A new compensation trend could be hurting workers.
Wage growth hasn’t been this slow since 1982. In the second quarter, raises and salaries ticked up a minuscule 0.2% percent, according to Labor Department data released Friday. For private-sector workers, in fact, wage growth hasn’t been this low in the entire 35 years the Labor Department has been tracking it.
The bottom line is that even as companies have been hiring more, they’ve been able to hold the line on pay.
The likely culprit, say experts, is the continued adoption of one-time bonuses given in lieu of raises. “The raise has gone the way of the gold watch,” Gary Burnison, CEO of executive recruitment and talent management company Korn Ferry, tells the Washington Post.
‘Variable Pay’ Hits Record
What has been a frustrating trend for workers first attracted widespread attention about a year ago, after a report by HR consulting firm Aon Hewitt found that a record amount — 13% — of employee payroll costs were going to what’s termed “variable pay,” a category that covers bonuses and related performance-based payments. (In 1988, when the company started tracking it, variable pay made up only about 4% of payroll costs.)
“Performance-related pay, of which bonuses are an example, will become more and more prevalent,” predicts Iwan Barankay, a management professor at University of Pennsylvania’s Wharton School who has addressed the wage vs. bonus issue in the past.
Companies like giving bonuses instead of raises because it requires less commitment on their part, and because they can tie payouts to company or departmental performance metrics, explained Aon Hewitt compensation, strategy and market development leader Ken Abosch in an article published by the Society for Human Resource Management.
“They feel like they need to be careful about adding to their fixed costs,” he says. “This is one of the main reasons variable pay programs are so attractive.” Incurring a one-time expense — one the company won’t have to pay again if certain performance targets aren’t met — is a better deal for them than raising wages across the board, then having to cut employees or pay if business slows down.
“The more compensation you can give in other forms, the more nimble you can be in a recession,” Linda Barrington, executive director of Cornell University’s Institute for Compensation Studies, tells the New York Times.
Workers Lose Out
But even when bonuses are paid out, performance-based pay can be a bum deal for workers. Your base salary is an important factor in calculating everything from how much interest you’ll pay on a loan to how much Social Security you’ll earn when you retire. For young adults, a lower starting salary can potentially put a drag on decades of future earnings.
A bonus-heavy pay structure also divides a workforce more sharply into winners and losers, Barankay notes. “Unfortunately, not all employees benefit from bonuses equally,” he says. “High performers can still command high fixed wages since — should an employer not offer them a raise — they can credibly threaten to get another job elsewhere.”
For everyone else, though, the picture looks a lot less rosy. “Low performers are less lucky as they [can] struggle to get a good alternative job offer and are stuck in a system where bonuses are hard to get,” he adds.
“The consequence is a situation where wage inequality will increase in the workplace,” Barankay says.
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