Why So Many Employers Are Getting Rid of Raises

When work is overwhelmingly frustrating, sometimes the only thing your brain can comprehend is a daydream about what you’d do if you had money to burn. Unfortunately, your odds of being the next lottery winner are low. But that annual pay raise is still in play, right? Maybe you could use that money to buy a boat or backpack through Europe like you’ve always wanted.

Well, don’t hold your breath. Kiplinger data predicts pay raises will hardly surpass yearly inflation rates in 2017, let alone provide any semblance of a monetary cushion. Hardworking employees can expect a 3% pay increase in 2017. Some high-performing employees could see increases between 4.5% to 5%, while low performers might see increases of 0.7% to 1% on average, according to Kiplinger.

Although the projected raises are nothing to write home about, many Americans will take what they can get. But it seems companies are doing away with pay raises for their employees. Why? Because annual pay raises don’t work. Research shows they’re both ineffective and costly — an undoubtedly bad combination for any budget-conscious organization. Read on for some of the biggest reasons why pay raises might become a thing of the past.

1. Pay raises hardly encourage loyalty

Man writing a check

Pay raises often aren’t high enough to promote loyalty. | iStock.com/Devrim_PINAR

The Chicago Tribune suggests a “salary increase serves two purposes: to motivate workers and to keep employees from leaving for a better-paying job. In its current form, the traditional raise does neither of those things very well.” Employers are lucky when pay adjustments amount to 1% to 2% above inflation each year, which doesn’t go very far — or do anything to encourage behavior changes when necessary. Workers have found the best way to score a significant pay raise is to move to a new company or get a promotion.

The Wall Street Journal cites a University of Toronto study, which found at least a 10% raise is needed to change morale, temporarily at least — and that’s something organizations just can’t afford. Increasingly competitive industries are forcing companies to rethink how to keep people around if they want to remain relevant.

Next: But pay increases don’t always equal money.

2. Bonuses are taking precedence

Travel agency office

More organizations are moving toward bonuses. | iStock.com/dima_sidelnikov

Take GE, for example. It recently scrapped the annual review, as well as annual compensation hikes. When asked about a replacement program, it hinted toward “flexibility” and “rethinking” how it defines rewards.

Other organizations are using bonuses and variable pay to reward employees for specific accomplishments. It’s seen as more cost-effective and influential for accountability. Bonuses can be given at will and serve as a more immediate recognition for performance, whereas annual raises aren’t usually an accurate indicator for how well someone performed all year.

Next: There’s no correlation between higher salaries and work ethic.

3. A higher salary doesn’t change employee work ethic

lazy dog

Employers wish employees were more motivated. | Timothy A. Clary/Getty Images

Actually, a higher salary promotes complacency. Organizational development consultant Stephen Balzac told the Society for Human Resource Management, “[Raises] represent a point of financial stability in a world that can be very unpredictable. Providing annual raises means that employees are unlikely to feel they need to compete with one another.”

And though financial stability can offer a sense of employee validation, an accompanying lackadaisical work ethic does nothing for a company trying to remain competitive in an ever-changing industry. Employees who are underwhelmed in their current role are not likely to have a change of heart with a $1,000 pay increase each year.

Next: See what is more likely to influence morale than money.

4. The annual review is bogus

meeting in office

The annual review often is a waste of time. | 20th Century Fox

Research shows timely, consistent, and specific feedback is key to managing performance, improving morale, and increasing work ethic. Many companies, such as Adobe, GE, Accenture, Netflix, are doing away with the annual review. Aside from the thousands of hours and mounds of paperwork these evaluations spur, holding people accountable for past behavior at the expense of improving current performance seems pointless and outdated for today’s business models. Even managers hate doing reviews. Deloitte found that 58% of HR executives considered reviews an ineffective use of supervisors’ time.

Instead, more supervisors are giving instant feedback, tying it to employees’ goals. And they hand out small, but frequent bonuses to employees doing well, which is a more effective way to reinforce desired behaviors.

Next: Accountability is out. Growth and development is in.

5. A shift from accountability to developmental reviews leaves no room for monetary raises

Young businessman working, office, stretching

There’s more focus on development than compensation. | iStock.com

Measuring accountability for past performance has faded, the Harvard Business Review reports. Jobs have become more complex, and team-based work makes it difficult to set and measure individual annual goals. And low inflation and small budgets for wage increases make appraisal-driven pay unsuccessful and ineffective in driving performance, according to a study by Willis Towers Watson.

Companies are placing more value in learning and development procedures, understanding that cheaper, inexpensive college grads can turn into skilled managers with structured training. Buffer even implemented transparent salaries based on the person’s role, experience level, and years with the company. Here, employees know exactly where they stand, and feedback is focused solely on growth and development.

Next: Employers are shifting toward employee perks.

6. People want perks before money

barack obama with a dessert

Perks are valued more than money. | Jewel Samad/AFP/Getty Images

Conventional pay raises are no longer warranted in a new job market. Research suggests employees value perks and benefits over monetary incentives. Glassdoor’s Employee Confidence Survey found 79% of employees would prefer new or additional benefits to a pay increase. Items, such as health care, paid time off, performance bonuses, paid sick days, and various retirement plans, were all valued more than pay raises.

Millennials in particular would take a 6% to 12% pay cut for jobs that offer long-term security, flexible hours, mentorship opportunities, and the ability to grow and expand. Organizations are more than happy to adapt to these demands and change with the tide, removing pay adjustments from their systems entirely.

Next: Employers say you can’t have your cake and eat it, too.

7. The cost of benefits is more expensive

The boss in The Wolf of Wall Street

Total employee compensation is higher than you think. | Paramount Pictures

If an organization can find a way to trim the fat, it’s going to do so — even if it comes at the employee’s expense. One reason so many employers are getting rid of pay raises is because the cost of funding additional compensation for employee benefits (which workers demand) is so high. Employees are probably unaware of the cost of their benefits when they consider their total compensation package.

According to the Bureau of Labor Statistics, employer costs for employee compensation averaged $35.28 per hour worked in March 2017. Wages and salaries averaged $24.10 per hour worked and accounted for 68.3% of these costs, while benefits averaged $11.18 and accounted for the remaining 31.7%. Multiply that by 60 other employees, and you can see why some organizations are running on tight budgets for raises.

Next: What’s being done to cut budgets that affects employees most

8. Cutting hours to keep costs down

Overtime and Regular time registers with calculator on a table

Hours go first when employers want to cut costs. | iStock.com

When the order comes down from corporate that your location needs to cut costs by 10%, 20%, or even 30%, nearly everything is on the chopping block. Unnecessary supervisor and coordinator roles are re-examined, and miscellaneous spending is reduced. What’s worse is pay increases for even your best workers get eliminated.

The Affordable Care Act mandated health insurance for employees who work over 30 hours. Although the debate surrounding the effects is still heated on both sides, some say employers are now forced to cut hours to keep costs down.

Next: But don’t let this discourage you. It’s often the squeaky wheel that gets the grease.

9. Ask and you shall receive

Melissa McCarthy in The Boss

You could still get a raise if you ask for one. | Universal Pictures

With so many organizations getting rid of traditional annual pay raises, your only opportunity to score one could be to ask your manager flat out. Employers assume most workers won’t ask for a bump in pay, thus cutting costs by giving it to those who really want it.

Unfortunately, many workers don’t know their worth and will improperly tackle this task. Negotiation starts with research-backed claims and definitive examples of your individual company value. Salary information websites can also help you ballpark what others in your industry are making to ensure you don’t ask for the moon and ruin any chance of a raise.

Follow Lauren on Twitter @la_hamer.

More from The Cheat Sheet: