Bonuses are making up a bigger and bigger percentage of companies’ payrolls

August 27, 2014

(Illustration for The Washington Post)

Companies aren't budging much when it comes to raises. But they are devoting more of their total compensation budgets to bonuses than they ever have in the past.

The human resources consulting firm Aon Hewitt is releasing its annual U.S. Salary Increase Survey on Wednesday, which reveals that performance-based annual bonuses made up 12.7 percent of payroll in 2014. That's the highest ratio companies have paid out of their budgets toward bonuses since the firm began keeping records 35 years ago.

This year's figure represents a significant jump from 2008, when it was only 10.8 percent; and even from 2013, when it was 12.0 percent. Companies surveyed also expect the trend to continue, projecting that they would again set aside 12.7 percent of their payroll for bonuses in 2015.

Ken Abosch, who leads the firm's compensation practice, says that "since 2008, when everything fell apart, there really hasn’t been anything interesting to talk about" when it comes to employee compensation. "All of a sudden in 2014 we see a spike — a significant spike — on bonuses, which raises our attention to a trend we’ve been watching. Companies are shifting their focus away from their fixed costs and are willing to put more money on the table if the performance is justified."

Abosch says companies prefer allocating money to performance-based pay for several reasons. To start: It keeps employees focused on good performance rather than just showing up, and it allows companies to reward and retain their really valuable employees.

The other big reason is that it keeps companies from having to commit to higher base salary levels, which are much harder to pull back when the economy turns south again. "Companies are still very reluctant to spend more on fixed costs," Abosch says. With bonuses, "they pay out once in cash, and the company starts at zero the following year. It makes it attractive to employers because they can project a significant expenditure, but only incur the expense if they have good or great results."

While the payroll ratio that companies are allocating to bonuses is reaching record highs, that doesn't necessarily mean the average absolute size of the bonus is increasing at an equal rate. Abosch says the size of employees' bonuses, whether five percent of their salary or 40 percent, has remained relatively stable over time.

Salary increases are also fairly stable. In 2014, raises for salaried employees were 2.9 percent, the same as 2013 and only slightly higher than 2012, when base pay increases rose 2.8 percent. Raises for salaried employees in Washington D.C. were just above the national average, at 3.2 percent, essentially tied for fourth place with three other cities.

For employees, Abosch says, the message is that the rules of the workplace have changed. "It's no longer a world where salaries increase and everything is based on that," he says. "There’s been a change in thinking and more of your compensation growth in the future will be coming from your bonus."

While 91 percent of the companies in the survey pay out annual bonuses, Abosch says there's a lesson in here for employees who work at the few who don't: "You might want to rethink your situation. There's no way an organization that doesn't pay bonuses is going to make up the difference. You're going to be at a disadvantage."

Read also:

Why slackers still get bonuses

Why more companies should pay employees to quit

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.
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