By Daniel Hunter
Short-term cash incentives, or annual bonuses, have become the norm for workers at the majority of UK companies with 94 per cent of those surveyed offering an annual incentive to a broad range of their employee base, according to research by professional services company Towers Watson.
Despite challenging economic conditions, businesses admitted that over the past few years, bonus pay-outs remained at, or near, target levels. The average short-term incentive payment in 2011 was 100 per cent of target, 2012 came close at 90 per cent and a similar figure is anticipated by Reward professionals in 2013.
The research also found that half (49%) of the companies surveyed still pay-out pro-rata bonuses to ex-employees: either calculated when the employee leaves the company (20%) or paid out on the company’s normal payment date (29%) even if the employee has resigned months beforehand. Almost all companies (94%) offer their incentives as cash-based rewards, while the remainder insist on combination of cash and company shares.
“We have seen a steady expansion in the proportion of companies offering annual incentives compared to equivalent studies conducted in 1999, 2004 and 2009. Not only is the proportion of organisations offering bonuses on the rise but the breadth and depth of eligible workers also continues to increase," Joris Wonders, Director of Towers Watson’s UK Reward practice, said.
"When designed and implemented successfully short-term variable pay can be very effective in incentivising employees to perform. However, when companies pay-out bonuses regardless of individual or financial performance the rewards can be perceived as an entitlement, rather than an incentive, and lose their value as an employee motivator.”
The research, conducted by Towers Watson’s UK reward practice, surveyed reward professionals at 120 companies. The findings provide an insight into the nature of short-term (i.e. annual) incentives offered to the general employee base across the UK, from middle management to manual workers.
The research excludes executive pay structures and sales incentive plans. Data was gathered on a range of elements: bonus plan type; prevalence; metrics and weights; uses of threshold; funding approaches; and deferrals. It also assessed the use of discretion, the degree of differentiation in making individual awards.
“We know that companies that can encourage high performance from employees perform better financially so the business case for creating a strong link between pay and performance is clear. It can also help organisations to manage their total reward costs, develop defined and measurable objectives for employees and help sustain workforce engagement,” said Wonders.
Other findings from the research include:
Employee eligibility: On average 62 per cent of employees are either automatically eligible to be in a bonus plan or become eligible once they reach a certain grade/band, rather than having to wait for the completion of a probationary period or fixed length of service.
Bonus structures: The most popular types of short-term incentives are tiered incentive plans which contain several levels of performance measures, such as corporate performance, business performance and individual performance. This type of incentive is in place at 60 per cent of the companies surveyed, with overall pay-out levels most commonly determined by company profit and individual performance.
Deferrals: Only eight per cent of companies defer their employee incentives for any length of time. In this respect employee bonus programmes differ from executive schemes which have seen increasing numbers of incentives deferred for three or five years. In the rare instances in which employee bonuses are deferred, the average is for 40 per cent of the award to be deferred for between two and three years.
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