The leaky bucket in total rewards: A cost-conscious leader’s guide to hidden overspend 

Even the most well-run total rewards program is likely to have at least some leaks.

Over time, it’s common for small inefficiencies to creep in: a merit increase here, an off-cycle promotion there, a bonus structure that once made sense but hasn’t been recalibrated in years. These aren’t red flags at first glance. They’re pinpricks. But together, over time, they quietly drain resources, subtly distort fairness, and slowly compromise the impact of spend.

In some cases, leaders don’t notice them until Finance does. In many, they’ve known all along, but fixing them felt too daunting, too politically fraught, or too low on the priority list to take on. Especially when the fix might not be popular.

It may feel like the cost of operations — until it doesn’t.

Today’s headlines are filled with news of restructuring, and the labor market remains tight, with employers continuing to face pressure on both ends. They face mandates to control costs without losing critical talent. Total Rewards and HR leaders are being asked to justify spend and find savings without triggering disengagement or churn.

Employers need to squeeze every ounce of value from their investments, so suddenly those leaks are no longer background noise, but a big opportunity.

The truth is, most organizations aren’t overspending because they’ve made poor decisions, but because small, outdated, or unchecked decisions have quietly accumulated.

When we work with clients to assess Total Rewards leakage, common patterns emerge— across sectors, geographies, and industries. If you're looking to optimize spend without undermining employee experience, these are five good places you can start.

• A disproportionately large portion of employees are promoted each year;
• Too many roles sit in higher job levels relative to market norms;
• Employees with only 1–2 direct reports are classified (and paid) as people managers;
• Turnover above industry norms, especially among high performers, high potentials, and critical roles;
• Poor performers are not managed out quickly enough; and
• Roles are backfilled at the same level automatically, without considering if a lower level backfill might suffice.

Salary decisions are often made with the best intentions: to recognize performance, close gaps, or retain top talent. But over time, well-meaning exceptions can accumulate into expensive patterns. When increases happen outside of formal processes, or when pay band discipline slips, salary spend can begin to outpace structure, quietly eroding careful design and desired efficiency.

While flexibility is often necessary in a highly competitive labor market,  untracked or inconsistent adjustments can blur the boundaries of your compensation philosophy. That drift is rarely visible on paper — until the budget line makes it undeniable.

• Merit increases provided to employees who are already above the maximum of their pay bands;
• Off-cycle adjustments for job track changes or role expansions that are not budgeted or tracked;
• “Manager discretion” adjustments that create internal inequity; and
• Significant market adjustments without an assessment of ROI.

Bonuses are usually intended as variable pay to reward performance, but without the right controls and meaningful differentiation, they can easily become (or be perceived as) an expensive form of fixed pay. What begins as a performance lever can morph into an expected payout, regardless of business outcomes. Plans with soft goals, vague measures, or multiplicative formulas can end up delivering inflated rewards without delivering real accountability.

We often see bonus plans that were designed years ago still operating under outdated assumptions or layers of changes added over time without a recalibration. The result? High spend, a complex design, and few levers to control outcomes when performance doesn’t align with projections.

• Bonus plans are not directly tied to profitability or financial performance;
• Subjective goals lack appropriate controls to prevent individuals or groups from “gaming” the system;
• Plans consistently pay out above 100% of target, potentially indicating insufficient rigor in the goals;
• Individual incentive plan components are not separately funded, making costs harder to manage; and
• Company and individual performance components are multiplicative, compounding payouts when individual ratings are high.

Equity can be a powerful retention and alignment tool — when it’s used strategically. But when equity is distributed too broadly, in the wrong markets, or to the wrong populations, it can become one of the most expensive forms of compensation with the least perceived value.

In our work with clients, we’ve seen equity programs that are no longer matched to company lifecycle, workforce expectations, or employee understanding. Without data on how grants are valued by recipients — or whether they’re actually influencing behavior — companies may be spending heavily on incentives that simply aren’t doing their job.

• Equity is granted to lower levels of the organization without demonstrated ROI;
• Equity is granted in countries or talent segments where it's not typically valued or understood;
• Data is not used to assess whether equity is actually driving retention or engagement; and
• Vehicles used are mismatched to company stage or misunderstood by recipients.

Benefits are one of the most tangible ways an organization demonstrates care, but are an easy place for value to go unnoticed. Even generous programs can fall short if they’re underutilized, poorly communicated, or misaligned with employee priorities. When that happens, organizations end up investing heavily in offerings that aren’t delivering return in engagement, retention, or satisfaction.

We frequently see benefit portfolios shaped by prior decisions or vendor inertia, rather than active preference data. Without regular reassessment, what was once a differentiator can become a sunk cost — and a missed opportunity.

• Maintaining underutilized or low-satisfaction benefit programs;
• Carrying high-cost health plans with poor wellness or chronic condition management; and
• Working with third-party providers on long-standing contracts without revisiting cost.

Mercer has worked with organizations across industries and lifecycles to identify and address persistent inefficiencies in their Total Rewards programs.

In some cases, we’ve conducted deep-dive modeling to quantify the potential cost of inaction. In others, we’ve helped clients realign rewards based on what their people actually value. What unites all of them is a commitment to using data to better inform decisions — and build more cost-conscious, people-centered programs. 

Here are a few recent real-world examples:

The truth is, most leaders already know where the leaks are. What’s harder is deciding when — and how — to fix them. The longer inefficiencies go unaddressed, the more likely it is that budget owners, finance leaders, or even external forces will dictate the solution. 

Mercer’s four-phase framework is a concrete way to break that inertia, with four steps to help organizations move from vague suspicion to more informed and confident action:

• Lead with listening
  Start with the voice of your workforce. Surveys, behavioral analysis, and pulse data are forms of employee listening that can reveal what employees truly value, and where spending may be misaligned with actual need.
  
  
• Get to the heart of the issue
  Using data modeling, ROI analysis, and peer benchmarking, we help teams identify the root causes of overspend and missed impact.
  
  
• Identify where you want to shine
  With the right insights, you can target strategic investments that differentiate your EVP and deliver maximum value to the people you need most.

• Engage for impact
  From business case development to change management and communication strategy, help your good decisions gain traction — and trust.
  
  

Small inefficiencies don’t always feel urgent. But the longer they go unaddressed, the harder they are to defend, and the more likely it is that solutions will be imposed from outside the HR function.

We know these decisions aren’t easy. Redesigning bonus structures, adding rigor to salary range management, or rethinking benefits can be politically sensitive and emotionally charged. These are areas where employees — and leaders — have strong opinions. But they’re also places where small, data-backed adjustments can deliver meaningful savings, greater fairness, and better outcomes for everyone.

At Mercer, we help Total Rewards leaders navigate that tension — with empathy, precision, and a clear focus on long-term health. You don’t have to figure it out alone.

Be sure to explore the Total Rewards guidebook - A deeper dive into Mercer’s Total Rewards strategy framework, built for today’s workforce and tomorrow’s demands.