Paltry Pay Raises? The Money May Be Going to Benefits

By boosting benefits now, employers can scale back later if the economy turns sour

Dana Wilkie By Dana Wilkie October 9, 2018
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To hire good workers and keep them happy, U.S. employers appear to be relying on benefits, such as bonuses and vacation time, more than on salary increases.

Aon, the human resources consulting firm, noted in its annual survey of company pay practices that there has been "a continuing dramatic shift in the mix of compensation."

In 1991, spending on temporary rewards and bonuses for salaried employees accounted for an average of 3.1 percent of total compensation budgets, while salary increases amounted to 5 percent, Aon reported. In 2017, those same temporary rewards and bonuses consumed 12.7 percent of those budgets, while raises amounted to 2.9 percent.

"We've seen an uptick in candidates questioning potential employers about benefits across the industries we recruit for, including administrative, creative, technology and legal," said Brett Good, senior district president for specialized staffing firm Robert Half International, based in Menlo Park, Calif. "This tells us that candidates are closely examining quality-of-life issues."

Is Your Company Afraid to Raise Base Pay?

The economy is strong, unemployment is at an all-time low, many businesses are turning healthy profits, and the financial markets have surged. But these developments have not translated into robust wage growth for many U.S. workers, even though basic economic theory holds that this should have happened. Instead, wages for many low- and middle-income workers have remained relatively stagnant, in some cases barely keeping pace with the yearly rise in the cost of living and in other cases not keeping pace at all, according to a four-part series published by SHRM Online.

Why would employers be investing more in benefits than in base wages?

"One possibility is that employers have become more risk averse after the Great Recession, so they are restructuring [compensation] to give themselves more flexibility in case of a downturn" in the economy, said Fatih Guvenen, economics professor at the University of Minnesota.

Investing in benefits is "not necessarily a fixed cost," said Oliver Cooke, executive director at financial-services recruiter Selby Jennings in New York City. It is easier and quicker to take away benefits—including bonuses and vacation time—if the economy turns sour.

"You can give your top performers a nice end-of-year bonus as a retention tool, and you don't have to raise base salaries across a large number of people," he said. "Being involved in placing and moving around thousands of candidates per year in the U.S. across different industries, we see that it's also proving to be successful in terms of retention. This of course varies across different industries. If you take finance as an example, people are generally more money-motivated than in other industries."  

Undergrads Tend to Value Base Pay over Hefty Benefits

Yet many college undergraduates, encumbered with large student loans, want to make good money after college and are willing to give up greater job security and richer benefit packages in exchange for bigger paychecks, according to polling by LendEDU, a Cedar Rapids, Iowa-based marketplace for private student loans.

Good acknowledged that pay raises that don't—or that barely—keep pace with the cost of living could be a disadvantage to workers in the long run because their current pay impacts their earning potential down the road. But, he said, "it really depends on the worker and their individual needs.

"For example, as professionals are getting older, benefits like retirement savings plans and premium health insurance might be more appealing. On the other hand, professionals who live in areas where the cost of living is high might seek the higher salary over a standout benefits package."

[SHRM members-only resource: Salary Survey Directory]

Said Cooke: "Although wages haven't risen in line with cost of living, it's not necessarily a disadvantage to the worker.

"There are several reasons for this," he said. "In short, people are generally realizing that money isn't everything. Historically in the U.S., you were paid well, but benefits were scarce. For example, [paid time off] used to be about a standard 10 days. Now we are typically seeing 15 to 20 days as standard. Factors such as one's manager, the content of the work, the workplace environment, the culture of the business, work/life balance and the ability to learn new skills can far outweigh the benefit of being paid a little more annually, and people are generally wiser to this fact than in the past."

Paid and even unpaid vacation are also appealing in a society where leisure time has become more valuable to the worker and where whether a worker can take a longer vacation is at the employer's discretion, Guvenen said.

"Similarly, it is difficult for a worker to improve some aspects of his or her health care plan—such as the choice they have in doctors, hospitals and procedures—unless it's provided by the employer. In this case, it may be more effective to give benefits than a higher salary." 

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