Trend of bonuses might be restraining wages
The recent stock market rumpus has been set off in part by fears that a tight labor market and quickening wage growth are a foretaste of higher inflation and interest rates. But sustained raises for U.S. workers might be possible only if employers can break a habit: handing out one-time 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. And those companies announcing bonuses last year stand to save tens of millions of dollars more in taxes than if they had book the deductible compensation expense this year, when the corporate tax rate is slashed to 21 percent from 35 percent.
The little-noticed shift in how employers compensate workers also could 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, a 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 of those budgets; raises amounted to just 2.9 percent.
And the practice has broadened. In 1991, fewer than half of companies that Aon Hewitt surveyed had a broad-based rewards program. Last year, 88 percent did.
“It’s now widespread across all industry sectors, even some that were hold-backs such as utilities, health care, not-for-profits and government,” said Ken Abosch, a partner at Aon Hewitt.
“Pressure to increase productivity and minimize costs,” the report concluded, had pushed employers to forgo raises and rely more on short-term 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.
In the recession that began a decade ago, the businesses most likely to survive tended to be the most conservative spenders, said Douglas 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,” Aon Hewitt’s Abosch said. “I think there’s been a lesson learned from that.” That lesson: Stay nimble. 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 long-term increase in real wage growth,” Abosch said.
Salaried workers, rather than hourly wage earners, remain much more likely to be the recipients of such extra payments.
If given a choice, most workers would take a raise. When Aon Hewitt asked 2,079 U.S. workers in a second, newly completed survey what they would like to see their employers do with their tax-cut windfall, 65 percent chose a pay raise — twice as many as any other option, including a bonus or a 401(k) contribution.
Takisha Gower, a passenger service agent for Envoy, the air carrier that was previously known as American Eagle and is owned by American Airlines, welcomed her recent $1,000 bonus, which the company credited to the “new tax structure.” She is much more concerned, however, about her base pay, a subject of long-standing contract negotiations.
Gower said of the bonus: “It was appreciated, but it doesn’t fix the long term. We need a livable wage that we can support our families off. A lot of employees qualify for government assistance. Some have to work 60 hours a week to make ends meet.”