According to a new report from the Hay Group, employers are making short-term incentives harder for employees to earn, and subjecting them to greater scrutiny at the highest level.
The report examines how the use of bonuses and incentives is evolving post-recession. The study is based on the views of HR professionals in 1,300 firms globally, of which 132 are based in the UK.
Close to half (46%) of UK firms are increasing the proportion of variable pay relative to base salaries for their employees: 28% have already done so, while a further 18% plan to over the next two years.
Over a third (35%) are increasing funding for bonuses and incentives: 20% have done so, with 14% planning to in the next two years. A similar number (33%) are widening eligibility for bonuses among staff, with 20% having implemented this and an additional 13% planning to do so.
Over half (52%) of firms are increasing performance thresholds for variable pay: 35% have already implemented tougher measures, while 17% plan to.
At the same time, the emphasis is shifting to hard, financial targets. Over half of UK businesses (55%) are placing more emphasis on financial performance metrics – for example, sales, revenues and profits.
At the same time as becoming harder to earn, bonuses are under closer scrutiny than ever before. Two thirds of UK businesses believe their board is more likely to be involved in decision-making when it comes to variable pay.
More than three fifths (61%) of HR professionals identify the need for better alignment with business strategy as the key driver of change.
Other important drivers are: improving team performance (35%); enhancing individual performance (31%); and ensuring market competitiveness (31%).
Almost half of respondents (48%) are unconvinced that their incentive schemes are understood by their workforce, while less than a quarter (23%) believe their schemes are effectively communicated by line managers.
As a result, close to two thirds (61%) have implemented changes to the communication of variable pay programmes, or are considering doing so.
In keeping with the focus on bottom-line performance, evaluation is also a key focus when it comes to bonuses and incentives. Over half (53%) of firms have or will be evaluating the effectiveness of variable pay.
"While increasing the emphasis on variable pay, firms need to ensure they drive the right behaviours and guard against placing excessive pressure on already demotivated staff. However, currently this is a risk they are prepared to take as the upsides of getting it right can be significant.
"Employees have been through a tough time, suffering pay cuts and freezes, bonuses that haven’t paid out and falling pension values. Companies that get bonus scheme design right enhance performance. Those who get it wrong risk workers switching off altogether, which would seriously damage their prospects for growth and maybe their very survival."
"Reward is the most powerful way to send the right message to employees. What is important to a company – its behaviours, values and strategic objectives – must be reflected in its reward strategy."
