The “Tax Cuts and Jobs Act” passed by the US Congress last month, which lowered taxes on corporate profits and most employees’ salaries, has a number of implications for employers, affecting payroll withholding as well as the tax treatment of executive pay and some employee benefits. One of the arguments the Trump administration and Congressional Republicans advanced for the tax cuts, which were historically unpopular among the American public, was that lowering the corporate tax rate would incentivize companies to use their tax savings to invest in their workforce, giving millions of employees a much-needed raise.
While several large employers announced plans to issue bonuses to employees, raise wages, or make other business investments after the tax reform bill was passed, most companies have indicated in earnings calls and surveys that they plan to parlay most of their tax cuts into debt repayment, dividends, and stock buybacks. Corporate America, Solutionomics founder Chris Macke argued in an op-ed at the Hill in December, was already sitting on large piles of cash and not prioritizing business investment due to insufficient demand. Companies, he wrote, need more customers more than they need more cash.
Whether or not US companies decide to invest more of their tax savings in growing their business (which they may still face public pressure to do), Bloomberg’s Rebecca Greenfield notes that these investments probably won’t come in the form of across-the-board raises. For most workers, the 3 percent annual raise, which has been standard for five years, will likely remain the norm in 2018:
For one thing, the tax overhaul passed Congress too late to affect 2018 compensation budgets. “Companies, at least the ones I’ve talked to, are still in the process of analyzing the rules and the implications,” said John Bremen, a managing director of human capital at Willis Towers Watson. But the legislation might not have made a difference anyway. Employers have become attached to that 3 percent raise they’ve given for the past few years, Bremen said. He doesn’t see that changing, not even with the new law. …
Companies, for their part, say salary bumps are too permanent—too expensive. If times get tough, pay cuts hurt morale and productivity and risk attrition. “When you give a raise, it’s stuck in the pay system,” said [Paula Harvey, the vice president of human resources at Schulte Building Systems]. “It is something you’re guaranteeing; it’s becoming a fixed cost.”
This is why, in recent years, more organizations have shifted to a more differentiated system of rewards increases, handing out bigger raises to top performers or replacing incentive raises with bonuses, which avoid the fixed-cost commitment Harvey describes to Bloomberg. There is also some evidence that employees are more motivated by a lump-sum bonus than by a merit raise they receive over the course of a year, as the value of the bonus is more immediately tangible.