Bonuses After Tax Cut Don’t Always Live Up to Their Billing

Bonuses After Tax Cut Don’t Always Live Up to Their Billing

At Travelers, an insurance company, the $1,000 bonus will be distributed to workers who earn $75,000 or less and who meet certain objectives in annual performance reviews.

Given how slowly lower- and moderate-wage workers’ pay has risen in recent decades, any added cash is welcome. But for many workers, the one-time bonuses reflect a familiar pattern: The bulk of economic rewards flow to stockholders, who tend to congregate at the top of the income scale, while most working Americans receive a relatively tiny portion.

What Companies Are Doing With Their Savings From the Tax Law

The tax overhaul has prompted hundreds of employers, including at least 40 members of the Standard & Poor’s 500-stock index, to pass on savings to workers.

“It’s a nice gesture on the part of employers,” said Ken Abosch, compensation practice leader at Aon Hewitt, a human resources consulting firm. “And it appears to be great for employees who up until this point were not eligible to receive any type of bonus opportunity,” such as part-time and hourly workers.

“But I don’t see anything that suggests this is going to be ongoing,” he added.

Particularly since the recession, businesses have been reluctant to increase fixed costs and have relied more on one-time bonuses than permanent raises, Mr. Abosch said.

A survey of 241 companies by Aon Hewitt in December found that 83 percent did not expect the tax cuts to result in any changes in future salary increases.

A somewhat higher proportion said they expected to award bonuses, but estimated the awards would not exceed 2 percent of annual base salaries.

“That is significantly less than what would be a competitive bonus target,” Mr. Abosch said.

Based on data from thousands of companies, a competitive bonus for workers earning, say, $30,000 a year equals 5 percent of base salary, he said. Retail workers who get a $250 bonus, by comparison, are receiving just 0.8 percent. (A $1,000 bonus equals 3.3 percent.)

For $50,000-a-year employees, the competitive bonus rate is 7.5 percent, Mr. Abosch said. A $250 bonus amounts to 0.5 percent, while a $1,000 bonus equals 2 percent.

“And as you go higher up the wage scale, it becomes less and less consequential,” he said.

At the same time, some corporations offering bonuses will be able to subsidize their payouts with taxpayer funds. If they announced their plan before the end of 2017, they will be allowed to deduct the cost of the bonuses at last year’s 35 percent corporate rate, even if they pay employees in the early months of 2018, after the rate dropped to 21 percent.

“That’s a very advantageous tax rule,” said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

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