U.S. employers do not expect to fund their annual bonuses for workers again this year, but companies do predict small to moderate pay increases in 2013, according a pair of surveys by Towers Watson.

Firms’ average projected bonus funding for 2012 is 93% of target, down from 95% of target in 2011, marking the second consecutive year with a funding gap.

“Companies have been increasing performance expectations for individuals and the organization,” says Laurie Bienstock, Towers Watson’s North America rewards leader. “Organizations that raise the performance bar without also increasing rewards to reflect those efforts are in danger of an erosion of employee engagement and performance.

“Companies will have to make up for these lower funding levels by doing a better job of differentiating rewards between top performers and underperformers.”

Indeed, a separate survey shows that to be the plan with salary increases next year. Companies are reportedly planning pay increases at an average of 2.9% for 2013 for salaried non-management employees, with similar bumps expected for non-exempt employees and executives.

Out of those, exempt employees with the highest performance ratings should see an average raise of 4.7%, or approximately 50% more than those with average ratings, who are expected to get 3.2%. Below-average performance ratings will net an average of 1.3% pay increases.

“Most U.S. companies continue to keep their salary budget relatively tight, especially since they are having little difficulty attracting and retaining employees, in general, reflecting the soft labor market,” says Laura Sejen, global practice leader for rewards at Towers Watson. “At the same time, most organizations are having as much trouble attracting and retaining critical-skill employees as they did during the economic expansion from 2002 to 2007.”

Keeping base pay competitive in critical conditions, Sejen says, will prove as key as companies asking employees to do more with less find themselves faced with the same task.

“… Organizations will need to focus on allocating available resources toward rewarding top performers and employees with critical skills,” Sejen says.

The 2.9% expected raises of 2013 continue an upward trend from 2.8% this year and 2.7% in 2011.

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