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Time to Take a Good, Hard Look at Bonus Pay

Nov. 18, 2015
Bonus plans aren't delivering what they've promised--and with talent at a premium, that's a problem, says TowersWatson.

Although hiring is up and with it, turnover and talent mobility, employers still aren’t delivering on bonuses, a recent survey of mid to large employers found. That could mean one of two things, says Laury Sejen, managing director at professional services firm TowersWatson. Either companies are setting unrealistic performance goals, or what they’re communicating on a daily basis about what’s valued at the company and how they’re measuring for bonus pay are two different things.

The Towers Watson survey, which polled 170 U.S. employers, found that for the 5th straight year, bonus pools will be underfunded in 2015. All told, the companies' projected bonus funding is 89% of target.

When bonus plans don’t deliver, “that means it’s hard even for employees whose performance is at target to get their personal targeted amount,” says Sejen. “That can have an impact on retention and morale.”

The Towers Watson survey also found that employers, when they do give bonuses, aren’t exactly putting it to the best use. Thirty percent of the employers surveyed planned to give bonuses to employees who “failed to meet performance expectations”—the absolute bottom-of-the-barrel performance ranking. Some of those companies give the same payout to employees across the board, while others give poor performing employees around 65% of their target payout.

At the same time, over half of the respondents say they’re having difficulty keeping critical-skills employees. Two-thirds are having trouble attracting such employees.

To Sejen, that adds up to “not spending the money in the most effective way. In an underfunded environment, and one where you’re having trouble attracting and retaining really important employee skill groups, well then you really better be [awarding performance] to the greatest extent you can.”

Sejen advises that companies should be taking a fresh look at the metrics they’re using to drive bonus funding "and ask the question—Are they appropriately aggressive rather than unrealistically aggressive?

“Because there is a notion of having some stretch in these plans. I’m not saying make those targets easier to hit, but maybe there’s an opportunity to doublecheck and make sure they’re not overly aggressive. And then if these are appropriate goals and the performance just isn’t coming through, then make sure you redouble your efforts at communicating with employees at all levels why the plan isn’t funding the way it is.”

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