WASHINGTON ñ Funding for short-term incentives (STIs) such as annual bonuses increased significantly in 2005 to nearly 100 percent of targeted payouts, according to a new survey conducted by Watson Wyatt and WorldatWork. At the same time, however, companies are making it more difficult for employees to earn a bonus by increasing company financial performance goals and individual employee targets.
The survey of 265 large companies found that funding levels for the 2005 STI/bonus cycle averaged 99 percent of target, compared with 81 percent in 2004 and 91 percent in 2003. The survey also found significant differences in STI funding between high- and low-performing organizations: Companies with strong financial performance funded at an average of 118 percent of target, while less successful firms funded at an average of 93 percent of target.
ìThe improved economy and stronger corporate performance are driving higher bonus funding, and thatís good news for both employers and employees,î said Laura Sejen, director of strategic rewards consulting at Watson Wyatt. ìIt especially allows employers to better reward top-performing employees and attract and retain key talent.î
More than half (54 percent) of organizations increased their company financial performance targets last year, effectively raising the bar for employees to receive awards. Financially successful firms were more aggressive, with nearly two-thirds (64 percent) increasing company financial goals. A complementary survey of 1,100 workers found that most employees agree, with 55 percent indicating that it has become more difficult to earn a full bonus over the past three years.
ìEmployers are clearly recognizing the value of getting the right money to the right people,î said Sue Holloway, senior compensation manager at WorldatWork. ìWith higher financial performance targets, employers can make sharper pay distinctions in employee pay and more strongly align employee performance with organizational results.î
Long-term incentive plans continue to change
At a time when itís more difficult to receive short-term incentives, non-executives are also finding that their long-term incentive (LTI) plans are changing. Although 42 percent of companies offer stock options to non-executives, and 33 percent offer other long-term incentives, companies appear to be reducing the size of their programs in light of the new accounting rules.
Despite significant plan redesigns in the last two years, roughly one-third of companies continued to make changes to their non-executive plans in 2005. Among these companies, 52 percent reduced the number of stock options granted, 50 percent reduced eligibility and 27 percent eliminated stock options entirely. Overall, 14 percent of companies reduced LTIs as a percentage of total pay for non-executives, and only 31 percent of these adjusted any element (e.g., short-term incentives) upward to compensate.
ìEmployees below the executive level are feeling the impact of the stock option expensing rule. With the reduced use of stock options, the challenge for employers is to ensure that their total rewards package continues to motivate and reward their employees,î said Sejen.
Additional findings:
-- Merit increase budgets grew from 3.0 percent in 2004 to 3.4 percent in 2005 and are projected to increase slightly to 3.5 percent in 2006.
-- Employees generally view base pay increases as an entitlement. Nearly half of employers (49 percent) believe that employees at their company regard annual pay raises as entitlement ìto a great extent.î
-- Despite unfavorable accounting treatment changes, only 9 percent of companies that made LTI program changes in the last year eliminated their Employee Stock Purchase Plans (ESPPs). Thirty-seven percent of companies currently offer a broad-based ESPP to non-executives, which allows employees to purchase stock at a discount.
Distributed by HR Marketer.com
Watson Wyatt/WorldatWork survey finds employers changing long-term incentive plans
Funding for annual bonuses improves, but they are more difficult to earn
