- Bonuses could play crucial role in 2024. With salary budgets tightening due to an anticipated economic slowdown, more organizations could lean on bonuses to attract and retain talent.
- An effective retention tool. Both long term incentives and retention bonuses will also encourage employees to stay during tighter salary constraint.
- Simplify bonus structure. Organizations should work to ensure their bonus programs are easy to follow for employees and are driving the behaviors they are intending.
- Communication process is significant. Managers play a crucial part in the bonus process as they are responsible for communicating compensation decisions to their employees.
As many organizations enter another salary budget planning phase, pay raises are expected to trend down on average, causing the bonus to trend up in importance.
Consider 2022, a year when actual short-term incentive payouts exceeded targets across most employee levels — with almost 50% of companies saying that their short-term incentive plan would pay above target in 2022.
WorldatWork Research: “2023-24 Salary Budget Survey”
In regard to 2023 short-term incentives, actual payouts were largely aligned with targets in the 2023 US Mercer Benchmark Database published in August.
There are a lot of factors working against employers’ ability to differentiate salary for their top performers, according to LaCinda Glover, senior principal, career, at Mercer.
They include: limited merit pay budgets, pay compression, pay transparency and limited manager knowledge when it comes to how to disburse that money in an unbiased way.
“All of that makes incentive or bonus plans elevated in importance to truly be able to differentiate salary for the highest performers,” Glover said, adding that her organization has seen an uptick in employers reaching out with questions about their incentive programs.
“You just can’t do it the way it’s been historically done any more,” she said.
Types of Bonuses
When base salaries are more constrained due to the state of the economy, companies sometimes give out performance-based bonuses to help make up for those tighter salary budgets in order to remain competitive.
Performance bonuses are a win for the employer and employee, said Lexi Clarke, chief people officer at Payscale, as they motivate employees to maintain, if not increase, productivity while retaining top talent.
“Both long term incentives and retention bonuses will also encourage employees to stay during tighter salary constraints,” she said.
Meanwhile, WorldatWork’s “2023-24 Salary Budget Survey” reported that 55% of organizations budget for promotional pay increases while 45% do not.
Of the organizations that do budget for promotional increases, the survey found that 40% have separate promotional increase budgets, while 34% include them as part of their “other” increase budget, 22% have them as part of their merit increase budget and 4% allot them as part of their general increase/COLA budget.
Of the organizations that do not include promotional increases in their salary increase budgets, 62% fund the promotional pay increases via vacancy, salary or other savings, 25% pull it out of the merit increase budget, 21% pull it out of the “other” increase budget and 6% pull it out of the general increase/COLA budget.
“Among the nearly half of organizations that don't budget for increases, promotional increases are most often funded with savings from vacancies,” said Liz Supinski, director of research and insights at WorldatWork. “Very large organizations often have this degree of slack in their budgets, but other organizations choose not to budget for promotional increases as a control measure, believing that some managers with a line-item in a budget might promote staff simply because their budget allows it rather than because the employee deserves it.”
Building a Bonus
Organizations often make two mistakes when deploying a bonus program, according to Glover.
“They’re too complicated,” she said. “If a plan has 25 metrics that it’s tracking and each one is weighted at 4%, is that really driving behaviors? No, it’s not. So make them simple so that people can truly understand them.”
The second mistake, Glover said, is not establishing a clear line of sight for employees to aim at incentives and bonuses.
“The overall financial performance of a company is within the purview and line of sight of a CEO,” she explained. “But if I work in facilities, it’s much more difficult to make the correlation between the overarching company performance and my day-to-day work.”
Organizations should also consider their goals when identifying the best bonus structure for the company, said Clarke.
“For example, do we need to attract talent fast? If so, bonuses may be an effective strategy in this instance,” she said.
Additionally, companies should look at what their competitors are offering.
“If talent can find better pay and benefits elsewhere, most won’t hesitate to leave,” Clarke said. “Even listening to employee feedback is an effective way to see what your employees’ bonus expectations are.”
Action Items
Employers should be communicating their compensation strategies to their employees to ensure they understand their total value to the organization, said Clarke.
Managers play a crucial part in this process as they are responsible for communicating compensation decisions to their employees.
“Arming them with training on the company process and resources to help have these conversations ensures this goes smoothly and fosters a culture of transparency,” Clarke said.
She added companies also need to think of compensation planning as a journey, not a destination, by regularly revisiting their strategy. For example, Payscale’s trendspotters observed that between 2022 and 2023, there was a notable rise in organizations adjusting pay twice annually.
Understanding the key elements shaping pay adjustments today is crucial in navigating talent and market demands.
“The point is trying to drive outcomes,” Glover said. “HR needs to work really closely with the business to determine: ‘What are we willing to pay for to get the outcomes we’re looking for?’”
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