Will Passage of the Tax Cut and Jobs Act Result in Higher Wages?

January 11, 2018 Chris Kelley

PROJECTING IMPACTS TO 2018 SALARY PLANNING

Chalking up a big win for Republicans, Congress passed the Tax Cut and Jobs Act (TCJA) in December of 2017. After a rough and tumble first year, the signing of this bill fulfills one of the President's key campaign promises. As the bill was making its way through the House and Senate, most eyes were on the impacts on executive compensation. Now however, companies are contemplating the impact that the reduction of the corporate tax rate from 35% to 21% will have on their operations.

A question many business leaders have been asking of our consultants is, ‘what are other companies planning to do with the tax savings?’ One of the big picture benefits touted for the passage of the TCJA has been that the overall economy will grow which will boost wages. But companies are asking now about what immediate impact the tax reform will have on their 2018 salary budgets.

Small Minority of Companies Indicate Adjusting Salary Budgets

We recently hosted a compensation planning webinar with Ken Abosch, Partner and Broad-Based Compensation Consulting Leader, presenting trends in compensation practices and tips for increasing the effectiveness of variable pay plans. Salary planning and incentive pay are two of the most popular topics, so it’s not surprising that we had over 240 HR and compensation professionals participating in the live session. In the webinar, Ken polled the audience to find out what impacts the tax cuts will have on 2018 salary planning.

Over half (53%) of the respondents indicated that they do not expect to make any changes to their 2018 salary budgets. A large number (36%) indicated that they didn’t know or were undecided, leaving just eleven percent (11%) of companies indicating that they plan to make some sort of adjustment to their salary budget.

What impact would a decrease in the Corporate Tax Rate have on future salary increase spending?

 

We found similar results to the polling question of whether or not companies are planning to increase their bonus spend, however there is a slight uptick in the number of companies that do anticipate that the tax cuts will result in more money being paid out in bonuses. For this question, seventeen percent (17%) of respondents project higher bonus spends.

What impact would a decrease in the Corporate Tax Rate have on future bonus spending?

 

Why are Companies Hesitant to Pass Along Tax Savings to Higher Wages?

It’s impossible to say what’s behind the hesitancy for each company, but here’s one theory. Most companies rely on market pricing as their primary method for valuing work. Paying competitive wages is in the best interest of the company, but determining competitive wages is the result of the supply and demand for talent…not the corporate tax rate.

That being said, there are aspects of the TCJA that could be fueling the ‘wait & see’ approach as they could potentially lead to higher wages down the road.

  • Fully Expensing Capital Expenditures: For the next five years, companies will be able to fully expense the cost of capital expenditures. This feature incentivizes companies to invest in new plant and equipment, which could in turn, result in expanded hiring.
  • Lower Tax Rate Frees Up Cash: By paying less money to the government, companies will have more cash available to invest in expanding their operations. Again, the downstream impact would be to hire more workers.
  • Repatriation of Foreign Profits: By lowering the tax burden on foreign profits, companies will now have greater incentives to bring more of their global earnings back to the U.S. and expand their operations domestically. Here again, this is expected to have a downstream benefit of hiring more workers.

Salary Planning Trends

The features listed above in the tax reform bill could indeed create more demand for workers, which in turn might cause wages to rise. However, we don’t believe the TCJA will fundamentally change the long-term trends we’ve been seeing regarding how companies are budgeting for wages and incentives. Organizations will continue to be under intense pressure to hold the line on fixed costs (salaries) – especially with increased global competition. And there isn’t an obvious return on investment proposition for boosting the labor rates for employees who are already pushing the limits on their productivity potential.

The trend we’ve been seeing for more than twenty years is that companies are holding their base salary growth projections tight and we see the use of variable pay continuing to climb.

What’s the best way forward? Keep a close pulse on the market to make sure that you’re keeping current with changes. The 2018 salary survey season will be underway soon, so be sure to request participation materials, if you haven’t already. 

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