I am not saying that the next time your boss offers you a bonus, you should tear up the check and throw it back in their face. Money is money, after all. But it might be an opportunity to explain why you would be much happier about that bonus if it were spelled R-A-I-S-E.
It is a pretty decent moment to be a worker in America and has been for the past couple of years. Wages are rising, especially for lower earners, and now faster than inflation. Companies have had to compete to get people in the door and fight to retain those who are already there.
Many employers have tried to accomplish that with bonuses, offering workers an extra financial treat for signing on or staying on, for the holidays, or for a particularly good moment for the business. But, to quote Joe Biden, here’s the deal: A one-time bonus is often just that, one time. A bonus is not a lasting change to your compensation, and it can be taken away just as easily as it’s given out.
“You want to get the gift that keeps on giving,” said Sharon Block, a law professor at Harvard and former Biden administration official.
Receiving a bonus in place of a pay bump can feel like a gut punch — and like it’s less than advertised when it lands in your bank account. Jenny Petty, a teacher in Arkansas, was miffed over the state legislature’s decision to hand teachers a $5,000 bonus in 2022 instead of giving them a raise. “If they just raise our salary, we’re not going to be taxed so heavily on that. Plus there’s no guarantee year-to-year what they’re going to do,” she said. Bonuses can be taxed at a higher rate than normal wages, though there are some ways to mitigate that, and you might wind up getting a refund.
This year, the state voted to increase teachers’ minimum salaries and give raises, resulting in a $13,000 raise for Petty that will show up in her paycheck for years.
“Pay raises have so much more of a ripple effect because it affects a lot of things, like even what goes into Social Security on your behalf,” Block said. “Anything that is calculated as a percentage of your income, a pay increase is going to ripple out through other benefits.”
Here’s a look at the problems with bonuses, why they may not sometimes even benefit the companies that give them out, and what you should ask for instead — especially now.
Why your boss might like this bonus thing
A bonus is any form of compensation that’s not guaranteed, a proverbial cherry on top of the sundae that is your salary. They’re often doled out after the fact, when a certain target is hit or when the business has had a good year, but not always. Plenty of companies use signing bonuses, for example, as a way to recruit new talent.
Now, I know what you might be thinking here: Aren’t bonuses mainly a thing for already high-paid lawyers and finance guys who manage to get handed thousands of dollars in extra cash each year for ??? reasons? The answer is not really. According to the Bureau of Labor Statistics, in March 2022, 41 percent of private industry and 37 percent of state and local government workers had access to nonproduction bonuses — meaning bonuses for the holidays, longevity, retention, attendance, management incentives, and more. Two-thirds of workers in finance and information had bonus access, but so did over half of workers in manufacturing, a third of workers in education and health services, and a quarter of workers in leisure and hospitality. In other words, this is an issue for workers across the economy.
There are plenty of reasons an employer might want to opt for a bonus instead of a pay raise. For one thing, pay raises are sticky. “On a fundamental level, pay raises are quite a permanent change to compensation. One might think that companies, nothing would stop them from lowering pay, but empirically, that very rarely happens,” said Iwan Barankay, an associate professor of management, business economics, and public policy at Wharton. “There’s a downward rigidity to wages.”
If the economy goes south or business starts to falter, it’s a lot easier to skip holiday bonuses next year than it is to ask everyone to take a 10 percent pay cut.
Raises often include a more comprehensive review of someone’s performance and include objective and subjective measures, whereas a bonus may be based on something specific — a worker helped recruit someone or met some sort of attendance threshold. To that end, bonuses can be used as ways to incentivize workers toward certain behaviors, and companies spend time trying to figure out the right balance to make them work. If the required task to get the bonus is too hard, people don’t bother; the same goes for if the amount of the bonus itself is not generous.
Whether companies use bonuses can depend on what’s happening outside of the firm altogether, Barankay noted, and what’s common among competitors. “When there’s a change in the marketplace, a company will introduce or discontinue bonuses,” he said, noting that monetary incentives are often easier to dole out or get rid of than other, softer and perhaps more psychological measures. “The advantage of money is that it’s easy to pull back and correct it,” he said.
Permanent money > temporary money
I think about the Trump tax cuts a lot, when in late 2017 then-President Donald Trump signed into law legislation that, among other things, slashed taxes for corporations. A bunch of companies subsequently made splashy announcements about spending on workers, including on bonuses.
Much of the fanfare was largely about PR — a lot of these companies had these plans in the works already — and trying to make the tax cuts look helpful up and down income levels. However, as discussed, those bonuses didn’t amount to much, nor were they a lasting change. That’s the rub with a bonus.
“It’s not as good as a permanent raise, that’s the core, and I think workers know that, they’re not fooled,” said Heidi Shierholz, former chief economist at the Department of Labor and the president of the Economic Policy Institute, a progressive think tank. “It makes a massive difference in your expected earnings over a longer period than just the current year.”
A wage increase will continuously mean higher contributions for Social Security and 401(k) matching and retirement benefits. It can also help workers negotiate higher wages in their next jobs. Like it or not, we still live in a world where potential employers ask candidates what their current pay is. I suppose you can try to lie, but a lot of people don’t.
If you’re buying a new house, getting a new car, or applying for some kind of a loan, a lender might not give as much credence to bonuses as they do your total salary.
Paige, who works for a Chicago-based electronics company and asked to use a pseudonym out of fear of jeopardizing her job, recalled her feelings around her company’s decision to hand out a one-time bonus in December 2020 in lieu of the raises employees had been asking for. “A raise is consistent ... you can factor it into your budget,” she said. Her employer has announced it’s doing another “one-time bonus” this year, but again, it’s very much at their whim. “Because they’re phrasing it as a one-time bonus, it can obviously go away at any time.”
Bonuses are not always all they’re made out to be from the corporate angle, either. A signing bonus isn’t going to help with retention — it’s just as easy for a worker to say, “Thanks for the extra $300 that one time, bye,” in three months as it is three years. Short-term incentives are just that: short term.
“Merit increases actually provide a higher sense of security and stability,” said Mengjie Lyu, an assistant professor at the School of Labor and Employment Relations at the University of Illinois Urbana-Champaign. They can also help employees get a line of sight into how to make progress in an organization’s pay structure — especially when there’s transparency around pay.
Employers may ultimately miss out on certain workers by focusing on bonuses over base pay and raises because some people just can’t accept that level of variability in their personal finances. “Employers may think if I use bonuses I’m attracting good performers and people who are more competent with their productivity, but maybe the good performers are risk-averse or have financial constraints, have a family to support, have children to raise,” Lyu said. “That means they cannot go the bonus way, they just want to make sure that they have a secure income level every month.”
The labor market is strong right now — and it won’t be forever
Negotiating at work can be hard. (If you’re great at it, good for you, and teach me your ways.) But this is really the moment to push for what you want. The unemployment rate in the United States is at decades-long lows, and while there are signs the labor market is cooling somewhat, it’s still pretty damn good. Now is the time for workers to try to make some of that strength stick for themselves. At some point, the job market won’t be like this anymore.
“This is such an unusual moment when workers have such leverage. It’s a shame to bargain that away, whether that’s actual collective bargaining or even other just non-union workers deciding whether to take a job or not,” Block said. “We don’t know where the labor market will be next year. Workers won’t be able to say, ‘You gave me a bonus last year, I would like one this year.’ They may not have as much leverage to demand that from an employer.”
That means, practically, that if there’s a signing bonus in the mix, try to see what sort of movement you can make on your base pay instead. That applies to someone applying for a service job and someone looking to land a new gig in marketing. “Employers think that’s the kind of thing that can lure people into the labor market. But again, I think if you step back, workers are much better off getting a higher wage than getting a one-time bonus payment,” Block said.
Workers may not always win this fight. Who among us hasn’t asked for a raise or bump in compensation, either to be told no, flat out, or offered some sort of one-time pile of cash as a consolation prize? Plenty of workers have seen spot bonuses and holiday bonuses come and go, seemingly at random, without any rhyme or reason.
Still, this is the time to go for it, Block said. “This is the moment for workers up and down the wage scale to push for as high wages as possible. We’re seeing wages rise for low-wage workers actually faster than high-wage workers. I can’t think of a time when that’s happened before,” she said. “My advice is then organize a union, so you can be sure that you continue to push for higher wages.”
We live in a world that’s constantly trying to sucker us and trick us, where we’re always surrounded by scams big and small. It can feel impossible to navigate. Each month, join Emily Stewart to look at all the little ways our economic systems control and manipulate the average person. Welcome to The Big Squeeze.
Have ideas for a future column or thoughts on this one? Email email@example.com.