Incentives Enjoy Near Full Funding

September 19, 2005 ( - Even though companies in a recent survey funded their short-term incentive (STI) programs to almost 100% of targets, future bonuses will be tougher to get.

A news release about the short-term incentive survey by Watson Wyatt and WorldatWork said that employers are bumping up company financial performance goals and individual employee targets.

The poll of 265 large employers found that funding levels for the 2005 STI/bonus cycle averaged 99% of target, a significant hike from the 81% in 2004 and 91% in 2003. The survey also found significant differences in STI funding between high- and low-performing organizations: Strong performers funded at an average of 118% of target, while less successful companies trailed at an average of 93% of target.

“The improved economy and stronger corporate performance are driving higher bonus funding, and that’s good news for both employers and employees,” said Laura Sejen, director of strategic rewards consulting at Watson Wyatt, in the news release. “It especially allows employers to better reward top-performing employees and attract and retain key talent.”

More than half (54%) of organizations increased their company financial performance targets last year, effectively raising the bar for employees to receive awards. Financially successful firms were more aggressive, with nearly two-thirds (64%) upping company financial goals.

Meawhile, long-term incentive (LTI) plans are also changing, according to the survey. Although 42% of companies offer stock options to non-executives, and 33% offer other long-term incentives, companies are apparently trimming the size of their programs in light of the new accounting rules.

Despite significant plan redesigns in the last two years, roughly one-third of companies continued to make changes to their non-executive plans in 2005. Among these companies, 52% reduced the number of stock options granted, 50% reduced eligibility and 27% eliminated stock options entirely. Overall, 14% of companies reduced LTIs as a percentage of total pay for non-executives, and only 31% of these adjusted any element (e.g., short-term incentives) upward to compensate, according to the survey.

The survey also found that

  • Merit increase budgets grew from 3% in 2004 to 3.4% in 2005 and are projected to increase slightly to 3.5% in 2006.
  • Employees generally view base pay increases as an entitlement. Nearly half of employers (49%) believe that employees at their company regard annual pay raises as entitlement “to a great extent.”
  • Despite unfavorable accounting treatment changes, only 9% of companies that made LTI program changes in the last year eliminated their Employee Stock Purchase Plans (ESPPs). Thirty-seven percent of companies currently offer a broad-based ESPP to non-executives, which allows employees to purchase stock at a discount.