US firms relying on bonuses, not raises, to reward their staff

US firms relying on bonuses, not raises, to reward their staff

US workers are unlikely to see sizable increases in their salaries for 2018, despite a strengthening economy and a surge in job growth, according to a new survey from Aon, a global professional services provider.

Aon’s survey of 1,062 US companies projects that base pay is expected to be 3.0% of payroll in 2018, up slightly from 2.9% in 2017, whereas spending on variable pay is expected to be 12.5%. Most organizations will continue to tie the majority of their compensation budgets to pay incentives that reward performance and business results.

This week Apple joined other large employers (among them American Airlines, Bank of America, and AT&T), in the wake of the new US tax reform, in pledging bonus payments for many of its workers—in the form of US$2,500 restricted stock awards. 

A number of other companies have instead announced increases to their minimum wage or other adjustments to salaries. But the number of companies offering bonuses—or who say they may do so—is far higher.

“Salaries represent the single largest percentage of direct labor costs” for employers, says Ken Abosch, Aon’s broad-based compensation leader. “Any time you give someone an increase in their salary, it’s an annuity. It’s not a one-time event like a bonus. It’s additive and it compounds.” 

Given a choice, most workers would rather have a raise. When Aon asked 2,079 American workers in a second survey what they would like to see their employers do with their tax-cut windfall, 65% said a pay rise—twice as many as any other option, including a bonus or a 401(k)—retirement fund—contribution.

In his IZA World of Labor paper, Ekkehart Schlicht notes that “wages, unlike prices, serve several further functions that affect profitability beyond attracting workers. With higher wages, more demanding hiring standards can be implemented and better workers hired, labor turnover and associated turnover costs can be reduced, and better worker attitudes can be kindled.” 

Exploring the effect of employee ownership, sometimes offered as a form of bonus, on firm performance, Douglas Kruse says: “employee ownership can enhance company performance, as it creates a closer tie between employee performance and rewards. Employees are effectively ‘working for themselves,’ and by sharing the overall economic ‘pie’ more widely, the incentives of workers and owners can become aligned so that productivity-reducing conflict is minimized and productivity-enhancing cooperation and innovation encouraged.”

He warns, however, that “[w]orkers can be exposed to excessive financial risk…when employee ownership is a large share of a worker’s wealth, and when it substitutes for other pay and benefits.”

Read more articles on personnel economics and pay and incentives.

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