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Companies Tying Employee Pay to Performance Increases 17% in Last Two Years

Over 90% of organizations now say they are tying salary increases and annual bonuses to specific performance measures, up from 78% in 2009, according to a new study conducted by the Institute for Corporate Productivity (i4cp). Despite these high numbers, the study also shows that many companies aren't successfully executing their pay for performance strategy.

i4cp's new report Tying Pay to Performance outlines several key findings, including that more than three-quarters of high-performance organizations tie pay to performance to at least a moderate extent, while less than two-thirds of lower-performers do the same. There is little doubt that as signs of steady progress become more evident in the recovery of economies worldwide, organizations will need to move toward a pay for performance culture in order to remain competitive.

"The existence of a pay for performance strategy alone is not a differentiator between high- and low-performing organizations - most organizations, regardless of market performance, reported that they are using some sort of pay for performance strategy," said David Wentworth, a i4cp Senior Analyst and author of the report. "Rather, it is the approach taken in executing this strategy that separates the high-performance organizations from the rest of the pack."

One clear differentiator is what drives the strategy internally. Despite the weak economy and curtailed compensation budgets, just 6% of survey respondents identified the compensation budget as the primary driver of the pay for performance strategy. Budget constraints are third on the list for low-performers, but not in the top five for high-performers. So high-performers are driven by something else, and the survey found that the something else is driven by a clear focus on pay for performance results.

Top 4 Drivers for Tying Pay to Performance

Nearly half of high-performing organizations indicate that recognizing and rewarding high-performers is the main driver of their pay for performance strategy, making it number one on the list of primary drivers. A distant second is increasing the likelihood of achieving corporate goals.

Lower-performing organizations are not as sure about the drivers behind their strategy. The number one driver among this group is achieving corporate goals, chosen by nearly one-third, while recognizing and rewarding high-performers was cited second with 30%.

i4cp's Tying Pay to Performance report also explores:

  • The effectiveness of pay-for-performance for a variety of business and individual outcomes
  • Trends in forced ranking and forced distribution models
  • The importance of managers and training in the execution of the strategy
  • Pay trends and benchmarks

The report also continues executive insights from i4cp member companies Amway and Hertz. The report is now available to i4cp corporate members.

Erik Samdahl
Erik is the head of marketing at i4cp, and has nearly 20 years in the market research and human capital research industry.