The days of hefty raises seems to have gone by the wayside.
Instead, more companies are opting for a mix of modest raises and performance-based bonuses.
U.S. workers can expect a median salary increase of 3 percent this year—the same as the previous six years—as well as a projected 3 percent increase for 2017, according to a recently released report from The Conference Board.
While there could be multiple contributing factors for the stagnation, “we think that the main one is that companies have chosen to shift from the fixed costs of salary raises (which are difficult to revert, once granted) to rewarding employees through annual bonuses and other performance-based compensation,” explains Matteo Tonello, managing director of corporate leadership at The Conference Board in Manhattan.
These alternative compensation vehicles offer more flexibility and don’t commit cash resources in advance and for the long term, he notes. They can be tailored to end-year performance and cash availability, and can be significantly reduced in the following year if a softening performance requires it, he explains.
In 2015, bonuses accounted for 12.9 percent of businesses’ total compensation and spending budgets, an increase from 7.5 percent in 1996, according to Norwalk, Connecticut-based management consulting firm Aon Hewitt.
But that doesn’t mean raises are obsolete.
“It’s really not one versus the other,” says Preston Handler, an associate partner at Aon Hewitt. “They work together.”
Generally, annual merit/salary increases reflect individual performance of core duties that tend to be stable over time, while one-time bonus payouts reflect group and individual performance against a different set of objectives established each year, he explains.
“Each of the recessions has acted as a catalyst in shifting from merit/salary increases to variable pay (ie., incentives, bonuses and cash awards),” says Handler.
Locally, more companies are doing a combination of both modest pay increases and performance-based initiatives, says Rick Maher, partner and CEO at Port Jefferson-based Effective HR Inc., an outsourced HR firm.
“What we find is business owners are struggling with employee engagement,” he notes. “Underneath that umbrella is how to compensate properly.”
More firms are conducting a compensation analysis of each position in their company and benchmarking it against similar companies and positions in the area, he says.
Each company is different, but generally bonuses tend to start at 5 percent of annual salary at the lower levels, and rise to 10 percent to 20 percent of annual salary for first-line managers and supervisors at top tiers, notes Handler.
While cash is always appreciated, the bonus doesn’t have to be cash, says Michael Maciekowich, national director of Manhattan-based Astron Solutions LLC, an HR consulting firm.
For example, one client gives the top five outstanding performers a Caribbean cruise, he says. “It can be anything of value.”
If you’re not giving any bonuses, it could put you at a disadvantage.
Earlier this year, Westbury-based Spectronics Corp. started moving toward a hybrid compensation program that combines cost-of-living salary adjustments of usually between 3 and 5 percent, merit-based salary increases and performance-based bonuses, says President Jon Cooper.
The firm’s old model was strictly annual salary increases.
“The decision to move away from our old model came with the change in our workforce coinciding with the hiring of more millennials,” says Cooper. “We’re hoping that if we provide more benefits such as merit-based salary increases and performance-based bonuses, we’ll lead the market, attract the right talent, and give our employees the opportunity to grow within our company.”
Keep in mind if you’re not giving the same bonus to each employee, you should develop some basic criteria as to how you came up with the bonus distribution, suggests Maciekowich.
“Figure out who the number one employee is and write their attributes and use that as your criteria,” he says.
More than 90% of companies offer many employees variable pay (ie., incentives, bonuses and cash awards) in addition to merit increases.
Source: Aon Hewitt