Why Companies Are Saying Bye-Bye to Yearly Pay Bumps

Why Companies Are Saying Bye-Bye to Yearly Pay Bumps

There's some good news on the pay front for Americans: More workers are bringing home fatter checks. But here's the catch: Much of that hike is coming from performance-based bonuses, not raises.

According to a survey by human resources firm Aon Hewitt, companies plan to allocate an average of 12.7% of their 2015 payrolls to variable pay, which is compensation given when particular measures of success are achieved. That number is the highest it has been in more than three decades, and as many as 91% of employers feature some kind of variable pay program—compared with just 78% in 2005.

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So why are employers jumping on the bonus bandwagon? The economic recovery is a big factor, Kenan Abosch, who leads the compensation consulting practice at Aon Hewitt, told The Wall Street Journal. As the job market improves, companies are looking for ways to hire and retain the cream of the crop.

But the reason why employers are dangling bonuses rather than higher salaries is because variable pay doesn't require committing to the annual costs that year-over-year salary bumps require, helping companies control their fixed expenses. Plus, performance-based pay encourages staff to produce just that: stellar performance.

Base salaries did see a nominal increase of 2.9% in 2014, but Abosch predicts that will more or less stagnate, as more companies increasingly turn to variable pay systems. Even industries that haven't traditionally relied on bonuses, such as agriculture, higher education and the federal government, are starting to adopt them to attract more talent.

But just because performance-based comp is becoming more popular doesn't mean you shouldn't advocate for yourself if you think you deserve better pay. Check out our guide to requesting (and scoring!) a raise.

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