Upfront: Raising the Bar on Variable Pay

As companies endeavor to link pay and performance among nonexecutive employees, variable-pay plans are undergoing substantial changes, a new survey by Watson Wyatt Worldwide reports. While businesses are holding the line on merit increases (projected to average 3.4 percent this year), many are making adjustments to their short-term incentive plans.

According to the survey, about half of all businesses that offer variable-pay plans have revised them in the past year. The most common change was a revision to the performance measures on which bonuses are based (cited by 68 percent of respondents whose company has made some kind of change), followed by increasing the goals employees must achieve to earn an award (46 percent). But more than one out of four respondents increased the size of compensation employees receive for reaching their targets.

Respondents whose firms are low performers reported the most changes to their short-term incentive plans. Sixty-three percent of these organizations have made changes in the past year, while only 40 percent of high-performing companies have -- and of that number, 44 percent increased awards.

According to the survey, 82 percent of companies now offer a variable-pay program for nonexecutives, and 49 percent of organizations have a plan that encompasses all employees. Among respondents planning future changes to their reward programs, 43 percent expect to place a greater emphasis on variable pay.