Employers Put More Teeth into Variable Pay Programs

November 2, 2004 (PLANSPONSOR.com) - US employers have raised the bar on qualifying for non-executive variable pay plans in the last year or plan to do so in the coming 12 months, according to a new survey.

A Watson Wyatt news release said the company’s survey found that about half (49%) of all respondents with variable pay plans have recently revised them. The most common change was revising the performance measures on which bonuses are based (68%), followed by increasing goals employees are expected to achieve to earn an award (46%). More than one out of four (27%) increased the size of target awards employees receive for achieving goals.

“Employers are trying to better link variable pay programs with organizational and individual performance,” said Laura Sejen, director of strategic rewards consulting at Watson Wyatt, in the news release. “Clearly, employers are raising the bar for employees. As variable pay becomes more prominent, companies are realizing they need to carefully distinguish reward allocations to recognize outstanding employee performance if they are going to attract and retain top talent.”

Firms are apparently reacting differently depending on their corporate performance level. The survey found that low-performing organizations reported implementing the most changes with 63% having done so in the past 12 months. On the other hand, only four in 10 of high-performing companies reported making revisions to their plans, and, of that 40%, 44% increased target awards.

According to the survey, eight in 10 firms now have a variable pay program for non-executive employees, and 49% of organizations have a plan for all employees. In addition, among respondents planning future changes to their reward programs, 43% plan to put greater emphasis on variable pay.

Turning to long-term programs, about half of the employers with long-term plans also made changes in the last year. Of those that made changes, half did so in anticipation of the new accounting rules surrounding the expensing of stock options. Among the changes made, the most popular were decreasing eligibility (46%) and changing measures for award determination (35%).

The survey also found that companies are projecting merit increases to average 3.4% next year, slightly higher than the 3% increase this year, but still below the 3.6% average increase in 2002.