Where did your pay raise go? It may have become a bonus

The recent stock market rumpus was set off in part by fears a tight labor market and quickening wage growth are a foretaste of higher inflation and interest rates. But sustained raises for U.S. workers may be possible only if employers can break a habit: handing out onetime bonuses in place of salary increases.

A growing preference among employers for onetime awards instead of raises that keep building over time has been quietly transforming the employment landscape for two decades. But it was accelerated by the recession’s intensity, which made employers especially cautious about increasing labor costs.

The stream of companies announcing bonuses for their employees in the wake of the newly minted tax cuts is just the latest expression of the trend.

This little-noticed shift in how employers compensate workers could also help explain one of the economy’s most persistent puzzles: why a hot labor market has failed to ignite bigger increases in wages.

There has been “a continuing dramatic shift in the mix of compensation,” Aon Hewitt, the human resources consulting firm, noted last summer in its latest annual survey of company pay practices.

In 1991, for example, spending on temporary rewards and bonuses for salaried employees, known as variable pay, accounted for an average of 3.1 percent of total compensation budgets, while salary increases amounted to 5 percent.

In 2017, one-time payments consumed 12.7 percent to those budgets; raises amounted to just 2.9 percent.

“Pressure to increase productivity and minimize costs,” the report concluded, had pushed employers to forgo raises and rely more on shortterm awards “as the primary means of rewarding for performance.”

Ordinarily, the jobless rate and wage growth are like two ends of a seesaw: When one drops, the other is supposed to rise. But that link seems broken, and like film-noir detectives, analysts have scrutinized hardedge statistics and fuzzier psychological indicators for clues about why.

In the recession that began a decade ago, the businesses most likely to survive tended to be the most conservative spenders, said Douglas G. Duncan, chief economist at Fannie Mae. That approach was rewarded and has now been reinforced, he said, helping to restrain the growth of full-time workforces and salaries.

Aon Hewitt’s annual surveys seem to bear that out. The practice of spending more on variable pay than on permanent raises took root in the 1990s, when growing competition from abroad increased pressure on companies to keep a lid on prices and production costs.

Pay-for-performance and other bonuses increasingly functioned as a release valve. Companies could offer more money to attract talent or when profits were strong, and pull back when business was slow.

After the recession, the trend accelerated.

“The response in 2009 was unlike any prior response to a recession or depression in that organizations actually reduced salaries, they didn’t just freeze them as a means of allegedly avoiding greater layoffs,” said Ken Abosch, a partner at Aon Hewitt. “I think there’s been a lesson learned from that.” That lesson: Stay nimble.

The recessionary hangover encouraged employers to avoid adding fixed costs and to be as flexible as possible in staffing and compensation. The trend toward outsourcing work once handled in house as a way of saving money fits in with that storyline.

The percentage spent on salary increases never returned to its pre-2009 levels, the Aon Hewitt surveys show, while the percentage spent on bonuses and other shortterm rewards climbed to new levels. “I don’t believe we’ll see a longterm increase in real wage growth,” Abosch said.