There´s good news for many employees. Despite tight merit budgets and relatively flat pay raises this year, companies are prepared to provide slightly more bonus cash to their workforce.

According to a new survey from Mercer Human Resource Consulting, about three-quarters of employers surveyed expect bonus payouts for 2006 - based on 2005 performance - to be equal to or more than those paid in the previous year. Moreover, payouts based on 2006 performance are projected to be even higher. (See Tables 1 and 2.)

The survey was conducted in October. It includes responses from 370 mid-sized and large employers across the US and provides an update to Mercer´s 2005/2006 US Compensation Planning Survey of nearly 1,350 companies conducted in April.

According to Steven E. Gross, leader of Mercer´s Global Rewards business, "Companies are under enormous pressure to deliver results while controlling fixed costs. As such, they´re offering incentives based on the company´s performance, spot cash awards for exceptional achievement, and bonuses based on individual performance - all aimed to focus and reward employees on activities that create value."

Companies struggle to recognize those employees who truly make a difference and find that performance based pay allows for appropriate differentiation based on contribution, explained Mr. Gross.

Pay increase budgets:

According to survey findings, while approximately one-quarter of employers claim they will make some type of adjustment to their 2006 pay increase budgets set last spring, those changes will be fairly small this year - with increases of just one- or two-tenths of a percentage point higher for some employee groups. Thus, average pay increases for 2006 are still projected to be around 3.6% for most workers. (See Table 3).

The employee group targeted with the largest adjustment is executives. Among employers that anticipate a budget change, pay increases for executives now will average 3.9% in 2006 instead of the 3.6% projected earlier this year.

According to Mr. Gross, organizations are still being cautious with base salaries because of uncertain future corporate profits and an economy that may not grow as much as anticipated. "Although employers are maintaining modest base pay increase budgets, they still need to reward, retain, and engage their top-performing employees," said Mr. Gross.

Despite tight base pay budgets, employers are continuing to differentiate their workforce based on performance. According to Mercer´s survey, the highest-performing employees (22% of the workforce) are expected to receive average base pay increases of 5.2% in 2005 compared to 3.4% for average performers (which make up 70% of the workforce). The weakest performers (8% of the workforce) are expected to receive 2.0%, on average.

"In today´s economic environment, employers need to be concerned about retaining their strongest performers - those employees needed most to help the company succeed," Mr. Gross said. "Unless these employees are rewarded at a significantly higher compensation level and are given more career growth opportunities, you risk losing them as the job market becomes more competitive."

Other trends:

Mercer´s 2005/2006 US Compensation Planning Survey Update also sheds light on other reward-related developments:

• Attracting and retaining employees - Employers are continuing to utilize reward practices outside traditional merit increases for selected job families where attraction and retention is critical. Signing bonuses and spot cash awards continue to be popular forms of rewarding employees, particularly for Information Technology, Accounting & Finance, Sales & Marketing, and Engineering jobs. Mr. Gross noted such awards do not impact fixed costs.
• Broad-based stock options - As in past years, the granting of broad-based stock options is a practice that is continuing to decline. While some 9% of organizations awarded broad-based stock options to their employees in 2004, this percentage fell to 5% in 2005. Looking ahead, only 3% of organizations are planning to grant broad-based stock options in 2006.
• Return on reward investments - Despite the investments employers make in their compensation and other reward programs (including benefits), most organizations (59%) do not measure the return on these investments, according to Mercer´s survey. Among those that do attempt to measure the return, the top measures include reduction in unwanted workforce turnover (used by 15%) and productivity increases (used by 6%). Said Mr. Gross, "Given the cost of these programs and their potential impact on business results, employers would benefit from a more disciplined approach at measuring the return on their reward program investments using reliable, quantitative measures - including retention, business results as well as development of needed skills, behaviors, and future organizational leaders."

For more information or to purchase the full report of Mercer´s 2005/2006 US Compensation Planning Survey or the new update, visit www.imercer.com/cps or call 800 333 3070.

Mercer Human Resource Consulting is a global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in over 190 cities and 41 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges. For more information, visit mercerHR.com.

Table 1: 2006 expected incentive payouts (based on 2005 performance)*

*Note: Percentages do not add up to 100% due to rounding.

Source: Mercer Human Resource Consulting, 2005/2006 US Compensation Planning Survey Update

Table 2: Projected incentive payouts based on 2006 performance (typically paid in early 2007)

Source: Mercer Human Resource Consulting, 2005/2006 US Compensation Planning Survey Update

Table 3: 2006 projected base pay increases

Source: Mercer Human Resource Consulting, 2005/2006 US Compensation Planning Survey Update.