their traditional pay-for-performance programs, primarily annual merit pay increases and annual incentives," said Laura Sejen, global practice leader, Rewards at Willis Towers Watson. "Unfortunately, these reward programs are falling short in the eyes of many employers. It appears that organizations are either trapped in a business-as-usual approach or suffer from a me-too mentality when it comes to their programs."
The Willis Towers Watson survey found that only one in five (20%) North American companies find merit pay to be effective at driving higher levels of individual performance at their organization. And only one-third (32%) say their merit pay program is effective at differentiating pay based on individual performance. Similarly, employers give their short-term annual incentive programs low marks. Only half say these programs are effective at boosting individual performance levels, and even fewer (47%) say annual incentives effectively differentiate pay based on how well employees perform.
The survey also found more than seven in 10 (71%) employers use wage increases in local markets as the basis for determining merit increase budgets, while 54% use their organization’s financial performance in the most recent year as the basis. And when it comes to annual incentives, just over half (51%) report using organization-wide performance measures to determine the funding pool, while individual performance measures are used to determine award payouts.
"Employers need to break out of an outdated paradigm and rethink their approach to pay," said Sandra McLellan, North America practice leader, Rewards at Willis Towers Watson. “In many cases, merit pay is a standard adjustment disguised as a pay-for-performance program. All too often, there is either a breakdown in delivery or managers feel compelled to give some type of increase to everyone instead of differentiating performance and rewarding employees accordingly.”
The survey notes some of these changes are already under way. Organizations say their managers are adopting a broader, more forward-looking view of performance when making decisions about merit pay. For example, they say their managers are giving more weight to certain performance indicators than is called for in their program’s design.
Nearly two-thirds (64%) of respondents say managers at their organization consider demonstration of knowledge and skills required in an employee’s current role when making merit increase decisions. That compares to less than half (46%) who say their programs are designed to take these performance indicators into consideration. More than four in 10 respondents also say their managers give much greater weighting to the criticality of roles (42%), possession of skills critical to the success of the future business model (45%) and achievement of team goals (41%) than is called for in their programs’ design.
"Pay-for-performance programs, when designed and implemented effectively, are great tools to drive performance, and recognize and reward employees. However, conventional thinking on pay for performance is no longer appropriate. Companies need to define what performance means for their organization and how managers can ensure they are driving the right performance, and reevaluate the objectives of their reward programs to ensure they are aligned with that definition," said Sejen.
About the Survey
The Willis Towers Watson Talent Management and Rewards Pulse Survey was conducted in October and November 2015. A total of 150 large and midsize U.S. and Canadian employers representing a cross section of industries participated. Respondents were primarily HR executives.