Employers Miss the Mark on Bonuses

Employees looking forward to a fat year-end bonus might want to temper their expectations.

North American employers do not expect to fully fund their annual employee bonus pools this year, according to a new survey from professional services firm Towers Watson. That marks the third straight year and the seventh time since 2005 that bonus pools for annual incentives have fallen short of targets.

“We’ve really only had one year since the Great Recession where we’ve enjoyed above-target bonus pool funding,” said Laura Sejen, global leader for rewards consulting at Towers Watson and the lead author on the survey’s findings.

Companies’ average projected bonus funding for 2013 is at 87 percent of target, the same as the previous year, according to the survey, which polled 121 organizations from the United States and Canada in June and July. In 2011, employers reported a bonus funding level at 95 percent.

Since 2005, companies have reported being able to fully fund annual bonus pools twice, in 2006 and 2010, when employers held fund targets of 102 percent and 111 percent, respectively, according to Towers Watson.

The survey defines incentive pools as generally linked to how well the organization has performed financially — not on individual performance.

What’s more, the Towers Watson survey found that nearly a quarter of employers plan to award some incentive payout to employees who fail to meet performance expectations. And about 18 percent of employers say they fail to set differences in target payouts based on performance, the survey said.

This, in essence, treats annual incentive programs as a de facto profit-sharing plan, according to Towers Watson.

These incentive programs often miss the mark in the eyes of employees, too. Less than half of employees surveyed reported that high performers in their organization are rewarded for performance through incentive programs.

Sejen said reasons why less-than-stellar employees still get bonuses varies, but a lot has to do with middle managers unsure of the structure of the incentive program. Not all total rewards programs are communicated clearly. Also, some managers may feel guilty not rewarding some bonus for employees who worked hard but came up a little short in meeting goals.

Still, Sejen said incentive programs remain a valuable tool for talent recruitment and retention; it’s just a matter of making sure the bulk of the money is going to employees who are high performers and exceeded their annual goals.

She said talent managers should re-examine how their incentive plans are structured. The emphasis, she said, should be on making sure line managers are clear on its design and function.

“There’s an important role for an annual incentive plan,” Sejen said. “These are great tools if you implement them properly.”

Frank Kalman is an associate editor at Talent Management magazine. He can be reached at fkalman@talentmgt.com.Fcompensation