Faced with tight corporate budgets and an uncertain economic climate, employers are increasingly turning to bonuses and performance-based pay as a strategy for retaining top-performing workers.
Human resource experts say this approach to compensation is attractive because it is flexible and allows companies to reward good work without creating additional fixed costs.
“If the organization is not having a good year, maybe their financial results are way down, then it allows cash payments to commensurately reflect poorer financial performance,” said Kerry Chou, compensation practice leader at nonprofit research group WorldAtWork.
But these one-time payouts are not just advantageous because they can be trimmed or withheld in an event of financial shock. They also provide a way for companies to create incentives for productivity.
“They’re placing their bets more on this idea of putting pay at risk and paying big if the company wins big,” said Ken Abosch, compensation practice leader at human-resource consulting firm Aon Hewitt.
The switch to this compensation approach has intensified during the recent economic gloominess, but reflects a long-term trend.
Variable pay, a category of compensation that includes bonuses and other performance-based pay, was used by 82 percent of employers this year, up from 79 percent last year, according to a study by WorldAtWork. Another survey by Aon Hewitt found that companies allocated 12 percent of their payroll budgets for variable pay this year. In contrast, they spent just 3 percent of those budgets on salary increases.
That shift has occurred during the past 10 years, Abosch said, because “there’s a very strong belief and there’s evidence and academic research that shows that variable pay does create focus among employees.”
In other words, bonuses help foster a concept known among human-resource professionals as “employee engagement,” which is a measure of how invested a worker is in the company and his or her job.
When employees are highly engaged, the theory goes, they do better work.
But perhaps just as important, they are more committed to the company. And cultivating loyalty could be critical at a time when many companies are acutely focused on retaining top talent.
“If the company performs and the [bonus] plan is funded, that doesn’t mean we should just hand those dollars to everybody,” said Laurie Bienstock, a leader for rewards consulting at Towers Watson.
Instead, a company can target the money at the staffers it values most.
There are many varieties of bonuses, including those tied to the performance of the entire company or of a particular business unit.
But when it comes to retaining key workers, employers most commonly offer an incentive called a spot bonus, said Jeanie Adkins, co-leader of the rewards segment at consulting firm Mercer. This type of reward is a lump-sum payment given to an individual for good work.
The increased use of variable pay spans nearly all sectors, even in government, education and nonprofit organizations. And though this type of compensation was once largely offered to executives and managers, experts say it is increasingly becoming available to lower ranks of workers.
In the Washington area, human-resource consultants say the trend toward more variable pay has become particularly pronounced as worries mount about the looming “fiscal cliff.”
“In the Washington market, I think we’re very much being impacted with what’s happening politically,” said Kathy Albarado, chief executive of Helios HR, a Reston-based consulting firm.
Amid the uncertainty over the combination of tax increases and spending cuts, some local
human-resource consultants say they’ve noticed an increase in clients who want to explore variable pay as a strategy for keeping payroll budgets nimble.
“They’re going to reward their top performers, and it just means that there’s going to be less to go around,” Albarado said.