Smaller pay rises lead to boom in performance bonuses


American employers are increasingly relying on performance-related pay awards that must be re-earned every year to attract and motivate their workers.

With wage rises during a period of economic expansion failing to keep pace with inflation for the first time since World War II, most American workers are keenly aware that rising energy, medical and interest rate costs have cancelled out any pay rises they may have earned this year.

But a survey of 1,028 large employers by Hewitt Associates has found that bonuses and performance-related pay deals are increasingly filling this gap.

The findings echo a study by Mercer Human Resource Consulting in July that suggested U.S firms were relying more on incentives such as year-end bonuses to retain employees without boosting fixed costs.

The Hewitt study found that base salaries were increasing by around 3.7 per cent next year, the highest increase in five years but only a modest increase from this year's 3.6 per cent.

Executives were projected to receive 2007 increases of 3.8 per cent, compared with 3.6 per cent for salaried non-exempt and non-union hourly workers, and 3.3 per cent for union employees.

"In today's competitive global economy, companies are unwilling to increase costs to their bottom line; therefore, they are relying more on variable pay to help motivate employees and help them cope with growing economic pressures," said Hewitt Associates' Ken Abosch.

"Variable pay programs allow companies to manage fixed costs, create focus on key business objectives, motivate and reward employees with bonuses when performance goals are attained.

"The bottom line is that variable pay is a smarter way to manage a business in a good or bad economy," he added.

Variable pay could help make up where base salary increases fell short of expectations for many employees, suggested the study.

Employers, it found, were relying more on bonuses as a primary means of attracting, motivating and retaining key talent.

In 2006, actual company spending on variable pay as a percentage of payroll was 11.2 per cent, more than three times the 2006 average base pay increase.

Spending on variable pay in 2007 was projected to remain strong at 11 per cent.

Variable pay had grown in prevalence since the early 1990s, with 80 per cent of responding companies currently offering at least one type of broad-based variable pay plan, compared with 51 per cent in 1991.

According to Hewitt's study, special recognition awards were the most common awards (63 per cent), followed by business incentives (62 per cent), signing bonuses (62 per cent), individual performance awards (44 per cent), non-executive equity awards (44 per cent) and retention bonuses (35 per cent).

"Variable pay is a win-win as employers can manage their costs and reward employees, and, at the same time, motivate and drive business results. Employees like variable pay programs because there is a tremendous upside and they feel like they have more control than they do in earning base salary increases," explained Abosch.

"The key to an effective variable pay program is to create meaningful goals and to effectively communicate the program to employees.

"Employees should also make sure they understand their manager's expectations, get as specific as possible about measuring results, and ask for performance updates throughout the year," he added.

Employers also reported a 15.7 per cent average turnover rate in the past 12 months, with attraction and retention continuing to be a sore spot for a number of companies, as 37 per cent reported problems.

Fewer than two per cent reported a salary freeze for 2006, and fewer than one per cent expected a salary freeze in 2007, it added.

In a separate study, Hewitt's UK operation has reported that nearly two-thirds of British firms are now offering their employees flexible benefits.

Its 12th Annual Flexible Benefits Survey showed a clear increase in the popularity of flexible benefits and salary sacrifice schemes, with the number of organisations offering flexible schemes increasing from half in last year's survey.

Salary sacrifice schemes, where employers can opt for a small salary in return for tax-efficient benefits such as pensions, bicycles and childcare vouchers, accounted for almost half of the new flexible reward schemes, it found.