Yacht-sized bonuses for Wall Street big shots and employee-of-the-month plaques for supermarket standouts are nothing new, but companies’ continued efforts to keep costs down have pushed employers to increasingly turn to one-off bonuses and nonmonetary rewards at the expense of annual pay raises.
“There is a quiet revolution in compensation,” said Ken Abosch, a partner at Aon Hewitt, a global human resources company. “There are not many things in the world of compensation that are all that radical, but this is a drastic shift.”
According to Aon Hewitt’s annual survey on salaried employees’ compensation, the share of payroll budgets devoted to straight salary increases sank to a low of 1.8 percent in the depths of the recession. It dropped to 4.3 percent in 2001, from a high of 10 percent in 1981. It has rebounded modestly since the recession, but still rose only 2.9 percent in 2014, the survey of 1,064 organizations found. (These figures are not adjusted for inflation.)
Aon Hewitt did not even start tracking short-term rewards and bonuses – known as variable compensation – until 1988, when they accounted for an average of 3.9 percent of payrolls. Ten years later, that share had more than doubled to 8 percent. Last year, it hit a record 12.7 percent.
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Of course, companies have long rewarded top executives and rainmakers with bountiful bonuses – and that continues to be true – but compensation experts say the prevalence and types of one-time rewards and perks have spread further down the ranks than ever before. Although pay-for-performance rewards for top achievers and signing bonuses to attract talent account for most of the one-shots, they also include companywide amenities and targeted perks, such as lunches out with the boss or Visa gift cards.
“It affects the CEO all the way down to the guy who sweeps the factory floor,” Abosch said. Ninety-one percent of the companies surveyed have at least one broad-based reward program, up from 78 percent in 2005 and 47 percent in 1991.
Perhaps more surprisingly, the trend now extends to sectorssuch as higher education and agriculture, as well as to the government, which historically resist performance-based rewards because they often rely on subjective judgments.
With the economic recovery nearing its sixth anniversary, stubbornly sluggish wage growth has become a central issue, eroding people’s faith in the American dream, shaping the economic messages of potential presidential candidates and weighing on the Federal Reserve Bank’s decision of whether to raise interest rates from their near-zero levels.
Over the past 12 months, real average hourly earnings have increased just 2.2 percent. Since 1979, most of the gains in pay have gone to those at the top of the salary pyramid while, except for brief periods in the 1980s and late 1990s, those in the middle and at the bottom have been losing ground.
Several developments help account for wage stagnation. The economy’s globalized and technological nature, which has placed more bargaining power in the hands of employers, and long periods of relatively high unemployment – compounded by waves of layoffs and excessive numbers of discouraged and underemployed workers, leaving some employees fearful to ask for more.
The shift in compensation that favors one-shot-only rewards over incremental increases in salary that compound over time also appears to be playing a significant role.
“This is something that has not gotten as much attention in conversation about flat wages,” said Linda Barrington, executive director of the Institute for Compensation Studies in the Industrial and Labor Relations School at Cornell University.
The shift to short-term rewards took off after the economy went into a nosedive in 2001, she said.
“Then in the Great Recession, it really skyrocketed,” she said. “It’s really hard to cut wages and salaries, so the more compensation you can give in other forms, the more nimble you can be in a recession.”
Some experts expect the trend to continue even as the unemployment rate drops and the labor market tightens.
Employers like one-shots precisely because they are temporary. They save money over the long run because they don’t lock in raises, giving managers greater control over budgets, particularly during downturns.
“It’s so much easier to not give a bonus than to cut someone’s pay,” Barrington said.
At Squaremouth, a software company in St. Petersburg, Fla., most employees received an annual raise of 0.8 percent for 2015, just enough to match last year’s rise in consumer prices. But staff members have been treated to other sweeteners such as new Apple Watches – preordered with choice of size and color – a $200 “beer” bonus, birthdays off and the installation of a “hangover couch” for midday snoozes.
Chris Harvey, the chief executive of Squaremouth, which produces a travel insurance website, said he took his cues from the tech industry, which pioneered creative incentives and amenities for workers such as Ping-Pong tables and on-site dry cleaning. “We wanted to find innovative ways to keep people happy and keep people surprised,” Harvey said.
Alternative forms of compensation can be popular among workers, too. Some like the idea that good work is recognized and rewarded. But while across-the-board perkssuch as free food or lunchtime yoga can make the workplace more pleasant, others support performance-based bonuses.
“I personally love suddenly finding an unexpectedly large sum added to a month’s pay,” said Michele Heisler, an associate professor of internal medicine at the University of Michigan, who can receive a yearly bonus based on quality-of-care ratings of her work as a physician at Veterans Affairs Ann Arbor Healthcare System. Such pay-for-performance policies are steadily becoming the norm among both private insurers and the government.
“It is like getting a surprise gift,” Heisler said. “It probably wouldn’t seem nearly as thrilling if it were just spread out across salary payments each month.”
While a few more dollars in each paycheck may lack that Christmas-morning feeling, a raise is the gift that keeps on giving. The benefits of wage increases are compounded each year, with every future raise building on the back of the one before it. In addition, salaries are the foundation of a range of other benefits, such as Social Security and pensions.
Abosch says that the biggest bang for the buck comes when workers can see a direct return for specific efforts. In the days when bosses handed out holiday hams or turkeys, he said, “employees would walk to the top of the building and drop them off the side to show their displeasure.” Their message: cash preferred.
Stephanie Thomas, a research associate at the Institute for Compensation Studies, says some industries and jobs are more suited than others to rewards. Merit bonuses (a sales commission, for example) work well when employees have direct control over their performance and results can be objectively measured, she said. But “it’s not right for all employees and all organizations,” Thomas said, referring to professionssuch as teaching.
The big question now, said Kerry Chou, a compensation specialist at Worldatwork, a nonprofit membership organization of human resources professionals, is not so much whether variable compensation will continue, but whether wage gains are permanently stuck in a low gear.
“Are we just dealing with a cautionary economy where ultimately budgets get back to where they were before the recession, or do have a new normal now?” Chou asked. “The jury is still out.”