Set aside your politics for a minute. Tax reform in the U.S. is now law, and this is not the setting to debate if it is good or bad. It simply is.
So now what?
Of course, there are the areas where we need to respond. Relocation costs that used to be tax free are not taxable. 162(m) limits on the tax deduction for executive compensation expenses changed notably. Individual withholding rates are changing, so payroll has to update the tables. Those are the must do items.
But what about spending the money? A key premise of the corporate tax reform was to make America more competitive and free up capital to invest, and a growing number of companies are publicly declaring their intentions to invest in their workforce.
What Are We Seeing?
This list, from the conservative group Americans for Tax Reform, captures the names of companies who have communicated workforce investments. While some companies have described hiring plans or an increase in charitable giving, the headlines are dominated by companies giving one time bonuses and a few increasing their starting wages.
The most common strategy is to provide one-time cash bonuses. $1,000 seems to be the number many are gravitating towards (Apple of course had to go bigger at $2,500 but is doing so in stock units). This is the easy approach. It’s a great publicity move, puts cash in employees’ pockets, and doesn’t commit to long-term cost increases. It capitalizes on the known phenomena that tax rate changes are a big deal when they are enacted, but tend to fade into the distance over time as they become embedded into day-to-day financial management (the extra money will still be there… but the appreciation for it coming from a tax cut tends to go away).
I suspect that the desire to make one-time investments in part reflects uncertainty around how likely the tax cuts are to stick. A reduction in the corporate tax rate was pretty unthinkable less than a decade ago, so we shouldn’t exclude the possibility that these new-found savings will disappear. It will remain to be seen how these bonus-giving companies will invest their tax savings in 2019, or if that savings will flow to shareholders.
A few big names, however, like Wal-Mart, Humana, Discover Financial, and a bunch of banks have raised starting wages. Wal-Mart increased it’s starting wage to $11 (from $10), and the banks seemed to all gravitate to $15. I suspect that these companies may have been considering such moves prior to tax reform, given the national conversation about living wages and income inequality. It’s worth noting that these companies and the worker who will benefit tend to be relatively transient workers. As such, the fear of these “permanent” changes may not be as great when you are talking about base wage increases in a high turnover segment of your company.
There is a notable industry trend in the list of companies, too. Banks are raising wages to a similar level… airlines are all giving bonuses. This demonstrates the dynamic markets in which companies continue to compete for talent. Even if one airline has a more compelling employee value proposition, it doesn’t look good to not follow the trend. In an era where headlines often carry more weight than the full story, companies have to have a simple, Twitter-sized message that keeps up with their competitors.
Should I Follow the Crowd?
This is very much a question of what objectives you have or what problem you need to solve. If your primary talent competitor is raising salaries, you may need to respond. There is also certainly nothing wrong with holding firm in what you believe to be a competitive total package. If your organization was paying fairly before the reform bill passed, it’s pretty likely that your overall position is still strong.
How HR drives the conversation about re-investing tax savings will be largely an exercise in marketing and consumer psychology. It just might be the time for compensation professionals to flex some creative muscles and explore ways to put the employee value proposition into the headlines.