Human Capital & Careers

How Employee Pay Programs Fall Short

Base-compensation programs may be too complex, while incentive-pay plans may be structured illogically.
David McCannJune 20, 2018
How Employee Pay Programs Fall Short

Employers’ base-pay programs tend to be too complex to effectively drive employee performance, new research suggests.

Greater emphasis on incentive compensation could serve as a partial antidote. But, according to the research, the structure of pay-for-performance programs often leads to missed opportunities to effectively differentiate incentive payouts.

In a Willis Towers Watson survey of 1,949 employers in 48 countries, only 44% of respondents said their base-pay plans were effective at influencing higher individual performance.

Speaking to the complexity issue, more than half of survey participants cited each of six factors as affecting “to a great extent” the level of base-bay increases.

“Achievement of individual goals” led the way at 70%, followed by “final rating in most current year-end performance review” (69%), “concerns over market competitiveness” (62%), “demonstration of knowledge and skills required in current role” (60%), “criticality of the role” (59%), “possession of skills critical to the success of future business model” (59%), and “penetration in pay range for current role” (57%).

Four other factors each were cited as influencing base-pay hikes by at least 39% of survey takers.

“Companies may be considering too many factors in making certain pay decisions,” the survey report states. “These findings suggest that the role of base pay needs to be redefined for today’s changing workplace.”

Apparently, however, what employers are planning to change would serve to increase the complexity of base-pay programs.

For each of the 12 factors Willis Towers Watson asked about, at least 20% of respondents said they expected the factor to become more important for setting base pay over the next three years. The factor most expected to increase in importance was “possession of skills critical to the success of future business model” (51%).

(Few survey participants said that any of the factors would become less important over the next three years.)

At the same time, 76% of survey takers said knowledge and skills required in the current role will remain just as important going forward as they are today. That result “highlight[s] employers’ competing priorities,” the survey report says.

Also of note, “achievement of individual goals,” cited as the most important factor for determining base-pay increases currently, fell to eighth-most-important in respondents’ assessments of how such determination will change over the next three years.

Meanwhile, judging by the survey data, some companies aren’t very rational in the structure of incentive-pay programs. For example, one-third of respondents indicated that they actually pay incentives to employees that do not meet expectations.

Also defying logic are the decisions some employers said they make in years when incentive-pay programs are underfunded.

“When actual incentive funding levels fall below target, nearly a third (33%) of employers reduce the payout to top performers by a greater percentage than they do the payouts to other employees,” according to the survey report.

“These missed opportunities to differentiate bonuses could help explain why almost half (48%) of organizations are planning or considering changes to the design of their annual incentive plans,” the report says. “We also see that as past performance becomes less of a key factor in base-pay decisions, the importance of reflecting this factor in annual incentive plans becomes more important.”

The report also reveals that many employers are unprepared to meet growing expectations for transparency around their compensation policies.

Contributing to such expectations are generational preferences, legislation, and publicly available comparative data. “Yet, there’s still a relatively low level of pay transparency, which involves providing clarity around how pay decisions are made as opposed to disclosing employees’ actual salaries,” the report states.

“The reasons for this lack of transparency vary. In some cases, an organization’s compensation system may be so confusing that it’s difficult to clearly explain the decision-making process. In other cases, the results may be embarrassing — for example, an organization may have a substantial gender pay gap.”

Respondents rated gender pay equality as the least important of the 12 factors for determining base-pay increases today. Over the next three years it will rise to sixth-most-important, according to the survey results.

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