More employees get bonus instead of raise

Millions of people have hopes of getting a raise this year, but many employers are sending this message: You will have to earn it as a bonus.

Increasingly, companies are moving away from the traditional annual pay raise in favor of beefing up the amount of money earmarked for employee bonuses. The bonuses are largely based on performance, meaning only the most productive employees — or those lucky enough to be in a profitable company or division — will reap the bounty.

Once the province of upper management and executives, bonuses are ending up in the pockets of a much broader group of employees than they used to. Mercer Human Resource Consulting reports in a recent survey that workers down to the clerical level are now commonly eligible for bonus pay. At companies that grant bonuses across the board, clerical and support staff generally earn payments of 3 percent to 5 percent of annual salary.

Executives, of course, continue to pick up the biggest bonus checks each year, typically from 30 percent to 50 percent of their base pay. Upper managers generally receive 15 percent to 25 percent of their underlying pay, while middle managers are typically eligible for bonuses of 10 percent to 15 percent.

The move toward bonuses comes as overall salary increases are expected to be measured again this year. A recent salary survey by Hewitt Associates, a human-resources consulting firm, shows that companies expect to offer pay raises of about 3.4 percent to 3.7 percent for 2005, depending on an employee’s corporate rank. That comes on top of similar pay raises in 2004, which Hewitt calls “some of the lowest increases ever recorded” in the 28 years the consulting firm has gathered and analyzed compensation data. Moreover, those raises will just barely keep up with inflation, which is running at about 3.6 percent annually, according to Economy.com. In the early 1990s, workers typically received raises of 5 percent or more.

By contrast, companies committed nearly 10 percent of their annual payroll to pay-for-performance bonuses in 2004. That’s up from the 8.8 percent allocated to bonuses in 2003, and marks a significant escalation from 3.8 percent in 1991.

Some companies use egalitarian bonus-pay structures. If the company as a whole, or a particular division, meets established production or profit goals, then everyone benefits. Other companies operate a meritocracy in which workers in the same job could earn different pay based on their own quarterly or annual performance.

To determine performance, companies often look at both objective measures — quantifiable goals such as sales targets or cases handled — and subjective ones, such as how well an employee gets along with colleagues and clients.

Companies are focused on bonuses over pay raises for several reasons. Inflation remains relatively tame, meaning companies aren’t feeling pressured by the economy to raise salaries. Job creation remains lethargic, so there is little pressure on business to raise pay in order to attract workers.

Another issue: Companies, seeking to remain competitive globally, want to keep their fixed costs low. Raising someone’s salary, of course, is a permanent cost that a company generally must live with in subsequent years. Bonuses, however, are optional from year to year, allowing companies some control over a big expense.