Bonuses, wages, and U.S. compensation growth

Receiving a bonus check is definitely a pleasant experience even if it’s not always a surprise. Getting an extra bump up in pay in December can be a great way to end the year, assuming the worker isn’t depending upon the bonus to get through the end of the year. Bonuses, as you’d expect from the name, were originally intended to reward workers above and beyond their usual wages and salaries. But some new data indicates that bonuses are fast becoming supplements for wage and salary increases instead of complements to them.

In yesterday’s New York Times, Patricia Cohen highlighted the increasing use of bonuses and non-monetary perks to substitute for wage gains. Cohen digs into data provided by the human resources company Aon Hewitt to look at these trends. According to the data, bonuses and other “variable compensation” were only 3.9 percent of payrolls for the companies surveyed in 1988 when the firm started tracking these data. By 2014, this share increased to 12.7 percent. It’s important to note that Aon Hewitt’s data only covers payroll for salaried employees. And it doesn’t mean that just under 13 percent of every individual worker’s paycheck is bonuses. Rather, that out of all payroll for salaried employees, 13 percent is spent on bonuses.

Yet this movement toward bonuses and other non-salary compensation is part of a larger trend in compensation away from cash wages and salary towards other forms of compensation. Employer-provided health insurance and contributions toward retirement plans are now a bigger share of compensation than bonuses, a trend evident over the past several decades. Together, contributions to health insurance and retirement and savings plans were 13.7 of employee compensation in December 2014.

This large share doesn’t mean that employers pick up more of these benefits than in the past, but rather that the portion they do pick up is a larger share of compensation. In fact, employees are paying more for employer-sponsored health insurance and the share of employers sponsoring retirement plans is on the decline. Most economists would point out that in the long run workers pay for the entirety of these benefits, so these shifts are about making the payment more upfront.

But the increase in bonuses as part of overall worker compensation also highlights important short-term consequences. As Cohen notes in her column, bonuses have become more prevalent since the beginning of the Great Recession in late 2007. This shift is particularly evident in the data beginning last year. As Ryan Sweet points out at Moody’s Analytics, a large portion of the increase in compensation growth measured over the course of 2014 was due to increased incentive pay.

If more recent compensation growth in the United States is primarily driven by incentive pay, then how sustainable is that growth? An actual raise in base pay locks in increased earnings and sets a foundation for the next increase. In other words, the raise is a more transparent way for a worker to understand their actual level of compensation and potentially argue for even more when the time comes. Bonuses and other incentive pay are by their very nature temporary. A rough period comes along for a company and suddenly the worker’s compensation could decline.

Perhaps this trend toward bonuses is temporary. If the labor market continues to heal, a tighter jobs market could shift more bargaining power toward workers and return compensation growth toward regular wage and salary raises. But if this shift is actually structural and a new long-term facet of the U.S. labor market, then some serious thinking needs to be done about its effects on economic inequality and sustainable economic growth.