Shift Toward Variable Pay and Bonuses Carries Risks for Employee Engagement

Shift Toward Variable Pay and Bonuses Carries Risks for Employee Engagement

Recent surveys of US organizations on their 2018 salary budgets show that more of them are moving toward an increasingly differentiated compensation strategy, with high performers getting rewarded with variable incentive pay and bonuses, while average and low performers receive smaller annual raises, or sometimes none at all. Employers like these more targeted pay schemes because research, including our work at CEB (now Gartner) shows that they tend to be more effective at motivating performance than routine raises for everyone.

The other reason for the increasing popularity of variable pay is that it gives employers more flexibility in their compensation budgets from year to year. It is practically impossible to take back across-the-board raises, or decline to give them when employees have come to expect them each year, without incurring a huge hit to employee morale. Variable raises and particularly bonuses tied to individual performance are more malleable: Giving an employee a substantial bonus for the great work they did this year this does not obligate you to give them that bonus again next year.

While beneficial to employers, and arguably good news for top performers, this change does have a downside for employees, making their incomes less predictable and leaving them more vulnerable to macroeconomic shifts. The other challenge here is that focusing raises exclusively on top performers can leave less room to differentiate rewards between average and low performers. As our own Brian Kropp tells NBC News’s Martha C. White, this carries its own set of risks for employee engagement:

“What companies are trying to do is increase differentiation of their bonus payouts, trying to pay their top performers even more,” said [Kropp]. “That money has to come from somewhere. It means the average employee is going to get an even smaller bonus.”

Workers today see a strong economy with a booming stock market and healthy corporate profits, and they expect to be compensated accordingly. “In 2017, employees are expecting their bonus to be about 1 percent higher than it was last year,” Kropp said. “It’s a real problem, which is that if companies are going to cut bonuses and employees are expecting a bigger bonus, there’s a huge mismatch.”

In our research at CEB (now Gartner), we’ve found that average performers actually don’t mind if their high-achieving colleagues earn greater rewards than they do: What does bother them is when their own pay isn’t differentiated from that of low performers.

In today’s tight labor market, any move that risks increasing turnover or lowering morale must be weighed against those risks, and employers should not neglect the importance of retaining and motivating the average employee, in addition to rewarding their highest performers. CEB Total Rewards Leadership Council members can check out our research on how the best companies reward employee performance here.