Why are Companies Replacing Raises with Bonuses?

Wednesday, May 27, 2015
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It used to be getting a bonus from your employer was great news. However, bonuses are now replacing raises in an effort to save employers money and increase their budget flexibility.


Described as a “quiet revolution in compensation,” bonuses are now a hot thing in the private sector, and not just for executives. More ordinary employees are getting bonuses “at the expense of annual pay raises” from companies to cut costs, Patricia Cohen wrote at The New York Times. “Employers like one-shots precisely because they are temporary,” Cohen added. “They save money over the long run because they don’t lock in raises, giving managers greater control over budgets, particularly during downturns.”


Aon Hewitt’s annual survey on salaried employees’ compensation shows that since the 1980s, the frequency of raises has been going down, while bonuses have grown in popularity. In 1981, the share of payroll budgets devoted to straight salary increases was 10%. This figure dropped to 4.3% by 2001, and even further to 2.9% by last year. In contrast, short-term rewards and bonuses went from 3.9% in 1988 to 8% by 1998 to 12.7% in 2014.


Another disadvantage of bonuses to workers is that lenders don’t look at that money the same way they do at a regular paycheck when it’s on a mortgage application. Bonuses also come at the whim of an employer; it’s a lot easier for a bonus to be denied than to cut a worker’s salary. Pensions are also often based on salaries, so money earned in a bonus isn’t part of those calculations upon retirement.

-Noel Brinkerhoff


To Learn More:

One-Time Bonuses and Perks Muscle Out Pay Raises for Workers (by Patricia Cohen, New York Times)

Why ‘You’re Getting a Bonus’ Is Actually Horrible News (by Martha White, TIME)


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