Despite the importance of pay when it comes to attracting and retaining employees, companies are falling short in the delivery of their base pay and annual incentive programs, according to the Towers Watson Data Services Salary Budget Survey. Companies also do not differentiate pay for their best performers as much as in recent years, and some continue to provide annual bonuses to employees who don’t meet performance goals.

The survey found 50 percent of employees believe they are paid fairly compared with other people in similar positions in their organizations.

Additional findings include:

• Fewer than six in 10 employees, 59 percent, said their company does a good job of explaining their pay programs.
• Less than half 40 percent report a clear link between pay and performance.
• Only 50 percent of employees say their managers are effective at fairly reflecting performance in their pay decisions.

“Pay really matters to employees when they make decisions about whether to join or stay with a company,” said Laura Sejen, managing director, Rewards, at Towers Watson. “But simply offering a competitive salary and annual bonus is not enough to win the war for talent. Employees believe that employers are falling short in how pay decisions are made and that there is much room for improvement.”

Thirty-five percent of employers in the survey said their employees understand how base pay is determined, and 61 percent said employees understand how their annual bonuses are determined. Thirty-eight percent said managers execute their base programs well, while 53 percent indicate that managers execute their annual incentive programs well.

In a separate survey, Towers Watson Data Services found that U.S. employers plan to give pay raises that will average 3 percent in 2015 for their exempt non-management (e.g., professional) employees, only slightly larger than the average 2.9 percent increase workers received in each of the past two years. And annual bonuses are expected to fall short of target, the fourth consecutive year employers are unable to fully fund their annual incentive pools. However, while star performers are expected to receive significantly larger pay raises and above-target annual bonuses, employers are differentiating less for performance compared with previous years.

Exempt workers who received the highest performance ratings were granted an average salary increase of 4.5 percent this year, about 73 percent greater than the 2.6 percent increase given to workers receiving an average rating. Three years ago, the best-performing workers received raises that were 80 percent greater than raises given to average workers.

The survey noted that pay differentiation for annual bonuses is narrowing as well. The top 10 percent of employees are expected to receive bonuses that are 25 percent larger than those given to employees who met expectations. In 2010, those same top performers received bonuses that were 30 percent larger than those of workers who met expectations. However, 30 percent of employers plan to give bonuses to workers who failed to meet performance expectations, an increase from last year, when nearly one-fourth gave bonuses to employees with the lowest ranking.

“Despite awarding better-than-target bonuses and higher merit increases to their best performers, many companies are still not providing enough differentiation in their incentive programs for them to be effective. In fact, it appears that the extent of differentiation has declined in the past few years. This is a missed opportunity not just for recognizing top performance and improving the employment deal for this segment of the workforce, but also for creating incentives for improved productivity across the entire employee population,” Sejen said.

The Towers Watson Data Services Salary Budget Survey was conducted in June and July 2014, and includes responses from 1,090 U.S. companies. The Towers Watson Talent Management and Rewards Survey was conducted from April to June 2014 and includes responses from 337 U.S. companies.