Towers Watson

Expecting a fat year-end bonus? Don't get your hopes up

December 5, 2012: 10:38 AM ET

Bonuses at many companies this year are likely to be lackluster. Next year is looking even tougher.

FORTUNE -- If your bonus in 2011 seemed skimpy, get ready for a rerun. For the second year in a row, big companies aren't paying out 100% of their targeted bonus pools, according to a survey of employers by global compensation consulting giant Towers Watson.

That's partly on account of the still-sluggish economy, of course. For bonus plans that are pegged to a company's overall profitability, payouts won't go up until earnings do. But something else is going on as well: Plenty of big employers have raised the bar for bonus eligibility, and many more plan to do so in 2013. For workers who already feel overworked and underpaid, that's discouraging news.

Consider: Over the past 12 months, more than a third (34%) of U.S. companies Towers Watson polled set higher bonus targets for organizational financial performance, and 24% increased their targets for individual performance. The trend will pick up steam in the coming year. About 40% plan to raise company performance goals, and 30% will demand more of employees.

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Asked to do more with less for the past four years, a whopping 76% of U.S. employees Towers Watson surveyed said stress levels where they work have soared to new and unhealthy heights.

Moreover, notes the Towers Watson 2012 Global Workforce Study, the combination of more pressure and ho-hum bonuses (or none at all) is making people increasingly cynical about the connection between achievement and pay. Most workers don't believe that producing better results will be rewarded. Only 36% of the 3,600 U.S. employees in the study see a clear link between performance and pay, including incentive pay like bonuses. A slightly larger percentage (37%) see no link at all, and fewer than half (42%) think top performers in their companies are compensated accordingly.

Laura Sejen, global practice leader for rewards at Towers Watson, notes that despite the currently soft labor market, "most organizations are having as much trouble attracting and retaining critical-skill employees as they did during the economic expansion of 2002 to 2007." To keep those key employees and attract top talent from elsewhere, she adds, employers "have to get serious about the incongruence between what the company is asking" and how it rewards its employees.

One way to do that: Cut out annual bonuses altogether. At least, that's the view of compensation expert Aubrey Daniels, whose firm Aubrey Daniels International has designed incentive pay plans for Blue Cross Blue Shield, NASA, Westinghouse, and many others. The author of an intriguing book, Oops! 13 Management Practices That Waste Time & Money, Daniels believes handing out one bonus check at the end of the year is a mistake.

"Even when they're tied to individual performance, end-of-year bonuses can be ineffective because they're too far removed from the behavior they're rewarding," Daniels says. Instead, he recommends paying out smaller, more frequent bonuses -- as he does at his own company, where he set up a monthly system of evaluation and rewards.

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Echoing Towers Watson's research, Daniels says that managers need to start doing a better job of making sure employees "can draw a direct line between performance and reward. Explain exactly what people have to do to earn a bonus, and how the available amount of extra compensation is determined."

If your goal is to keep your stars from quitting, he adds, "Using bonuses to create good will won't work. Being treated well every day and being praised for excellent performance is far more likely to foster loyalty than getting a check once a year. As a Shell Oil executive I once knew put it, 'It's hard to celebrate when you've been beaten up on the way to the party.'"

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