Bonus pay may contribute to wage stagnation

It feels good getting bonuses, but those surprise payments may not always be the answer to middle class workers’ problems.

According to a recent report by Economic Policy Institute (EPI), salaries have not risen much for the bottom 70% of American earners during the last decade.

Yet, a salary survey by Aon Hewitt shows during the same period the number of companies handing out bonuses to employees skyrocketed.

"Bonuses once were for the C-suite. We now find them all the way down to the person sweeping the factory floor,” says Ken Abosch, a compensation expert at AON Hewitt.

AON Hewitt says twenty years ago, 74% of annual compensation budgets went to pay bonuses. Today, 81% of those budgets are going to employee bonuses.

But even as bonuses become more common in both large and small companies, there are extreme gaps in just how much workers receive in their lump sum. 

"Entry level, non-exempt employees in the US generally would expect to see a 5% bonus opportunity of their pay,” says Abosch. “Executives could see anywhere from 50-75 percent or higher.”

BUSINESSES LIKE GIVING OUT BONUSES

The Great Recession may have increased the popularity of bonuses. Companies used to give pay raises as a way to offset inflation, but thanks to a sluggish economy and high unemployment, employers are no longer under pressure to increase worker salaries. 

Bonuses also have other benefits for companies. They are a form of variable pay used to encourage excellence which can lead to higher productivity and higher stock prices. 

“Shareholders also highly value seeing employees have something at risk,” said outplacement expert John Challenger, CEO of Challenger, Gray & Christmas.

Bonuses also help companies keep payroll costs down by not locking themselves into fixed compensation costs. 

"Whether you are making swim suits or selling ice cream there is a seasonality to it. And a lot of business sell the bulk of their sales in the last 3 or 4 months of the year so they have to have way to preserve their payroll in the 8 months that it is sluggish," said Donna Rockin. She counsels business owners and runs Duman Entrepreneurship Center, JVS Chicago.

So if you are star employee, you can expect more bonus, but if you are average you wages may not rise.