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OM in the News: The Changing Employee Incentive Systems

May 28, 2015
Most employees at Squaremouth, a software company in St. Petersburg, Fla., receive a small annual raise, but they're also treated to perks like the new Apple Watch Sport.

Most employees at Squaremouth, a software company in St. Petersburg, Fla., receive a small annual raise, but they’re also treated to perks like the new Apple Watch Sport.

“Yacht-size bonuses for Wall Street big shots and employee-of-the-month plaques for supermarket standouts are nothing new, but companies’ continued efforts to keep costs down have pushed employers to increasingly turn to one-off bonuses and nonmonetary rewards at the expense of annual pay raises,” writes The New York Times (May 26, 2015). The share of payroll budgets devoted to straight salary increases sank to a low of 1.8% in the depths of the recession, from a high of 10% in 1981–and has rebounded only to 2.9% in 2014. Short-term rewards and bonuses — known as variable compensation — accounted for an average of 3.9% of payrolls in 1988. Last year, it hit a record 12.7%.

The shift in compensation that favors one-shot-only rewards over incremental increases in salary that compound over time also appears to be playing a significant role in wage stagnation. It took off after the economy went into a nose-dive in 2001, but is expected to continue even as the unemployment rate drops and the labor market tightens. Employers like one-shots precisely because they are temporary. They save money over the long run because they don’t lock in raises, giving managers greater control over budgets.

“I personally love suddenly finding an unexpectedly large sum added to a month’s pay,” said one Michigan doctor.  “It probably wouldn’t seem nearly as thrilling if it were just spread out across salary payments each month.” While a few more dollars in each paycheck may lack that Christmas-morning feeling, a raise is the gift that keeps on giving. The benefits of wage increases are compounded each year, with every future raise building on the back of the one before it. In the days when bosses handed out holiday hams or turkeys, employees would often walk to the top of the building and drop them off to show their displeasure. Their message: cash preferred.

This is a topic (seen in Chapter 10 on page 403, “Motivation and Incentive Systems”) about which your students will all have opinions.

Classroom discussion questions:
1. What are the benefits and downsides to the one-off bonus from the corporate perspective?

2. From the employee perspective?

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