Raises to stay small even as labor market tightens, survey finds

Even with a tight labor market, employers aren’t expected to dole out hefty salary increases in 2018.

Seventy-three percent of employers polled in a recent PayScale survey were estimating an average of 3 percent or less — same as last year — with many employers counting on “variable pay,” such as bonuses and commissions, to attract and retain top talent.

The Tax Cuts and Jobs Act has even spurred some businesses to offer one-time bonuses, which experts say could boost morale but also potentially set expectations for future bonuses.

“The question is: Will employees who benefitted from a one-time bonus now, expect that there will be a similar kind of action 12 months from now?” says Jim Hudner, a managing director in the Boston office of Pearl Meyer & Partners, which specializes in executive compensation consulting.

That’s yet to be seen, but it doesn’t seem to be stopping companies from doling out bonuses.

In an online survey conducted in late January by Pearl Meyer, out of the 301 respondents nationwide, 20 percent had already provided some enhanced benefit to employees as a result of the tax overhaul and another 35 percent were considering it, Hudner says.

While a one-time bonus not tied to performance or goals isn’t traditionally the norm, over time there’s been “a slow, but very steady increase in the utilization of variable pay programs like discretionary bonuses or annual incentive plans,” he says.

With moderate salary increases, the use of bonuses starts to become more important to recognize higher performers, Hudner says.

In fact, 71 percent of organizations offer some form of variable pay, says Tim Low, senior vice president of marketing at Seattle-based PayScale, an online salary, benefits and compensation information company, which recently released its 2018 Compensation Best Practices Report.

Interestingly, the number of organizations offering so-called spot bonuses — those that are unexpected, even if they are given to acknowledge good work — decreased year over year from 46 percent in 2016 to 39 percent in 2017. At the same time, use of individual incentive bonuses — those that employees are aware of and working toward — increased from 64 percent in 2016 to 67 percent in 2017, PayScale said. Use of hiring bonuses also increased, from 27 percent to 34 percent.

Bonuses should be part of the compensation mix, Low says, but “what’s potentially concerning is if companies are only using bonuses, it can affect an employee’s ability to make longer-term plans.”

Islandia-based Empire National Bank, one of the companies that announced it would give certain employees a one-time $1,000 bonus as a result of the tax overhaul, understands this and is also increasing salaries 5 percent for 2018 for all employees and increasing the company’s contribution to its matching 401(k) program from 4 percent to 6 percent, CEO Douglas Manditch says.

With Empire recently hitting its 10-year anniversary and given the corporate tax reduction, the bank thought “it would be a good time to recognize all of the staff,” he says.

The $1,000 bonus will go to approximately 30 nonexecutive employees who traditionally don’t get bonuses, says Manditch, noting Empire normally gives annual bonuses including incentive and discretionary bonuses to certain managers.

Over the past few years companies have been more willing to expand the use of cash bonuses to lower-level employees, says Ted Turnasella, principal of Comp-unications, a West Islip compensation consultant.

“Given that salary-increase budgets have been so low, it’s been hard for companies to recognize outstanding performance using just raises,” he says.

The one-time bonuses tied to the tax act may not continue after the initial round has been distributed, he says, but bonuses will continue to be prevalent in more targeted ways such as hiring bonuses in this tight labor market.

Further, the lower corporate tax rate will likely lead to companies expanding, which will increase the demand for labor and ultimately put an upward pressure on wages, Turnasella says.