A big shift is underway in how companies in many different industries pay workers, with a move toward bonuses and other variable pay over annual salary increases.
A recent study by the human resources consultancy Aon Hewitt found firms are devoting 12.9 percent of their payroll budgets to bonuses and other variable pay, an all-time high. Twenty years ago, that number was only 7.6 percent. During that same period of time, money set aside for base salary increases slipped from 4 percent to 2.9 percent.
Lots of factors are driving this move from annual raises toward bonuses. But unsurprisingly, it’s largely companies looking to save money.
“Budgets are tight; the economy isn’t doing as well as many were hoping it would by now,” said Jean Phillips, a professor at Pennsylvania State University’s School of Labor and Employment Relations. “I think that they’re having to be creative in how they invest the resources that they do have.”
Paying bonuses gives managers more flexibility to pull back during difficult years. Companies also believe bonuses help recruitment.
“The highest-quality workers actually like these pay-for-performance type systems because, essentially, they can be rewarded for performing very well,” said Michigan State University professor Felice Klein, who studies compensation.
But bonuses can also create anxious employees, who can’t easily plan ahead when they don’t know what they’ll make. Even when their personal performance is strong, bonuses won’t be fat if the company struggles overall.
Measuring performance becomes increasingly important as bonuses creep beyond Wall Street. Bankers’ output isn’t that hard to nail down, because management knows how much money they bring in. In other jobs, it’s harder to tell, including for those HR execs who manage company pay policies.