Employers Choose Bonuses Over Raises

https://www.wsj.com/articles/benefit-gains-exceed-wage-growth-new-labor-data-shows-1537289455

by JumpCrisscross • 8 years ago

89 65 8 years ago

wsj.com

circadiam• 8 years ago

paywall bypass: https://outline.com/JzU3Zu

gok• 8 years ago

That’s a different article

newscracker• 8 years ago

I wonder if there's a need to read the entire article, because anyone who thinks a little bit about continuous costs and one off costs will arrive at the same conclusion as mentioned in the first paragraph:

a move that gives them more flexibility to dial back that compensation if the economy turns sour.

To add further, though salary cuts can be done by companies (this may vary across geographies), it's usually a little more cumbersome and also sends a different message to employees. It's a lot easier to put in vacation caps (thus chopping off the ability to use the provided compensation completely) or not pay a bonus. While bad for morale, at least some employees may not consider these moves as a loss from the status quo. That's why different kinds of variable pay schemes is very attractive for employers so that they have several knobs to control.

As far as I'm concerned, employees should consider their base salary, benefits and some expected bonus as their fixed compensation so that they can better understand if the company is just skimming money and not rewarding their work because top executives want the bonuses for themselves (even when the situation looks like it wouldn't hurt to give some additional compensation). This behavior is quite common in many companies, and is probably one of the reasons why the CEO to average employee compensation has become increasingly skewed over time and is getting worse.

On the other hand, given a choice, most employees would choose a salary increase (continuous increase) over an unpredictable and one off bonus or any other benefit that can be easily cut.

olliej5• 8 years ago

Lots of executive have “low” salaries in exchange for one off* bonuses :D

* though they do seem to get a lot of one offs...

coaxial• 8 years ago

In my experience, bonuses are also very discretionary and completely opaque. I've seen countless offers touting a sizeable bonus at the entire discretion of the company with no way to know what are the criteria for award. And what do you know, nobody ever got these phantom bonuses because reasons. But it was included in offer letters and used to lower the negotiated salary as of it was a sure thing, and not everyone was savvy enough to push back.

foobiekr3• 8 years ago

I've worked at companies that document bonuses and companies that don't. Documented bonuses are a completely different situation.

My current employer is documented: it calculates your pro-rated fraction at each grade level for the bonus period two deal with promotions and then divides by 2 (bonus is paid out in two payments per year) and then multiplies grade level * company performance * employee performance. Any employee can calculate exactly how their manager ranked their performance. They can complain (or leave). With one weird exception people's grade levels are visible to others which means their bonus target is visible. For some people, 100% of their details (everything: base, etc.) are sometimes known to anyone who is interested (this applies to me).

(I should note that I don't think the compensation is transparent at VP level and above and know from experience there are tons of shenanigans there.)

When I worked for companies that did not document the bonus methodology, it was appalling. Bonuses were for glory hounds and friends of management. Terrible. A lot of employees didn't even know bonuses were paid.

I think the same issues exist for compensation (equity and base as well as special packages or retention bonuses) that exist for bonuses. It would be interesting to see if you could meaningfully execute a company with total transparency but I don't think it would survive contact with reality.

reboog711• 8 years ago

This was a sticking spot to a recent negotiation I had. I fought for higher salary, but they added it into bonus.

cpeterso• 8 years ago

Raises also compound if you get a raise year after year. A bonus probably won't increase each year.

mc32• 8 years ago

>a move that gives them more flexibility to dial back that compensation if the economy turns sour.

That’s the only thing that makes sense. Asian economies learned this a while ago —but it leads to seasonal departures (after bonus distribution).

But yeah much easier to say bonuses will be reduced than to say salaries will get cut during lean times.

dunpeal3• 8 years ago

To add further, though salary cuts can be done by companies (this may vary across geographies), it's usually a little more cumbersome and also sends a different message to employees.

It's a lot more cumbersome, and will create a lot more friction and problems.

The key reason there's even a distinction between salary and bonus is that a salary is guaranteed as long as you work there, while the bonus is not.

rootusrootus• 8 years ago

OTOH, when the bonus has been paid out reliably for years, then the distinction gets pretty blurry. My company just cut bonuses this year for the first time in memory, by almost 40%. In the last two weeks we have had a half dozen new resignations per day. The company is profitable, they just set a target for year-over-year revenue gain that has not ever been met in the company's history, so that they'd have an excuse to pay less. And now everyone's pissed and the best folks are walking.

I am pretty sure it was deliberate, a way of cutting way back without having to give severance or make the news.

henrikschroder• 8 years ago

Another aspect is that, depending on your jurisdiction, salary is used as the base for calculating unemployment pay, parental leave, pensions, severance, and similar.

As an employee, if you're given the choice between salary increase and bonus, the salary increase is worth way more in the long run.

olliej5• 8 years ago

Presumably a raise brings a long term cost as it’s much harder to lower someone’s wage than to not give them a bonus.

Similarly I suspect people take a bonus of X amount more happily than a raise that would work out to the same amount (like credit purchases talking about monthly costs making a purchase seem cheaper, even when you end up paying more). Of course it’s possible a lump sum all at once has more intrinsic “value” to the recipient (eg getting a bonus right now vs more money spread over the next year)

maxxxxx10• 8 years ago

"Similarly I suspect people take a bonus of X amount more happily than a raise that would work out to the same amount ”

I think most people know that a bonus is a much worse deal for most people who aren't VP and above level. A salary increase locks you in for the next year but the bonus can be taken away.

jtr_47• 8 years ago

I agree- Also, bonus pools also decrease in some groups year after year because the new project pool has dried up & you end up in BAU (business as usual) support mode and can't get another "new" project. New projects have nice bonus pools for most folks.

Salary increases can also decrease, but you get something VS a bonus which could be 0 - some percentage of your base salary in some cases.

olliej5• 8 years ago

Yeah, I’m not so sure - basically imagine you’re an low/minimum wage worker. You (and millions who are earning more than the anemic us minimum wage) are fundamentally trapped in a paycheck to paycheck existence. A few hundred dollars right now could actually be worth more than an equivalent pay rise, because you don’t have to wait an entire year to have recovered it. That money you could use to immediately pay down debt, and you’re low income so you credit interest will be higher than the rich.

Don’t get me wrong: I know that in general a bonus is probably cheaper than an actual wage increase for the company, but there’s a fairly large group where it can legitimately be worth more to someone.

(Please no one respond with “poor people waste the bonus” it’s not helpful and also largely not true)

throwaway9292• 8 years ago

It can be extremely hard to predict revenue. We've made exactly this choice so that we can dial back compensation if revenue goes down, hopefully without sending the wrong message.

anigbrowl• 8 years ago

I guess the wrong message here would be 'our business plan isn't very robust.'

thedufer• 8 years ago

Smoothing volatility is expensive in some businesses. Plenty of rational people would prefer $90 this year and $120 next year over a consistent $100 each year.

no-such-address• 8 years ago

Is this actually a surprise to anyone? Year 1: here's an extra x% of your salary! Aren't you happy! Year 2: here's the same x%! Aren't you just as happy.

Compare this with getting a raise.

exabrial• 8 years ago

Given how badly the Democrats oppose anything Trump signs off on, this is a smart bet. It's sad we can't look past party lines on good things like this

maxxxxx10• 8 years ago

Can you be a little more specific?

k__• 8 years ago

When I read about such behavior, I'm happy not being employed anymore...

tejasmanohar• 8 years ago

Sometimes, I wonder what percent of the people who upvote these links actually read them. I hit my free limit on WSJ opening HN links and can't read this.

freddie_mercury• 8 years ago

You must be new to the internet :)

But, yes, it would a better world if people read links before upvoting/downvoting/commenting.

tomhoward• 8 years ago

Most people hit a paywall when trying to read WSJ articles, but it can always be gotten around with an archiver like https://archive.is or https://outline.com

A commenter usually helpfully pastes a link, like this one has today:

https://news.ycombinator.com/item?id=18028925

arnvald2• 8 years ago

Besides flexibility for the employer, there's one more reason why they prefer bonuses over salary raise: if you leave the company in the middle of the year, you don't get half of the bonus, you get nothing.

I understand employer's perspective here: they don't know how well the company will perform, you can't predict everything. So bonuses are a good way to say "if we achieve our goal, you will get part of it as a reward".

However, very often recruiters include the bonus as part of annual salary when presenting the offer. This is unfair to the candidate - since bonus is not guaranteed, it shouldn't be included in the annual compensation, it should always remain separate with a clear information about conditions under which the bonus will or won't be granted.

cuchoi• 8 years ago

A optimal theoretical contract for an employer is:

- If good outcome, pay a huge amount of money.

- If bad outcome, pay 0 (or even negative, by getting money from the employee).

This will incentivize workers for good outcomes. Of course this is unfeasible and difficult to measure, but bonuses make contracts closer to this theoretical contract.

lallysingh2• 8 years ago

It also puts all the risk on the employees. They showed up, can they did their work. Whether that resulted in money made is a management issue.

fzeroracer• 8 years ago

During my prior job hunt I interviewed with a large financial company. I was upfront about my salary requirements and every step of the way they aggressively negotiated the final amount lower and lower until it was barely more than what I had earned at my prior job and mind you I was already being paid below market rate.

Their direct reasoning for this was that the company offered strong end of year bonuses up to a ridiculous amount which in the fine print was dependent on a bunch of nebulous criteria. This was a company making money hand over fist.

Needless to say I ended up not going along with that offer. As you've mentioned companies likely do this because not only can they fluff up an offer letter to look better, but because they have multiple avenues to deny you the bonus and save even more money rather than paying candidates a proper amount.

esoterica• 8 years ago

Bonus-centric compensation schemes are the norm in the financial industry. Discretionary income isn't a fake promise designed to trick employees, for many firms it represents the bulk of actual realized employee compensation. If you had an offer at a large company it should be pretty easy to dig around and figure out what the actual average bonus numbers are like.

balladeer• 8 years ago

In India this is exactly what happened with me. It was GS. Eventually I choose a startup (one of the large ones) as the GS team I was supposed to get into had a true legacy code and complete focus was maintaining the old, not at all brining in something new.

They were offering me monthly salary which was a lot lower than what the startup offered (the one I eventually joined which was CTC = 95% fixed + 5% bonus). I tried to strike a balance with GS HRs but they were adamant and low monthly salary and an insane year end bonus. It was simple take it or leave it. I declined. I think it was a good call. That year that team got fried and bonus was low and there were firings too (knew some people in that team).

From my experience I have noticed something that goes on in almost every company - your yearly bonus is dependent directly on your final rating and your final rating, love it or hate it, is almost entirely decided by the last few months and god help you if your manager changes towards the end.

jknz2• 8 years ago

This may be a short-sighted policy for the employer.

Once-in-a-year bonuses give very little incentive to produce efficient work day-to-day. Because bonuses are given far in the future, employees have little to no rapid feedback on their work; and being far in the future some employees simply forget about them (or believe they might change jobs before bonuses are given so why work hard anyway).

Giving weekly or monthly bonus would give a rapid a powerful feedback to employees; and bonuses would be much connected to actual work than the corporate politics that happen just before the yearly bonus.

Another thing that employers risk with this policy is employees leaving en-masse as soon as the bonus is given. Some consulting/audit companies give bonus after the summer, just before their busy season starts; and employers learn the hard way that giving the bonus as late as possible is not as smart as it first sounded.

hackits• 8 years ago

Very common for software developer working in Asian countries. As soon as the end of year bonus is given out they can walk into their office the next day and everyone has resigned and moved onto another company with all your IPO and business knowledge.

JackFr• 8 years ago

It's not short sighted.

In finance it used to be the norm and is largely moving back that way.

Using it as a lever for employee performance is a secondary effect (that can be done just as effectively with salary). Primarily it allows the firm to manage comp costs to be in line with the firm's performance. During a downturn it allows you to cut comp by like 25% without reducing headcount. The possibility of employees leaving en masse is certainly considered but it's not very common.

wolco• 8 years ago

Getting 20 dollars extra a week doesn't feel worth it vs 1000 dollars at Christmas

manigandham• 8 years ago

The counterpoint is that the "bonus" amount seems larger when given as a single payment, and doubly so since most people only budget against their paycheck. Add in the end of year holiday season and it's very effective.

maxxxxx10• 8 years ago

"if we achieve our goal, you will get part of it as a reward".

And next year the goal post gets raised. That's how it works at my company.

ChuckMcM• 8 years ago

I have a mixed opinion on bonuses.

On the one hand as engineers get more senior it becomes more possible for them to 'move the needle' in the parlance and do something really impactful for the company. Its also possible that they might do something really great one year and nothing notable for the next four years. So bonuses allow you to reward for work done "above an beyond" without a long term salary expense hit that might not be as justified in later years. So in that regard I think making more of the pay variable as you get more senior makes a lot of sense.

But then bonuses can also be used as tools by managers to foster unhealthy behavior. When they are a 'beauty contest' (basically people who the manager likes get good bonuses unrelated to their contribution) then they are demoralizing to the group and promote sycophantic behavior over outstanding technical contribution.

When I was at Google they tried to have their cake and eat it too, on the one hand they said your bonus was all algorithmic (personal multiplier, company multiplier, salary) but they refused to tell you what your personal multiplier was. So your manager could give you a really happy sounding review and a personal multiplier of .1 or something and you had no way of knowing if what you did was really useful or if they were just blowing smoke. It was pretty clear that management reverted to what managers do, which is lean the rewards toward people that supported their agenda and away from people who didn't, regardless of "impact" (positive or negative!) to the company.

Bonus plans that work are ones where you establish clear measurable goals for the year which can be objectively adjudicated. If you make all the goals you get the full promised bonus, you make a fraction of them, you get the prorated bonus. Weak managers will push back on those because they don't have the tools to evaluate the difficulty of the goals. Something I suggested at Google could be peer reviewed (they still didn't like it).

I don't have any magic bullets here, having experienced no less than six differently structured bonus programs they all seemed to leave some folks feeling they were treated unfairly.

SomewhatLikely• 8 years ago

A raise has added value also in that base salary seems to go further when negotiating your next jump. Of course, this also motivates the employer to give bonuses vs raises.

analog31• 8 years ago

I've thought about this, and wondered if I should just show my W-2 if asked about my current salary in a negotiation. It doesn't differentiate between salary and bonus. I would have no problem stating outright that I don't care how they pay me, so long as it's a hard offer and adds up to the right amount.

tlear• 8 years ago

Well it is not like the next employer has any way to know if the number you gave is your salary or your salary + bonus

Employers Choose Bonuses Over Raises

Related Stories