Is the pay rise being replaced with other benefits?

Once a staple of the American workplace, the annual raise is turning into a relic of the pre-crisis economy as companies turn to creative — and cheaper — ways to compensate their employees.

More businesses are upping their spending on benefits such as one-time bonuses, health care and paid time off, according to recent survey data. Many are rolling out perks such as free gym membership, commuting subsidies, even pet health insurance.

Often, those benefits are being provided in lieu of higher salaries. Government data shows the growth in spending on benefits is outpacing gains in wages. Companies say they are catering to the growing workforce of millennials who seem to prize short-term flexibility over long-term financial security, and the change allows bosses to reward star employees without permanently increasing costs.

“There’s been this seismic shift,” said Gary Burnison, chief executive of Korn Ferry, an executive search and talent management firm. “And I think one of those is that the raise has gone the way of the gold watch.”

The decline of the raise could help explain one of the most frustrating puzzles of the America’s lumbering economic recovery: stagnant wages. Growth in workers’ average hourly earnings has been stuck at roughly 2 percent for the past five years — even after the rapid drop in unemployment and surge in hiring over the past 18 months.

It’s one of the main reasons many Americans feel the recovery remains elusive, as stagnant wages mean rising rents and college tuition take a bigger bite out of the family budget. Economists are divided over whether the paltry paychecks are the new normal or a sign of underlying weakness in the labor market, especially among people in relatively low-wage jobs like retail.

But wages don’t tell the whole story, some economists argue. Broader measures of compensation casting a rosier light on what Americans take home — in particular in the higher-skilled jobs that come with benefits.

Government data shows companies’ spending on benefits has jumped 16 percent since 2004, after adjusting for inflation, compared to a 2 percent increase in wages. Some of that reflects higher health care costs that companies have covered through employee insurance programs. But it also includes things like bonuses, vacation time and tuition reimbursement. And all told, benefits now make up 31.6 percent of workers’ total compensation, a share that has steadily risen over the past decade, according to government data.

Meanwhile, bonuses and other awards have spiked to the highest level in more than three decades, according to an analysis by consulting firm Aon Hewitt. A survey this summer by the Society for Human Resource Management, an industry group, found about 35 percent of companies increased spending on benefits, up 7 percentage points from the previous year.

“Wages tell you almost nothing,” said John Silvia, chief economist at Wells Fargo. “It has changed over the last 20 to 30 years as companies try to compensate workers in a way that matches their lifestyle.”

Of course, the growth in benefits can only occur at businesses that offer them in the first place, most frequently in white-collar industries where salaries are more generous. For many low-skilled workers, the paycheck is the end of the line. In industries such as retail and fast-food, labor groups are pushing to raise the minimum wage to $15 an hour. And even in jobs that have enjoyed bigger benefits, experts warn that workers don’t always come out ahead if they sacrifice traditional raises for other forms of compensation.

“I see it mostly as a risk shift onto workers,” said Josh Bivens, research and policy director at the left-leaning Economic Policy Institute.

When Ashley Chandler went beyond the call of duty at her sales job, she was rewarded not with a bigger paycheck but with something she said was just as valuable: time.

The 25-year-old spent weeks poring over paperwork at the flooring installation company Netfloor USA where she works in North Carolina to help one of the managers close some complicated projects on time — the type of dedication that a generation ago might have placed Chandler first in line for a big raise at the end of the year. Instead, she received three extra days of paid leave.

“Would I like to make more? I think everybody would like to make more,” said Chandler, who is expecting her first child next month. “But for me, what I liked most about it was the flexibility.”

The shift toward bigger benefits and smaller salary increases accelerated as firms tightened their belts following the financial crisis, experts say, but it is rooted in broader demographic changes in the nation’s workforce. Millennials say they prize the freedom to work away from their cubicles, while businesses have learned that flexible compensation can help the bottom line.

At Los Angeles-based Korn Ferry, the company devotes about a quarter of its payroll to targeted bonuses and incentives and is considering doubling its parental leave. Mattress company Casper Sleep says many of its employees take a pay cut to work at the start-up, but it provides equity in the firm and a doctor-on-demand in return. In New York, HR software firm Justworks eschews the standard matching contribution to employee’s 401(k) retirement plans in favor of paid gym membership and pretax commuter benefits for its millennial employees.

“The amount you spend on a benefit does not correlate with how much an employee gets out of it,” Justworks chief executive Isaac Oates said of the decision. “You’re spending a lot of money and people may not care.”

At Netfloor, Chandler’s boss, Ryan Hulland, used to give employees 6 or 7 percent raises, no questions asked. But that was before the 2008 financial crisis, when the boom in high-tech construction that drove sales of the company’s specialty flooring began to drop off. In downtown Charlotte, Hulland had watched the construction of the gleaming skyscraper Wachovia Bank once planned to use as its corporate headquarters. But before it was finished, the bank was taken over by Wells Fargo. Hulland was determined that his company would not meet a similar fate.

“I don’t want to be caught in a double dip recession,” Hulland said. “I don’t want to be caught in a position where we have overextended ourselves.”

So he slashed raises to 3 percent and began searching for other ways to reward his best employees. Hulland started by giving out $100 gift cards and was taken aback by how excited workers were to receive them. Encouraged by the response, Hulland began offering an intangible reward: extra paid time off.

Though the dollar amount didn’t make up for the smaller raises, human resources experts say such rewards provide a more immediate psychological boost — particularly when times are tight.

“That’s why we give people gifts at Christmas and not just bags of money,” said Andrew Chamberlain, chief economist at job search firm Glassdoor. “They can build a relationship that goes beyond a paycheck.”

When Korn Ferry reached a major milestone this summer of a record $1 billion in annual sales, the company’s chief executive wanted to thank the employees. But instead of giving everyone more money, Burnison opted to make them work less: The company will be closed the Friday before Labor Day and the week between Christmas and New Year’s.

“Given the demanding world in which we operate, I know we are all pulled in many directions and never seem to have enough quality time with family and friends,” he told staff in an e-mail. “This year, we would like to take a small step to improve that situation and demonstrate our appreciation for your dedication and commitment with the gift of time.”

This article is published in collaboration with WonkBlog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.

Image: Workers on the assembly line replace the back covers of 32-inch television sets at Element Electronics in Winnsboro, South Carolina. REUTERS/Chris Keane