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Incentive pay programs have been popular for decades, because many business managers believe that paying for performance can motivate workers and increase productivity. Nevertheless, our data shows that the largest incentive-pay packages have become less common than they were in 2008. The falling off of large incentive pay may be related to the Great Recession, which was just beginning when we last conducted an incentive-pay study.
In our annual salary survey, we asked respondents if they offer incentive pay programs. Figure 1 from the full report, Pay for Performance: Popularity and Impact of Incentive Pay in the IT Workforce, shows that 55.3% of IT organizations offer incentive pay.
Despite the majority of IT organizations offering bonus programs, the data shows that the generosity of those incentive plans is falling for those at the top of the employment hierarchy. Take executives, for instance. In 2008, 86% of organizations paid incentives to IT executives, and 53% of those executives received at least 20% of their cash compensation in the form of incentive pay. Now, only 60% of organizations pay incentives to IT executives, and only 33% of executives receive at least 20% of their cash compensation in the form of incentive pay. The trend is also seen at the manager and director levels.
“This trend is likely to do, in part, with the Great Recession that began in 2008,” said Tom Dunlap, director of research for Computer Economics, a research and consulting firm based in Irvine, Calif. “The largest portion of incentive pay is linked to corporate performance. When the economy is strong, linking pay to corporate performance can be appealing to everyone. However, when the Great Recession hit, not only were there a large number of layoffs, but many employees who were able to keep their job took sharp decreases in compensation, because so much of their pay was based on incentives they would not receive in a bad economy.”
It is possible that those who were able to renegotiate their terms of employment and new hires coming back into the economy after the recession chose salary certainty over larger incentives. Similarly, corporations have likely seen that large incentive packages do not necessarily have an equally large impact on performance or employee loyalty. Smaller incentives tied to more tangible goals are likely to pay strategic dividends both in terms of productivity and retention. Regardless of the reason, we have definitely seen a major shift away from large incentive pay offerings.
In the full report, we analyze the current trend within the IT industry based on a recent Computer Economics survey. We provide data on the percentage of employees receiving incentive pay by job level, the percentage of compensation comprising incentive pay, and the percentage of incentive pay based on individual, group, and company performance. Our report concludes with recommendations for implementing effective programs and mitigating the unintended consequences of paying for performance.