Anticipated payrolls are expected to remain flat in the coming year, though the use of variable pay schemes based on employee performance may rise as competition for talent increases.

New data from Towers Watson Data Services finds close to all employers (98%) are planning to give modest raises next year, with projected average salary increases of 3% in 2016 for their exempt non-management personnel – the same increases seen the previous two years. Executives and management employees can expect an increase of 3.1%.

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“To a large extent, 3% pay raises have become the new norm in corporate America,” says Sandra McLellan, North America practice leader, rewards, at Towers Watson. “We really haven’t seen variation from this level for many years. While most organizations are finding the talent they need at current salary levels, we are seeing more employers prioritizing how their salary budgets are being spent, especially in light of their ongoing difficulty in attracting and retaining top performers or employees with critical skills.”

To stay ahead of the talent wars, employers say they are planning to vary pay scales based on performance ratings. In fact, employers receiving the highest performance ratings were granted an average salary increase of 4.6% this year, about 77% larger than the 2.6% increase given to workers receiving an average rating. Employees with below-average performance ratings received salary increases of less than 1%.

And although salaries will remain relatively flat, some experts are still expecting to see an increase in funding overall, with variable pay spending expected to be slightly higher than last year (12.9% projection), say experts from Aon Hewitt.

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There are several advantages to an employer in paying bonuses versus increasing salaries, says Ken Abosch, Aon Hewitt's North American broad-based compensation practice leader, namely that salary increases are fixed costs that need to be maintained over the employee’s service to the organization, whereas bonuses are a variable cost that only has a financial impact the year it is paid. Variable pay can also very effective in creating focus for employees on key goals or initiatives.

“These are both important attributes from an employer’s perspective and worth the investment in employee bonuses,” he says.

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According to results a soon-to-be-released Aon 2015 company spending report, employers spent 12.9% of payroll on bonuses which is the highest level of spending seen in the 39 years of tracking this information.

Historically, bonuses have been reserved for executives; however employee feedback has shown a strong desire to be included in these types of variable pay arrangements.

“Employees also tell us that they perceive they have greater influence over the size of their bonus, than they do over the size of their salary increase,” says Abosch. “So, including employees in these types of variable pay arrangements has both employee motivation and retention advantages.”

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