The public sector is often criticized for its lack of pay for performance, but would it surprise you to hear that the private sector isn’t doing a great job either? Twenty four per cent of managers in North America admitted to providing bonuses to employees who fail to meet performance expectations, according to a recent survey by Towers Watson.
Pay for Performance
Would you be motivated to spend extra hours at the office if your colleague, who comes in late and takes two hours lunches, receives the same bonuses as you? In fact, that’s just what employers at doing – 18 per cent of managers fail to set differences in target payouts based on employee performance. It’s no surprise this can be demoralizing for hard working employees and can lead to job dissatisfaction. In fact, bonuses are typically linked to how well the firm performs financially; it may be even more discouraging for employees who constantly exceed expectations, yet don’t receive bonuses due to poor company performance.
Annual Incentive Plans Not That Effective
You’d think that pay would be the biggest motivator when it comes to employees, but you’d be surprised. In fact, annual incentive plans are not considered a key driver of sustainable engagement, and are not a strong source of attraction and retention, according to the survey. Employees blame this on the lack of a clear link between pay for performance. Instead of solely rewarding top performers, even subpar employees feel they are entitled to a piece of the annual bonus pie.
“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,” says Laura Sejen, Global Rewards leader at Towers Watson. “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.”
Annual Bonus Pools Underfunded
Why are employers rewarding their lowest performers, especially when their annual bonus pools aren’t even fully funded? For the third straight year and the seventh time since 2005, annual bonus pools will fall short of 100 per cent funding status. The average funding of bonuses is 87 per cent for North American firms, according to the survey. That’s unchanged from 2013, although down from 95 per cent funding in 2011.
This survey questions whether employers are truly getting a good bang for their buck, especially when money is tight. “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,” says Laura Sejen.