Although employers are hiring more workers, employee engagement is down, according to Mercer’s 2012 Attraction and Retention Survey.

In fact, more than 40 percent of respondents report that they are bringing in more employees in 2012 as opposed to 27 percent in 2010, and 16 percent of respondents are cutting staff compared to 25 percent in 2010. Still, 24 percent of respondents say they are seeing lower levels of employee engagements, a jump from 13 percent in 2010.

“Employee loyalty has been eroding the past few years due to companies’ responses to the economic downturn,” says Loree Griffith, principal with Mercer’s rewards consulting business. “Actions like layoffs, pay freezes and limited training opportunities have created an evolving employment deal for employees due to uncertainty about what is expected and how employees will be rewarded. Meanwhile, firms are still aggressively managing people costs while finding ways to re-energize and re-motivate engaged employees.”

Turnover is a major contributor to the attention employers are giving employee engagement as nearly 60 percent of respondents expect to see higher voluntary turnover with the job market and economy improving. Certain jobs are in higher demand than others because of skills shortages and market demand. Among these positions are information technology, research and development and scientific engineering, and executive level and top management.

“Employees with the ‘right’ skill sets are in demand,” says Griffith. “Despite the increase in hiring, many firms are experiencing talent shortages due to critical gaps between skills employees possess and skills businesses need. Now more than ever, firms need to engage and develop their high-potential employees and critical work force segments.”

Both cash and noncash rewards remain an important part in strengthening employee engagement and retention, and this is especially true as many employers are cutting base pay increases and offering smaller bonuses, the survey finds. Merit increases are particularly popular as 95 percent of respondents providing some form of increase for 2012.

Of the noncash reward programs implemented by organizations over the past 18 months, are communicating total reward value to employees at 25 percent, use of social media to boost the employee work experience at 25 percent, formalized career paths at 22 percent, internal and external training at 22 percent and special recognition at 22 percent. These responses are similar to those from 2010, although more respondents are relying on social media and team building.

Despite the higher use of noncash rewards, respondents expect the top rewards that drive employee engagement and retention in 2012 to be base pay increases at 50 percent, vertical career progression at 47 percent and leadership development at 46 percent. Rewards that are expected to have a moderate impact on employee engagement and retention are variable pay, health care benefits, work-life programs, performance management, time-off programs and training.

“While noncash programs, like work-life initiatives and formal career paths, are important for employee engagement all the time, employers must revisit pay in light of the changing business environment to stay competitive, retain their top-performing employees and ultimately buy or build required skills for the future,” says Jeanie Adkins, partner and segment co-leader of Mercer’s rewards consulting business.