Windfall Wishes

From bonuses to upskilling labor, companies are exploring strategies to use savings from the recent tax-reform law for long-term success.
By: | April 2, 2018 • 9 min read

In December, Alisa Miller, chief human resources officer at IAT Insurance, a Raleigh, N.C.-based national property and casualty-insurance company, could almost hear the company’s 700 employees cheering at its 13 offices.

During an employee webcast, IAT President Bill Cunningham announced that all staff—excluding roughly 15 executives—would receive a $3,000 bonus resulting from the federal tax-reform measure signed into law by President Trump earlier that month.

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“Employee reaction was phenomenal,” Miller says, adding that the bonuses were contingent on the passage of the tax bill. “I haven’t seen people react like that to what our president has said on a webcast in quite some time. It was great. It was goosebumps.”

Among Trump’s campaign promises was a pledge to slash corporate tax rates, offer tax breaks for private businesses and reorganize the individual tax code. The $1.5-trillion tax bill put in motion numerous changes, including the elimination of the individual mandate, or penalty for not having healthcare insurance, and the temporary increase of the standard deduction.

Many companies are sharing their windfall from corporate tax cuts with employees. Some are making decisions that are short-term-oriented, such as handing out one-time bonuses to workers, while others are evaluating options for enduring change that may impact healthcare or retirement. Either way, HR professionals can’t afford to make snap decisions that may come back to bite them.

Planning Ahead

At IAT, the company’s owner, Peter Kellogg, directed Cunningham to collaborate with his leadership team on effective ways to redistribute the company’s tax savings if the tax-reform measure was passed.

“There was a lot of brainstorming among our leadership team [regarding] what way would be most effective and helpful to employees this year,” says Miller, who serves on the leadership team.

She says many options were discussed, including salary raises. But this long-term approach requires a stable tax law, which isn’t the case. Considering the company offers competitive salaries, profit sharing and matches employee 401(k) contributions up to 7 percent, the team believed a bonus would be the best tactic because it would be quickly reinvested into the economy, which supports the bill’s intent.

Based on an employee’s suggestion, Miller says, after the bonuses were announced, HR encouraged workers to express their feelings about the bonus and share their purchase plans in writing, which was then converted into an article published on the company’s intranet. She says dozens responded and said they intended to do everything from paying off college loans to buying a snow blower.

However, employees’ excitement was tempered after they realized how much taxes were deducted from their bonuses. Miller explains that the tax rate for a bonus tends to be at a higher rate than for a paycheck since bonuses are considered supplemental pay. Besides informing employees in advance about the tax rate, she says, HR should also be prepared to address this common employee question: Will I get a bonus next year?

“We’re very careful about saying this isn’t an absolute every year,” she says, adding that if the revamped tax structure remains intact after the upcoming midterm elections, she believes the company will distribute another bonus. “It’s helping us continue to build our employee brand, and [we’re] using [the bonus] as part of our social-media strategy. It tells a nice story of how we put people first instead of [the savings] going into the pockets of shareholders, which is the last thing employees want.”

Investment Options

In January, Mercer surveyed 241 midsize-to-large employers about their tax-savings plans. Nearly one-third (32 percent) said they would redirect the funds to employee programs beyond raising wages and one-time bonuses. Some are increasing defined-contribution retirement-plan contributions (10 percent) while others are investing in employee training and development (11 percent).

“Companies were likely to increase minimum wages anyway but this gave [them] the financial boost to make this happen,” says Mary Ann Sardone, partner and workforce rewards practice leader for North America at Mercer.

Also in January, Willis Towers Watson, a global consulting firm in Chicago, surveyed 333 large and midsize companies across the country to determine how they planned on investing their tax savings. Nearly half (49 percent) are considering making a change to their employee benefits, compensation, total-rewards and/or executive-pay programs within the next two years.

Two-thirds (66 percent) are planning or considering making changes to their benefits programs or have already taken action. Among the most common changes are expanding personal financial planning (34 percent), increasing 401(k) contributions (26 percent) and increasing or accelerating pension-plan contributions (19 percent).

Another 64 percent are planning, considering or have already taken action on broad-based compensation programs in areas such as reviewing compensation philosophy (43 percent), addressing pay-gap issues (36 percent) and introducing a profit-sharing or one-time bonus to all employees (21 percent).

Some companies—41 percent—are also considering or planning to make changes to their executive-pay programs, such as spending more time and analysis on this year’s incentive target (33 percent) and increasing the use of discretion in this year’s incentive plans (19 percent).

“If there are changes the company has contemplated for a while and the tax law basically releases new sources of funds that [allow them] to do things they were already thoughtful about, that’s a very effective strategy,” says John Bremen, managing director, lead of human capital and benefits for North America at WTW. “What’s not effective are companies being knee-jerk and making decisions without a lot of data analytics about their people.”

Analyze and Reward

The number of companies redirecting their tax savings to their workforce or employee programs is growing. Generally, they’re companies with large, hourly populations, and they cut across all industries or sectors, says Bremen.

American Airlines, Comcast, JetBlue, Bank of America, Southwest Airlines, Walmart, Disney and Whirlpool are each handing out $1,000 bonuses to their employees. Fifth Third Bancorp and Wells Fargo committed to hiking their starting wage to $15 per hour, while Fiat Chrysler announced a $2,000 employee bonus.

Even small employers are sharing their good fortune. Joseph’s Lite Cookies in Vero Beach, Fla., boosted its hourly rate for its handful of staff by between $1.50 and $2, says Joseph Semprevivo, company president. He adds that a portion of the tax savings will also be used to hire more full-timers this year to staff a new production plant.

“The reaction from my team was very emotional,” he says, mentioning one employee who cried when news of the raise was shared.

In the future, Bremen believes that the majority of companies that benefitted from the tax law will have made some kind of change. Since tax and regulatory codes are dynamic, he says, the biggest mistake HR professionals can make is acting without full knowledge of employee preferences or a good understanding of the new tax law.

“Companies have pretty solid data today showing the connection between people investment and business results,” he says. “We know that an investment in people will yield higher engagement, higher productivity, higher quality, higher services and, therefore, higher financial outcomes.”

Still, it’s important for HR professionals to evaluate the impact of their decision from all sides, adds Mercer’s Sardone.

Sardone, who is based in the Atlanta area, says HR needs to address the following questions: Is this a decision we would make otherwise? Is this the right strategic investment in our human capital in the right place?

“Making decisions only because of the tax savings might be a little short-sighted just because they may not align with [the company’s] longer-term strategy,” she says. “Organizations are better off really studying what will work for their organization rather than doing what everyone is doing.”

Beyond Bonuses

What surprised Sardone was the number of companies increasing their investment in employee training and development. “Upskilling” the labor force by investing in professional development is top-of-mind for high-tech firms and also manufacturers, which represented a large portion of survey participants, she says, adding that this signals a long-term investment in human capital.

But when it comes to increasing the minimum wage, she believes this decision requires further analysis of whether it can be funded with or without the tax cuts, especially considering Washington’s volatile climate.

Many companies are attempting to understand their competitive position or how they fare against others in their industry when it comes to compensation, says Sardone.

It’s always a good idea, she adds, to create a more competitive pay situation, especially involving hard-to-fill jobs, and enhance your value proposition by beefing up career management, healthcare or financial well-being programs.

Adopting a sound approach to pay equity across genders and protected classes is a good place to start to “right past wrongs” before finding additional layers to invest in, she says.

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Some employers are also investing their tax savings in their total-rewards program, says Tara Tays, managing director of national compensation strategies practice at Deloitte Consulting in Los Angeles.

“Employers should engage employees to develop a total-rewards relationship that offers a personalized, flexible and customized experience [and is] set on a firm foundation of compensation and benefits, but [is] differentiated by other programs, including recognition, career development and a holistic approach to well-being,” she says.

Other considerations include enhancing family-sick leave or even the physical work environment, adds Sue Holloway, director of total-rewards strategy at WorldatWork, a global professional association in Scottsdale, Ariz.

For example, she says, use tax savings to enhance the overall work experience. Consider investing in the workspace by creating more collaboration areas, providing standup desks and ergonomic chairs or even building an onsite gym.

“Look at your workforce and business strategies,” she says. “What’s most important for your particular company? Where can you get the biggest bang for your buck in engaging your workforce?”

Holloway says employers must be prepared to operate in a new environment where employees compare notes about how companies operate, treat staff and reward them for good work.

Still, she doesn’t believe employers that have announced short-term perks such as one-time bonuses are setting the stage for workers to expect such rewards next year.

It’s important for employers not to surrender to the pressure created by others who have already made announcements about their tax-cut investments.

“Take your time, make the right investment,” says Mercer’s Sardone. “Look at your rewards strategy, [identify] what you’re trying to achieve with the program and make targeted investments from there instead of feeling pressure to make an announcement or immediate investment.”

Carol Patton is a contributing editor for HRE who also writes HR articles and columns for business and education magazines. She can be reached at [email protected]

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