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Good-bye, annual raises. Hello, bonuses?
In its annual U.S. Salary Increase survey, human resources consulting firm Aon Hewitt found performance-based bonuses were nearly 13 percent of payroll this year. That’s the highest percentage in the 35 years the company has conducted it survey.
University of Wisconsin Business Professor Barry Gerhart says there’s an easy explanation why: “If you put the money into salary, it’s there forever. If you give out money in terms of a bonus, people get it that year and have to re-earn it the following year,” he says.
Bosses’ love affair with bonuses began pre-Recession, and even if the economy heats up, Gerhart doubts firms will move back to annual across the board. That’s because raises carry fewer fixed costs and give companies flexibility.
Wharton Business School economist Iwan Barankay says if businesses rely on bonuses, they should be careful.
“If they are not designed well. The problem is that it leads to an environment where people are gaming the scheme just to maximize their bonus, but not really creating more value to the company,” he says.
Barankay says incentives are like a meal: what you put in determines whether you get what you want.
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