As stagnant wages and rising tuition and medical costs squeeze middle class families, Bloomberg reports that US employers cut employee bonuses this year for the first time in seven years, further straining household budgets despite an ostensibly bright economic outlook. Bonuses slipped a tenth of a percentage point to 12.7% of total compensation this year, according to data from Aon Hewitt, which conducts an annual survey of more than 1,000 employers.
Aon said that while the move may not be dramatic, it's confusing considering the relatively healthy state of the economy. What's more worrying is that the cuts come as part of a broader retrenchment.
“It’s not a dramatic change, but it is counterintuitive,” said Ken Abosch, who heads compensation at Aon Hewitt.
“What’s even more surprising and alarming is that organizations are pulling back their projected spending in 2018,” he added. Companies expect to spend 12.5% of total compensation on bonuses next year, the survey found.
And in the spirit of “the buck stops here,” employers are blaming President Trump for the cuts, explaining that the uncertainty surrounding policies from tax reform to health care is making long-term planning difficult. Fears of an imminent recession have also inspired some employers to pare back compensation spending, risking losing their most valuable employees in the process.
“Despite the strength of the economy, a tight job market, and strong corporate performance, employers have resisted raising wages out of fear of increasing their fixed costs. Those surveyed said they had given out, on average, 2.9 percent raises this year and expect to give around the same next year. The specter of a recession, or even just a bad year, has kept salary increases at that level for the last five years. “There’s just not any appetite to budge on salary spending,” said Abosch. In that kind of climate, the bonus is a much more alluring way to reward workers: It’s not permanent, so companies can choose to hand out bonuses during boom times or withhold them when budgets tighten. Workers who rely on their regular earnings to pay the bills would be justifiably angered by wage cuts, but they may not expect to get a bonus every year.”
And bonuses will likely continue to shrink this year. Ironically, Bloomberg says employers are claiming that Hurricanes Harvey and Irma are forcing them to be more conservative by increasing the chances that inflation could pick up and erode profits. Even after several investment banks warned that the storms could lead to a slight pickup in GDP by increasing construction costs.
“This year, however, companies are skittish on bonuses, too. Their budgets aren’t tight, but they fear an economic downturn is on the horizon—and specifically, those surveyed said, that greater government spending on defense, infrastructure, and hurricane relief could boost inflation and hurt corporate profits. “Organizations are expressing concerns about how all of that is going to get paid for,” said Abosch.”
Oh, and they’re blaming Congress, too.
“There’s something else giving employers pause on bonuses, too: “The accomplishments, or lack thereof, in terms of congressional results this year, and just some uncertainty about leadership in general out of Washington,” Abosch said. Congress has passed a $700 billion defense funding bill and a $15 billion in hurricane relief, but the passage of tax reform and health care legislation, two Republican priorities that would have a major impact on employers, is far from assured.”
US wages have been stagnant for years even as household wealth has ballooned to a record $96.2 trillion, according to the Fed’s latest flow of funds report."
Unfortunately, the benefits of this increase have largely accrued to the richest Americans, who own the majority of tradeable, and non-tradeable, assets in the US. According to the survey, virtually all of the rise in household net worth has only benefited a handful of the richest
Americans, with the top 10% of the wealth distribution holding 76% of all family wealth.
Because of this, the bonus cuts will almost certainly impact spending decisions made by middle class families, which could have economic ramifications for GDP, given the consumption-focused state of the US economy.
We wonder: With more cuts expected, whom will employers blame next to justify their “frugality”?
Our money’s on Putin.