Study Finds Rewards Programs Lagging Business Changes

September 6, 2007 ( - Despite enormous shifts in the business landscape over the last decade, most companies have made minimal changes, at best, in the design and delivery of their base pay, incentive and performance management programs, according to a Towers Perrin study.

One troubling trend Towers Perrin found was minimal customization of rewards beyond the sales function. In a press release, the firm said although a majority (59%) of respondents do customize rewards, most (79%) do this chiefly for sales positions. Very few extend this approach to other functions or roles that are critical to executing their strategies (e.g., customer service staff for retail organizations or R&D talent for pharmaceutical companies), despite evidence suggesting customized rewards can make a difference in both retaining and motivating people.

More than three-quarters of respondents said they have changed their variable pay programs in the past three years, and nearly half expect to implement more changes to variable pay and bonus programs in the near future. However, the most common change is an increased emphasis on using companywide performance as a metric (cited by 42% of survey respondents) rather than individual performance, the press release said.

Forty-three percent of survey respondents said their performance management systems did not effectively link to business needs and 42% felt their systems did not effectively equip managers to identify, develop and reward high performers or deal with poor performers. While 90% of respondents reported changes in their performance management programs in the last three years and almost the same number expect to make more changes in the next three years, for the vast majority the nature of the changes are technological, typically involving automating more aspects of the process.

“While technology can go a long way toward increasing the efficiency of performance management systems and is a ‘needed to play’ attribute, it cannot take the place of the human interaction that truly powers performance management: the personal relationship between manager and employee,” said Ravin Jesuthasan, Managing Principal and Practice Leader, Towers Perrin, in the press release.

The lack of effective changes in rewards programs could be explained by the survey finding that more than two-thirds (68%) of respondents said their organizations have no formal method for measuring the return on their investment in rewards. Without such data, HR and compensation executives can have difficulty making a case for more strategic investments in rewards programs or to justify current expenditure.

“In this environment, we expected to see comparable innovations in rewards practices,” said Jesuthasan. “Our data confirm what amounts to a pattern of ‘tweaking’ at the edges of programs, rather than creating the more systemic and integrated approach required to address the scope, intensity and magnitude of change on the business side.” Towers Perrin pointed out the changes in the business landscape have been driven by increased competition, cost pressures, globalization, aging populations, technology advances, and skill and labor shortages, among other things.

The 2007 Towers Perrin Reward Challenges and Changes Survey is based on data from 637 HR and compensation executives at midsize and large companies in 21 countries in North America, Latin America, Europe and Asia.