Increasingly, compensating employees is about a lot more than just wages.
The share of the average worker’s compensation that came from salary fell from 71% in 2004 to 68% in 2018, according to the US Bureau of Labor Statistics’ National Compensation Survey (2004 was the first year the survey was conducted). It’s part of a long-term trend. Economists estimate that wages made up over 90% of salary in the 1960s (pdf).
In a country that typically ties the provision of medical coverage to employment, the rising cost of healthcare is one reason for the shift in compensation makeup. But increased spending on health insurance accounts for less than 40% of salary’s falling share of total pay. Perks like paid leave, bonuses, and, most importantly, retirement savings are all having an effect on the composition of American compensation.
The trend doesn’t hold for all kinds of workers. The shift toward non-salary compensation has been far more pronounced for highly educated, top-earning workers. So while America’s managers, law and finance professionals, and teachers have seen a massive shift in the makeup of their compensation since the mid-2000s, the typical person working in retail and construction has seen only a small dip in wages as a share of total pay.
Tax incentives may be one of the reasons for the overall trend. A 2017 study of the rise of non-wage compensation (pdf) finds that companies tend to substitute benefit increases for raises for high earners, in large part because the extra money will have a high marginal tax rate, and most benefits aren’t taxed. Thus, companies have realized they can get more bang for their buck by offering better retirement or health benefits than straight salary.
Rewarding workers with bonuses and extra paid leave also allows employers to celebrate high achievement and flaunt their responsiveness to employees’ needs without making long-term financial commitments. Pay raises are notoriously sticky. Once you give someone a pay increase, there usually is no turning back.
But employees sometimes actually prefer perks like flexibility over cash raises. Working parents, for example, may value an additional paid day off more than the equivalent in salary.
In deciding between a higher-paying job or a lower-paying one with better perks, American workers surveyed in 2017 by the content marketing agency Fractl said they would give the heaviest consideration to medical benefits. Perks like on-site gyms, company retreats, and free snacks and coffee were given some consideration, but not nearly as much as flexible hours, more paid vacation days, and options to work from home, which trailed only health benefits in the “heavy consideration” category.
“[A]fter health insurance, employees place the highest value on benefits that are relatively low-cost to employers,” Fractl’s Kerry Jones noted in the Harvard Business Review.
It’s a trade many companies are happy to make.