Bonuses or pay raises: Which works best?

In December, immediately after President Trump signed big corporate tax cuts into law, high-profile businesses such as AT&T, Comcast and Walmart announced they planned to give bonuses to their employees.

Other companies, including CVS and Walmart, said they would raise the minimum wage entry-level employees receive, with corresponding increases for higher-paid staff.

Both strategies recognize a tightening job market. Which one is right for your organization?

Companies that offered bonuses in December realized significant 2017 tax advantages. Given the timing of the tax legislation just before the end of the year, raises would have had a much smaller impact on 2017 tax liability.

And of course, bonuses are a one-time expense that doesn’t lift the compensation floor the way pay raises do.

HR Forms D

Bonuses fall into two categories: discretionary and nondiscretionary. The 2017 year-end bonuses were discretionary, meaning they were not tied to the employee’s performance.

Nondiscretionary or performance-related bonuses become part of a nonexempt employee’s base pay for the purpose of calculating overtime pay under the Fair Labor Standards Act. Additionally, they represent a contractual obligation the employer must honor.

Advice: Always consult your attorney to identify FLSA compliance implications when providing nondiscretionary bonuses.

Employers that face stiff competition for talent may find that raising wages makes more sense than offering bonuses. Depending on the industry in question, employers may choose to boost wages across the board or target key competitive skills for higher increases.

In any case, employers must keep their overall strategic plan in mind. For example, CVS is planning to merge with Aetna Healthcare in a new venture that should bring more traffic to the store’s pharmacy and urgent care clinics. Lowering turnover costs by raising base pay may be key to smoother operations during a time of profound organizational change.