Employers say pay-for-performance programs are falling short, a new survey finds, doing little to drive and reward employee performance.

The survey of 150 companies by Willis Towers Watson finds that only one in five find their merit pay programs to be effective at driving higher levels of employee performance. Meanwhile, just half say their annual incentive programs boost individual performance.

The results are surprising, Willis Towers Watson says, because a majority of companies continue to put a significant amount of time and money into their annual performance review and pay decision cycles.

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“Companies have struggled for years to make annual merit increases meaningful or to meaningfully differentiate the ‘merit’ increase based on performance.”

Employees, too, according to consulting firm CEB, have come to expect those pay rewards. Last year, for example, employees worldwide on average expected a 4.3% merit pay increase and a 3.2% bonus pay increase.

But those traditional aspects of the pay performance programs are just not as effective as they once were, says Laura Sejen, global practice leader, rewards at Willis Towers Watson.

“Merit pay very well may already be outdated,” Sejen says. “Companies have struggled for years to make annual merit increases meaningful or to meaningfully differentiate the ‘merit’ increase based on performance, and it is particularly challenging in an era of 2.5 to 3% merit increase budgets.”

Employers need to break out of an “outdated paradigm” and rethink employee pay, adds Sandra McLellan, North America practice leader, rewards at Willis Towers Watson.

“In many cases, merit pay is a standard adjustment disguised as a pay-for-performance program,” McLellan says. “All too often, there is either a breakdown in delivery or managers feel compelled to give some type of increase to everyone instead of differentiating performance and rewarding employees accordingly.”

Also see:SEC proposal links executive pay to performance.”

The new findings don’t mean pay-for-performance programs will be completely abandoned — they just may need to be rethought.

For one thing, according to Willis Towers Watson, employers are adopting a “broader, more forward-looking view of performance when making decisions about merit pay.” For example, HR managers say they’re giving more weight to certain performance indicators than is called for in their program’s design, and increasingly are considering demonstration of knowledge and skills required in an employee’s current role when making merit increase decisions.

But going beyond merit pay altogether — and focusing on incentives such as bonuses — may be the best method going forward when considering compensation methods to recognize and reward employees, Sejen says.

“A better use of the hundreds of millions of dollars that even a midsized company spends on the annual merit increase might be to focus solely on market adjustments or to dedicate more resources to monetary recognition,” Sejen argues. “The objectives of base pay include meeting baseline requirements for attraction and retention, sustaining competitiveness of salaries vs. the market and reflecting an employee’s ongoing and potentially future contribution.

Also see:EEOC pay rules a new ‘burden’ for employers.”

“By contrast, the programs that can best support differentiating pay based on performance are incentive plans — both short and long-term — and monetary recognition plans, such as spot bonuses.”

Meanwhile, employers might also consider focusing on other benefits — including learning and development and career advancement — rather than, or in addition to, pay performance programs to attract and retain top employees.

“From our research, we know that companies often fall short in the eyes of employees when it comes to career management,” Sejen says. “So, better-designed and better-executed career management programs is one area where employers could focus to improve their attraction and retention outcomes.”

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