The tales of puny salary increases have become legend. In recent years, pay increases have been hovering around 2%. But that figure tells only part of the story. The other part is how your employer is paying you less than you think.
For 2018 and 2019, the average increase has supposedly been/will be in the 3% range. This is a bit of a distortion however, since it represents a blend of pay increases for high-, middle- and low-end workers. Apparently it looks as if middle- and low-end workers will continue to get something less than 3%.
The popular narrative on the economy is that “everything’s great”. And yet pay increases are only barely keeping up with the rate of inflation (which is hovering around 2.2%, if that number can even be believed).
It begs the question, if things are so great, and the labor market is so “tight”, why aren’t workers getting higher raises?
Before we get into that, let’s first discuss how your employer is paying you less than you think.
1. Playing with Bonuses
This article was inspired by a comment by reader IK. After working for her company since 2000, 2018 was the first year when they didn’t pay a year-end bonus. This despite the fact that the company claimed 2017 in 2018 were their best years ever. At this point, she’s not even certain she’ll get a pay raise that will keep her above the rate of inflation.
Now bonuses are just that, bonuses. They’re almost never guaranteed, and they can be increased or decreased at the employer’s discretion. But when an employer fails to pay bonuses – after doing so consistently for years – and despite having record earnings – it clearly represents a form of a pay cut.
I can relate to this issue. Years ago, I was working for an accounting firm that paid each staff member a “bonus” at the end of tax season. I wrote bonus in quotes because it really wasn’t a bonus at all. It was our accumulated overtime from the tax season. I guess they figured calling it a bonus sounded more beneficent than simply accumulated overtime.
But as has been the case for decades, the firm’s health insurance premiums increased for that year. We were told in a meeting that they would keep the health insurance in place, but we would receive lower bonuses as a result.
Translation: the firm was taking the increased cost of health insurance premiums out of our tax season overtime pay.
In retrospect, I’m not even sure that kind of thing is legal. But unless you’re willing to hire a lawyer, and several employees are willing to sign on, you’ll be stuck with the arrangement as it is.
But playing with bonuses is only one way your employer is paying you less than you think.
2. Playing with Commission Arrangements
This isn’t a situation that applies to most employees, but it does affect millions of commissioned workers. THE most affected are those who are on 100% commission.
Now as matter of full disclosure, I spent eight years working on 100% commissions from a small, independent mortgage broker. They never changed the commission structure in all that time (consistency breeds employee confidence). Now the fact that it was a small firm had something to do with it. Small firms have to have commission structures that are both generous and consistent to retain talent.
But that’s not true with larger employers.
Commission structures can be quite complex with large employers. For example, they often have commission tiers. You may get up to 40% of the commission income on production of up to $1 million per month, then 50% of any production above.
But employers are not adverse to “tweaking” the schedule. For example, they can lower the commission splits to 35% and 45% respectively. Or they can change the threshold for higher splits. Like raising the split to the $1.2 million level.
However it plays out, a change in the commission structure almost always runs against the employee. And when it does, it becomes painfully obvious the employer and employee are not in an equal partnership. The employer is looking to improve their margins by cutting back on compensation to the very people who are bringing in business.
It’s a self-destructive process to the core, but it’s how employers engineer paying less compensation to their commissioned staff.
3. Reduction in Hours Worked
According to the US Bureau of Labor Statistics (BLS) there are currently nearly 126 million full-time and more than 27 million part-time workers in the US.
By definition, part-time employees are nearly always hourly. But so are millions of full-time employees. This is especially true since so many jobs today are in the service economy, particularly retail and food service.
If you’re an hourly employee, your income is dependent upon the number of hours you work. If you’re considered a full-time worker, and scheduled to work 40 hours, you’ll earn “full pay”. And if you exceed 40 hours, you’ll most likely get overtime pay. That’s the best of all worlds.
Unfortunately, many hourly workers work less than 40 hours per week. For some people, in some jobs, that’s more typical than not. I’ve known of many situations of full-time hourly employees working 38 hours one week, 35 the next week, then 42 the following week. But on average, they work less than 40 hours per week. That means they earn consistently less than their stated/expected full-time pay.
I know one woman who was in such a situation. She rarely worked more than 35 hours per week, and then her employer finally closed the doors. The reduction in hours was more than a financial inconvenience. It was a warning of worse to come.
That may be an extreme situation, but it’s become quite normal. I refer to these arrangements as rolling furloughs. The employer can adjust the employee’s schedule up or down, based on need or cash flow.
That may be good for the employer, but it can be a certified disaster for the employee, who is dependent on a minimum 40-hour pay week.
It’s yet another example of how your employer is paying you less than you think.
4. Demanding More Work Out of You
If an employer increases your responsibilities, and doesn’t provide a corresponding increase in pay, it’s effectively a pay decrease.
Many people may not think of it this way, perhaps because it’s disturbing on so many levels. But it’s a real strategy employers use to squeeze more production out of you, without the arrangement costing them anything additional.
A common example is when you’re the office/shop “go to” person. If you are one, you likely know exactly what I’m describing. Any job that’s difficult, unpopular, or needs to be done right away, routinely ends up on your plate. Often this happens because you’re the boss’s right hand man or woman, and he or she has a habit of forcing his or her work off on you.
A more common example is the 80/20 rule. That’s where 20% of the staff is doing 80% of the work. It’s not often framed in these terms, but what it really means is that if you’re part of the 20% who are high performers, you’re carrying the load for a staff overweight in under-performers.
However it plays out, if you’re in this situation, your employer is paying you less than you think. You may be doing twice as much work as the person sitting next to you, who’s making roughly the same pay.
My Own (Short) Episode of More Work for Less Pay
I had a particularly extreme experience with this on a contract assignment when I was still in the mortgage business. As a contract underwriter, I was expected to underwrite five five loans per day. But when I was on the job, my time was 100% consumed with answering calls from borrowers and brokers, and dealing with a neurotic, malfunctioning computer (which seemed to be something of an industry standard with the larger mortgage lenders).
There was little if any time to complete underwriting the five-loan requirement. It was implied – but never spoken – that the “solution” was for us to underwrite the loans on our own time. That meant bringing the loans home, spending several more hours doing “homework”.
I was actually OK with that arrangement, but that’s because I expected the company would pay us overtime for the extra hours worked at home.
I was wrong. The contract company I was actually employed by agreed with me, and initially said overtime would be forthcoming. But the actual company I was working for nixed the idea. We were to underwrite the loans on our own time, and without any additional compensation.
Needless to say, that particular contract assignment didn’t last terribly long. After just 6 weeks, I called my contract company – before even leaving the parking lot of the mortgage lender – and told them I was done.
And lo and behold, the contract company was relieved that I requested leaving. The mortgage lender had called them only moments earlier, saying they didn’t think I was “working out”.
The contract company’s response was an interesting one. They thanked me for lasting on the assignment for all of six weeks. Why? Because no one else they sent to that company lasted more than four.
I’m not surprised.
And here’s a less direct way your employer is paying you less than you think…
5. Cutting Benefits
I think this is a pay reduction scheme most employees are well aware of. It can take different forms, some of which include:
- Canceling certain benefits.
- Increasing employee contributions to certain benefits, typically health insurance (though more than anything else, this has become part of a standard coping strategy for dealing with the unfolding national health care crisis).
- Reducing the amount of paid time off, or increasing the requirements to get it, which has the same net affect.
I’ve also experienced some certified nickel-and-diming behavior. One company I worked for took away the free coffee service. In order for it to continue, it had to become contributory. Each of us had to pitch in a few dollars each week to cover it. And this was at a very large company. Others I’ve seen have made the annual Christmas party contributory. There are all sorts of reduction schemes in this category, so it’s almost impossible to generalize.
But since benefits are a significant part of the average person’s compensation, cutting them – whatever the methodology – represents a reduction in total compensation.
Collectively, all these backdoor cuts in pay nullify pay increases, at a minimum. More likely, the net effect of a 2% or 3% salary increase is more than offset by a series of less visible cuts. This in large part explains why so many companies are so much more profitable in recent years.
After all, if payroll is an employer’s largest expense, the most effective way to lower costs is to cut payroll. That’s the cycle we currently find ourselves trapped in. And a major reason why so many employees feel they’re struggling more than ever even at a higher pay rate.
Why Pay is Being Constrained
In theory, none of the above should be happening in a job market with the unemployment rate at just 3.9%. That’s the lowest unemployment rate in decades, and more suggestive of dramatic increases in employee compensation and benefits.
But that’s not what’s happening, so it’s obvious we have a fundamental departure from previous employment models.
An excellent summary of what’s happening in the labor market was published last summer by Business Insider. In The ‘supply-and-demand model of labor markets is fundamentally broken,’ and that’s why you’re not getting a pay raise anytime soon, they listed the following contributing factors:
- The gig economy, which allows employers to sub out jobs to low cost providers.
- Part-time work replacing full-time jobs.
- Under-employment, which masks the true extent of structural unemployment (the unemployed now deliver pizzas, rather than collect unemployment).
I’m also going to suggest a few more causes that I believe to be contributing in a major way:
- A general preference among public companies to increase profits and share prices to impress their shareholders, at the expense of their employees.
- The rise of contract workers (who are really no more than contingent workers with little bargaining power).
- Offshoring of jobs to countries with lower wage costs and operating expenses.
- Technology, enabling one person to do the work once provided by four or five people.
- The general sense of fear among employees that “I’m lucky to have a job”.
- High levels of debt and low levels of savings that feed that fear.
All those factors have combined to create what is admittedly a grim picture. Unless you’re employed in one of the high demand occupations, like IT, health care, or education, it’s become very difficult to make steady progress and increasing your income.
Where Do We Go From Here?
I must confess, if I knew the answer to this question, I wouldn’t be writing this blog. Unfortunately, the answers are as complicated as the reasons that created the problem.
But let’s take a stab at it anyway:
- The forces driving down pay are the result of a powerful series of dynamics. Don’t waste time thinking it’s temporary, that it will be different in the future, or that there’s a political solution. False hope is no hope.
- If you can’t do much about your income situation at work, concentrate instead on personal finances. Lower your cost of living, and increase your savings. The combination of the two will give you a better chance of surviving and thriving come what may.
- Develop new skills. It can be skills you can use on your job that may result in a pay increase. But it’s just as likely those new skills will enable you to either enter a new and more promising career, or help you start a side venture to supplement your income.
- Seriously consider becoming self-employed, either now or at some time in the future. The worst outcome of all is living with the same constraints five or ten years from now. Becoming self-employed can present a serious opportunity to move in an entirely different direction, one unconnected to the forces that are limiting pay.
- Become flexible in your thinking and in your lifestyle. That seems to be increasingly rare in employment situations. If you don’t have that ability on the job, it’ll be even more important to implement it in your personal life. Simply put, be ready for anything.
Has your pay been stuck for several years? Do you have any suggestions to break out of that?