Wage Growth vs. Bonuses

Written by Mike Tedesco | Aug 14, 2018 2:19:00 PM

You might have seen the crop of articles at the beginning of the year about companies delivering big bonuses. Thanks to the recently passed tax cut for businesses, it seemed like companies were passing the breaks down to their employees. But what’s really happening with bonuses?

Since the recession, bonuses have been favored over wage growth so that companies can be flexible during tough economic times. But that attitude hasn’t changed during economic growth, leading to a huge increase in the percentage allocated to variable pay. This is part of the reason why wage growth is stagnating despite a period of low unemployment.

Variable Pay and Wage Growth

The companies that survived the recession did so by holding the purse strings. Bonuses were a safer financial decision in comparison to raises, since it was easier to walk back bonuses during tough times. Despite economic growth, budgets for bonuses and salary increases haven’t returned to what they were pre-recession. In 1991 spending on variable pay was 3.5% of total compensation, with salary increases at 5%. In 2017, variable pay made up 12.7% of compensation, with raises down to 2.9%.

Wages have stagnated since the recession, which is atypical for a hot labor market. Bonuses have not made up for wage stagnation, but they are a tempting way for businesses to keep financially nimble. Bonuses and prizes are a cheaper way to reward productivity, and employees don’t necessarily notice that their bottom line is different. It allows for spending flexibility and keeps labor costs down.

As popular as bonuses are for the employers, the majority of employees prefer raises to bonuses. Wage growth is essential for many employees. When the minimum wage is not enough to live on, a decade of wage stagnation is more than a problem for the economy; it’s a social issue.

Keeping Employees Motivated with Gamification

Some companies are swapping out traditional bonuses for prizes, lotteries, leaderboards and competition. The idea is that there are cheaper ways than bonuses to reward productivity and keep employees motivated. “Gamification” is integrating game principles into the workplace to tap into the competition rush of playing games. For example, Uber uses raffles and prizes to get drivers on the road during high-demand periods.

While there’s nothing malicious about motivating employees to perform better or rewarding good performance, mixing up motivation and fair payment is potential for disaster. Companies are always looking to lower their expenses, and gamification can be used to squeeze more out of employees. This recently backfired for United Airlines.

Recently, United Airlines announced that it was replacing bonuses with a lottery where only a few would win big. There was uproar. Employees felt that they weren’t being fairly paid since the majority would lose their bonuses to a few lucky winners. Employees were so unhappy with the decision that United Airlines put a pause on it.

Employee Retention

To keep employees happy and not shopping for other jobs, you should understand their expectations of fair pay and bonuses. For some industries like finance and insurance, performance and year end bonuses are deeply ingrained, whereas in retail there are smaller and fewer bonuses. Salaried workers are more likely to receive bonuses than those who are paid hourly.

There are many reasons that an employee will stay with their job, and compensation and motivation are key. Bonuses are not just a nice cherry on top for a worker; they are a new part of how an employee evaluates their income. To keep an employee for the long term, it's important to have room for growth. You want them to grow with your company, as it benefits everyone. And, a well-thought out compensation program goes a long way.

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