Human Resources

Merit Pay Programs Falling Short of Goals

According to a new survey of North American employers, only 20% find merit pay to be effective at driving higher levels of employee performance.
Matthew HellerFebruary 8, 2016

A surprisingly large number of North American employers say their merit programs aren’t an effective way of driving and rewarding employee performance, according to a new survey.

The consulting firm Willis Towers Watson reported that only 20% of North American companies find merit pay to be effective at driving higher levels of individual performance at their organization and only 32% said their merit pay program is effective at differentiating pay based on individual performance.

“Employers continue to make significant investments of time and money in their traditional pay-for-performance programs, primarily annual merit pay increases and annual incentives,” Laura Sejen, global practice leader for rewards at Willis Towers Watson, said in a news release. “Unfortunately, these reward programs are falling short in the eyes of many employers.

“It appears that organizations are either trapped in a business-as-usual approach or suffer from a me-too mentality when it comes to their programs,” she added.

Employers also gave their short-term annual incentive programs low marks. Only half said these programs are effective at boosting individual performance levels, and even fewer (47%) said annual incentives effectively differentiate pay based on how well employees perform.

Willis Towers Watson noted that some changes are underway, with organizations reporting their managers are adopting a broader, more forward-looking view of performance when making decisions about merit pay.

While 64% of survey respondents said managers at their organization consider demonstration of knowledge and skills required in an employee’s current role when making merit increase decisions, 46% said their programs are designed to take these performance indicators into consideration.

“Pay-for-performance programs, when designed and implemented effectively, are great tools to drive performance, and recognize and reward employees,” Sejen said. “However, conventional thinking on pay for performance is no longer appropriate. Companies need to define what performance means for their organization and how managers can ensure they are driving the right performance, and reevaluate the objectives of their reward programs to ensure they are aligned with that definition.”