For the third consecutive year and the seventh time since 2005, bonus pools for annual incentives will be under target. According to a new survey from Towers Watson, one in four North American employers will pay bonuses to workers who fail to meet performance expectations, even as bonuses are not fully funded.

According to Towers Watson, employers have only twice fully funded their bonus pool since 2005, once in 2006 (102%) and again in 2010 (111%). The survey reports that the average current projected bonus funding for this year is 87% of target, same as last year and below 2011’s 95%.

But some 24% of respondents say they will give incentive payout to workers with the lowest possible performance rating. An additional 18% do not set differences in target payout based on performance.

“Employers continue to take a conservative approach to funding their bonus pools while the strength of the economy remains both uneven and uncertain,” says Laura Sejen, Global Rewards leader at Towers Watson. “While the vast majority of employers have some type of annual incentive plan, the way some incentive plans are designed and viewed by employees raises the question of whether employers are getting a good return on their investment in these programs.”

Towers Watson says its recent research indicates that employees perceive annual incentive plans as ineffective, and not a key driver of sustainable engagement. Less than half of those surveyed think there is a clear link between their performance and pay, or that high-performing employees are properly rewarded.

“It appears that some organizations are simply paying for status quo, treating their annual incentive plans as an entitlement program rather than one that should reward employees for their performance and contribution to their organizations,” says Sejen. “Add to that the fact that some employers are not distinguishing enough in payments made to top and average performers. Companies may need to take a hard look at the design and delivery of their incentive programs to ensure they are meeting their objectives within the total rewards portfolio.”

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