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Michael Meeropol: Don't Be Fooled By The Story Of Bonuses

In January 2018, I delivered a commentary in which I quoted economist Dean Baker comparing the savings that major corporations were getting from the tax cut with the amount of money they were committing to the highly touted bonuses they were giving out.   It appeared that about ONE TENTH of the benefit from the increase in after-tax profits was going to these one “time bonuses.

[For a more recent example, see Dean Baker, “Disney’s Bonuses for Its Workers are Less than 10 Percent of Its Annual Tax Savings”  22 February 2018]

Disney will pay out $125 million in bonuses this year.  Last year, according to Baker’s blog, Disney “…paid $4,422 million in taxes on $13,788 million in pre-tax income for an effective tax rate of 31.9 percent. If the new tax law lowers Disney's tax rate to 21 percent (this assumes it pays the statutory rate, without being able to benefit from various special provisions in the tax code), it would save just under $1.5 billion based on its 2017 income.”   Doing the math, the bonuses they offered amount to less than TEN PERCENT of the tax savings Disney got courtesy of the Congressional majority.] 

(To add insult to injury, the Disney bonus is conditional on the union workers accepting the terms of Disney’s latest contract offer.)

Annual bonuses, such as the ones that Disney is dangling before its workers, are different from raises – and it appears that Disney is not the only giant interested in offering bonuses instead wage increases.   The New York Times just ran a front page story [Patricia Cohen, “What Happened to Your Raise?  It Could Have Become a Bonus”  February 11, 2017, pages 1, 19] noting that businesses in general are showing a growing fondness for these one-time payments.

Giving out bonuses, even annually, is a good strategy for businesses as opposed to granting a wage increase.   Once a raise occurs it becomes part of the wage base.   It is difficult to cut wages once a raise is part of the wage base.   A bonus however can be different every year.  This is especially easy for those companies whose highly publicized announcements represented first time bonuses.   Those bonuses are not guaranteed for NEXT January 1.   And if the businesses had offered these bonuses in order to claim that they were responding positively to the tax cuts they had just been granted as a way of helping the re-election of the members of Congress who had been so lavish in their gifts to these businesses --- well, in early 2019 the businesses will have no need to impress the constituents of those members of Congress.  They will either have been safely re-elected or defeated.

Once a wage increase becomes part of the base pay, it is also the wage for next year.  Thus, any percentage raise the next time around compounds the original raise.

Here’s a numerical example.  Assume you make $40,000 a year.  Would you rather have a $1000 bonus on January 1 or a 2.5% raise?   The two and a half percent raise will add up to $1000 by the end of the year and your pay will remain at that higher level in 2019.   Thus, if you get, say, another 2.5% increase on January 1, 2019, that percentage raise will be a percentage not of $40,000 but of $41,000.  That means your next raise will not be $1000 but $1025.  If you had opted for a $1000 bonus instead of a 2.5 percent raise on January 1, 2018, your wage base would still be $40,000 and your raise would be $1000, not $1025.  You’d lose the extra $25 if you had gotten the one-time bonus instead of a wage hike.

The New York Times article noted that these variable pay outs by businesses --- one time bonuses --- had quadrupled from 3.1 percent of total compensation business budgets in 1991 to 12.7 percent by 2017.   At the end of the article, an employee of a low budget airline (Envoy) is quoted.   While welcoming her bonus she noted that “… it doesn’t fix the long term.   We need a living wage that we can support our families ….   A lot of employees qualify for government assistance.  Some have to work 60 hours a week to make ends meet.”   It’s obvious that for a person actually working for a living a wage increase is much better than a one-time bonus.

This reminds us of how clever the members of Congress were when they created this monstrosity of a tax cut.  As I noted in early January, there will be increases in the take home pay of many American workers due to the TEMPORARY  tax cuts for middle income people.   In addition, corporations will be able to loudly proclaim that the tax cut is what made possible the bonuses and any wage increases they grant.   Yet as Baker made clear, turning ten percent of the benefits from the tax cuts into one time bonuses does nothing to solve the long term problem of wage stagnation.  

That same NY Times article also noted that inflation adjusted median income (including bonuses) of men working full time, was lower in 2016 than it had been in 1973.   And 2016 was a GOOD YEAR for wages.  (Median refers to the income of the person right in the middle – half the people make more, half make less.   The median is the way you measure what is typical of the population.   If Bill Gates walked into a room of 99 people who all make $50,000 a year, the average income in the room will jump dramatically while the typical income (the one of person number 50) will still be $50,000.)

Please do not be fooled by the hyped bonuses and the temporary up-tick in take home pay.  Workers should not be grateful for bonuses that come to them as an alternative to a wage hike.  Those who now are beginning to like the tax cut passed at the end of last year (supposedly 50 percent of the population now have a favorable view of the tax cut) are succumbing to a scam worthy of the con-man in chief in the White House.   The crumbs being shared with ordinary workers as the fat cats make off with the main course should not persuade us to change our minds about the policies of this government and the Congressional majority.   These policies are horrible for the vast majority of people in the country.

“Fool me once, shame on you.  Fool me twice, shame on me!!”

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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