Why The Meager Raises

I’ve been in the workforce long enough to understand the cardinal rule of the Christmas bonus: Be humbly grateful for whatever you get no matter how odd, inappropriate or paltry the gift or bonus might seem.

    This is a rule I didn’t really appreciate until the year that the president of the company I was working for decided that the holiday gift should be–and I am not making this up–lambskin fanny packs. No one knew what to make of such a “gift,” but some enterprising employee actually figured out where the fanny packs had been purchased and returned his for store credit. He received the grand sum of $17, and in short order there was a run on the store of other employees trying to get rid of their “gift.”

    Christmas bonuses and holiday gifts are a fading tradition, as we note this month on Page 12, and to those of you who have gotten some version of the lambskin fanny pack, this is not any great loss. What is more troubling than the Disappearing Christmas Bonus is another management trend that seems to be growing: the Puny Pay Raise.

    This is a trend that started after the dot-com bubble burst in 2000, accelerated in the wake of the 9/11 attacks and continues today as the economy struggles with inconsistent job growth. In other words, this means that we still are experiencing a soft job market that puts little pressure on businesses to compete for talent and increase wages more than the bare minimum.

    That all makes sense until you read, as I did, in the Los Angeles Times last month that “corporate earnings keep rising at a double-digit pace while workers are lucky to get even low single-digit wage increases.” The Times noted that operating earnings of companies in the Standard & Poor’s 500 rose 11.5 percent in the third quarter of 2005, the 14th straight quarter of double-digit corporate growth.

    Corporate dividends are also growing. The Wall Street Journal said that S&P 500 companies “are on track to pay out more than $500 billion to shareholders in the form of dividends or share repurchases. … That’s up more than 30 percent from last year’s record–and equivalent to nearly $1,700 for every person in the U.S.”

    And this month, the Commerce Department reported that the U.S. economy grew at a 4.3 percent rate in the third quarter–the fastest rate since the first quarter of 2004 and the 10th consecutive quarter of GDP growth close to 4 percent on an annual basis. All of this came despite Hurricane Katrina and the worries about the price of oil.

    This is all great economic news, except, as we point out in this month’s Data Bank Annual, real wages for American workers will finish 2005 down by about 2 percent because of the combination of rising prices and small annual pay increases. Next year doesn’t look any better, either: Salary increases for 2006 will fall in the 3.5 percent to 3.7 percent range, which is at or below the various forecasts for inflation.

    There’s been a lot written in the wake of Peter Drucker’s passing last month, but one of his core principles was that successful businesses create the conditions that allow their employees to do their best work. Some of these conditions surely include knowing when to make a prudent investment in the workforce–in pay increases that keep the talent on board, in training that improves skills and increases productivity, and in incentive compensation that better aligns workers and the business to reach ever higher goals.

    While my personal experience makes me appreciate the thinking behind the Disappearing Christmas Bonus, I just don’t get the ongoing obsession with the Puny Pay Raise.

    So here’s my New Year’s wish: that businesses everywhere continue to harvest the fruits of our robust economy, and that they reinvest some of their harvest in growing the wages of their employees and creating the workforce conditions to reap an even greater bounty in the year to come. wƒm

Workforce Management, December 12, 2005, p. 82 — Subscribe Now!