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More Bonuses And Fewer Raises Affect Workers

Author: Michael Taylor

Not too long ago, a person could go to work every day for years, collect a decent raise each year that more than reflected the increase in the cost of living, and then retire with a comfortable pension. Today, full-time work is being done by part-time or contract employees who cost a fraction of what a full-timer does. There are numerous financial benefits to this practice, with payroll and social security contributions, as well as health care benefits, creating major savings for employers.

Within the past decade or so, though, there's been another shift in employee pay structure: Companies are increasingly replacing salary increases with bonuses, and this change is affecting everyone from the senior executives to the secretaries and assistants.

Employees Should Hate Bonuses

For employees, the word bonus has a nice ring to it. We all budget and base our lives around our paychecks and, as the name implies, having bonus money at the end of the month (or at the end of the year) is like winning the lottery or getting a really awesome birthday present. Bonuses effectively feel like free money and they're addictive: once you get one, you want more.

But how does an employee get consistent bonuses? It's not quite straight-forward. Companies will tell employees that bonuses are based on performance or a company's profit, both of which are often outside of a single employee's control. Employees can work hard and be more productive each year but, if the team as a whole sinks, individual employees are not guaranteed their bonuses. In fact, a manager who pays bonuses to certain individuals on a lackluster team would likely need to explain his actions both to his boss and to the team members who didn't receive bonuses.

This is a problem. Employers are keeping salaries low by allowing only small wage increases based on inflation and filling in the gap with bonuses. When bonus time comes though, there's no obligation to pay out bonuses. (See also, How are an employee's fringe benefits taxed?)

Employers Should Love Bonuses

Because employers don't have an obligation to pay bonuses at the end of the year, they're able to keep their fixed costs low. Variable pay can be adjusted to suit the economic health of the company and, in slow years, can be written off entirely. Compare this to a company that increases salaries every year and then tries to cut wages during a recession. It just doesn't happen.

The increased control over wages has additional benefits aside from its flexibility. For starters, wage increases, once implemented, grow exponentially as each year's increase is based off of the previous year's salary. What's more, Social Security, payroll, and pension contributions are all based on salary: Save on salary costs, save on benefit costs. It's a win-win for any organization. (See also, Employee Benefits: How To Know What To Choose.)

Sound Familiar?

If the idea of not committing to future expenses but still making payees happy sounds familiar, that's because it is. Companies have been doing the same thing with shareholders for years. Instead of increasing dividends, companies have been instituting share buybacks, programs that return money to shareholders and increase EPS without having to increase the dividend.

Companies that do increase their dividends, like those that increase salaries, are pretty much locked into that obligation. Further dividend increases grow exponentially (as do salaries), and cuts to the dividend send a company's stock price plummeting as investors wonder if the company is in financial distress.

The Bottom Line

What if you could find a way to motivate your employees while paying them whatever you wanted to? Sounds great, right? That's the beauty of the bonus system. For employees, getting a bonus should be just that: a bonus amount of money above what is owed to them. Replacing wage increases with bonuses is a cost-saving measure that, according to Aon Hewitt's 2014 Salary Increase Survey, companies across the United States are now using in record numbers, much to the detriment of the employees.

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