Only one in five (20%) of North American companies find merit pay to be effective at driving higher levels of individual performance at their organization, according to new research by Willis Towers Watson.
Its Talent Management and Rewards Pulse Survey, which polled 150 large and mid-size employers in Canada and the U.S., found that just one-third (32%) of respondents said their merit pay program is effective at differentiating pay based on individual performance.
“Employers continue to make significant investments of time and money in their traditional pay-for-performance programs, primarily annual merit pay increases and annual incentives,” said Laura Sejen, global practice leader, rewards at Willis Towers Watson.
“Unfortunately, these reward programs are falling short in the eyes of many employers. It appears that organizations are either trapped in a business-as-usual approach or suffer from a me-too mentality when it comes to their programs.”
Respondents to the survey also gave their short-term annual incentive programs low markets, with only 50% saying these programs are effective in boosting individual performance levels and even fewer (47%) saying annual incentives effectively differentiate pay based on how well employees perform.
The survey also found 71% of employers use wage increases in local markets as the basis for determining merit increase budgets, while 54% use their organization’s financial performance in the most recent year as the basis.
When it comes to annual incentives, just over half (51%) report using organization-wide performance measures to determine the funding pool, while individual performance measures are used to determine award payouts.
“Employers need to break out of an outdated paradigm and rethink their approach to pay,” said Sandra McLellan, North America practice leader, rewards at Willis Towers Watson.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. 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.”