Despite embracing the concept of pay-for-performance, a surprisingly large number of North American employers say their pay-for-performance programs are not doing what they are designed to do—drive and reward individual performance—according to a new survey released by Willis Towers Watson.

The survey results come at a time when a majority of companies are fully engaged in their annual performance review and pay decision cycles.

“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 in a press release.

“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.”

The Willis Towers Watson survey of 150 companies found that only:

• One in five (20%) North American companies find merit pay to be effective at driving higher levels of individual performance at their organization.
• One-third (32%) say their merit pay program is effective at differentiating pay based on individual performance. Similarly, employers give their short-term annual incentive programs low marks.
• Half say their short-term annual incentive programs are effective at boosting individual performance levels, and
• Fewer than half (47%) say annual incentives effectively differentiate pay based on how well employees perform.

The survey also found more than seven in 10 employers (71%) 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.

And when it comes to annual incentives, just over half of companies (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“Employers need to break out of an outdated paradigm and rethink their approach to pay,” commented Sandra McLellan, North America practice leader, Rewards at Willis Towers Watson.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.”

And, adds Sejen, “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.”

However, the survey notes some of these changes are already under way. Organizations say their managers are adopting a broader, more forward-looking view of performance when making decisions about merit pay. For example, they say their managers are giving more weight to certain performance indicators than is called for in their program’s design.

Additionally, 64% of respondents say managers at their organization consider demonstration of knowledge and skills required in an employee’s current role when making merit increase decisions. That compares to less than half of companies (46%) who say their programs are designed to take these performance indicators into consideration.

Also, more than four in 10 respondents say their managers give much greater weighting to:

• Criticality of roles (42%),
• Possession of skills critical to the success of the future business model (45%), and
• Achievement of team goals (41%) than is called for in their programs’ design.

“Pay-for-performance programs, when designed and implemented effectively, are great tools to drive performance, and recognize and reward employees. However, conventional thinking on pay for performance is no longer appropriate,” adds Sejen.

“Companies need to define what performance means for their organization and how managers can ensure they are driving the right performance, and reevaluate the objectives of their reward programs to ensure they are aligned with that definition.”