New research from Aon Hewitt reveals that while salary increases for U.S. workers in 2014 are expected to reach their highest levels in 6 years, average increases are projected to remain modest as employers strive to reserve the majority of their compensation budgets for merit increases and performance-based awards for high-performing workers.
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Get Your Report Now!In 2013, top performing workers saw average increases of 4.7 percent, almost two times the amount the average worker (those who met expectations) received at 2.6 percent. Employees who did not meet expectations received average increases between 0.2 percent and 0.9 percent.
"With conservative budgets and increasing pressure to attract and retain the best talent, companies are still being overly generous towards workers who are underperforming," noted said Ken Abosch, compensation, strategy and market development leader at Aon Hewitt. "We think this often undermines the effectiveness of their pay-for-performance messaging by watering everyone's increases down. Instead of rewarding low-performers, organizations should reallocate that money towards those who have helped achieve strong results."
According to Aon Hewitt's survey, an increasing number of companies continue to use broad-based variable pay programs—performance-based awards that must be re-earned each year—as a way to reward top-performing workers.
Ninety percent of companies offer a broad-based variable play plan and expect to spend 12.0 percent of payroll on variable pay for salaried exempt employees in 2014. This is up significantly from a decade ago, when just 78 percent of companies offered a variable pay program, with an average increase of 9.5 percent of payroll.
"We've seen a dramatic shift in the mix of compensation over the past decade, with variable pay assuming the largest component of compensation growth," added Abosch. "Performance-based awards are attractive to employers because they tie employee compensation to business results and help give them more control over their costs. There is also a tremendous upside for employees—particularly those who are high-performing workers—because they have the opportunity to be rewarded for exceeding their goals. Regardless of economic conditions, variable pay programs will continue to be the primary way employers differentiate rewards in the future."