REWARD MANAGEMENT
US companies revamping annual and long-term incentives
Corporate America's cost-cutting measures to cope with the uncertain economy may have finally run their course. But companies continue to overhaul their annual bonus and long-term incentive programmes to attract and retain top performers and "critical-skill" workers, according to a survey by Watson Wyatt Worldwide.
The survey found that only 18% of the respondents expect to require employees to pay a greater share of benefit costs next year, compared to 56% that did so over the past 12 months. Other cost-management measures that companies implemented during the past two years -- such as reducing salary increase budgets, bonus funding or staff -- are also expected to decline sharply in the coming year, the survey noted.
"The difficult business environment and cost cutting of the past several years have caused many companies to change their reward practices, especially the mix of rewards," said Laura Sejen, national practice director for strategic rewards at Watson Wyatt. For example, in light of pending changes in accounting for stock options, 41% of companies have decreased eligibility for participation in long-term incentives.
According to Sejen, this weakens the link between employees' rewards and the long-term financial performance of their companies. It also reduces the opportunity for wealth accumulation, previously an important component of the employment deal in many companies.
The survey also found that 39% of companies are making changes to their short-term and annual incentives.
High-performers versus low-performers
According to the survey, low-performing companies -- those whose financial results are worse than their industry as a whole -- report twice the difficulty attracting and retaining top-performers and critical-skill workers compared to high-performing firms.
"High-performing firms clearly do a better job of differentiating pay based on performance," said Sejen. "They effectively use short-term incentives, spot bonuses and other recognition plans to successfully attract and retain top talent."
Watson Wyatt reckons short-term incentives, which top-performing employees rank as the second most valued monetary reward programme, offer significant reward potential. Most companies fund short-term incentives based on their financial performance, and according to the survey, high-performing companies funded their incentives at 108% of target while low-performing companies were only able to fund incentives at 75% of target.
Says Sejen: "Unfortunately, top-performing workers at financially weak companies are suffering the consequences. These workers are receiving bonuses that are significantly lower on average than their peers at high-performing companies at 84% of funded versus 118% of funded respectively. And the gap only becomes wider since low-performing companies are not able to fund their bonus pools to nearly the same degree as financially strong companies."
A final word
"To create effective reward programmes, companies need to understand where their reward dollars are being allocated. And the companies that do the best job of linking rewards to business results and employee performance to attract and retain the best workers will be the ones best positioned for future success." -- Laura Sejen, national practice director for strategic rewards at Watson Wyatt.
Want to know more?
Title: Survey of Strategic Rewards and Pay 2003/2004, Watson Wyatt Worldwide.
Survey sample: A total of 358 US companies representing a "broad spectrum of industries" participated in the survey.
Availability: Copies of the report are available from Watson Wyatt at www.watsonwyatt.com.
Watson Wyatt & Company is an international human capital consulting firm that provides services in the areas of employee benefits, human capital strategies, and related technology solutions. The firm has headquarters in Washington D.C., and has more than 4,100 associates in 61 offices in the Americas and Asia-Pacific. To find out more visit www.watsonwyatt.com
Posted 1 November 2003