February 5, 2005


Phasing Out the Annual Raise:: More Firms Opt for Bonuses (Jeff D. Opdyke, 2/01/05, The Wall Street Journal)

Millions of people are looking toward 2005 with hopes of a getting a raise, but many employers are sending this message: You will have to earn it as a bonus.

Increasingly, companies are moving away from the traditional annual pay raise in favor of beefing up the amount of money earmarked for employee bonuses. The bonuses are largely based on performance, meaning only the most productive employees -- or those lucky enough to be in a profitable company or division -- will reap the bounty. [...]

The move toward bonuses comes as overall salary increases are expected to be measured again this year. A recent salary survey by Hewitt Associates, a human-resources consulting firm, shows that companies expect to offer pay raises of about 3.4% to 3.7% for 2005, depending on an employee's corporate rank. That comes on top of similar pay raises in 2004, which Hewitt calls "some of the lowest increases ever recorded" in the 28 years the consulting firm has gathered and analyzed compensation data. Moreover, those raises will just barely keep up with inflation, which is running at about 3.6% annually, according to Economy.com. In the early 1990s, workers typically received raises of 5% or more.

By contrast, for the 2004 bonus season, companies have committed nearly 10% of their annual payroll to pay-for-performance bonuses. That is up from the 8.8% allocated to bonuses in 2003, and marks a significant escalation from 3.8% in 1991. [...]

Some companies use egalitarian bonus-pay structures. If the company as a whole, or a particular division, meets established production or profit goals, then everyone benefits. Other companies operate a meritocracy in which workers in the same job could earn different pay based on their own quarterly or annual performance.

Many companies use a hybrid approach. At Alpharma Inc., a Fort Lee, N.J., generic-drug maker, divisional profit targets drive part of the bonus calculation, with the other part based on specific goals set for each employee. Alpharma has seen a connection between company performance and employee incentive, says Mike Butler, the company's vice president of compensation and benefits. As such, "our thrust in the last two to three years has been putting more money into incentive compensation," Mr. Butler says.

To determine performance, companies often look at both objective measures -- quantifiable goals such as sales targets or cases handled -- and subjective ones, such as how well an employee gets along with colleagues and clients.

Keeping Fixed Costs Low

Companies are focused on bonuses over pay raises for several reasons. Inflation remains relatively tame, meaning companies aren't feeling pressured by the economy to raise salaries.

In the deflationary environment, neither companies nor employees have any margin to raise their prices, which feeds the deflation.

Posted by Orrin Judd at February 5, 2005 6:06 AM
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