It’s a burning question in corporate finance early this year: What are companies going to do with the cash windfall they’ll be reaping because of the reduced corporate tax rate?
Shareholders likely will get some of it, via dividend increases or share buybacks. Perhaps acquisition activity will pick up a bit. It’s probable that some companies will do nothing at all with the new money other than toss it atop their already big pile of cash reserves.
But one use of the extra cash is already known: a smattering of companies will be giving some to their employees.
In most cases, the payouts will be small. Dozens of companies, including AT&T, Comcast, Southwest Airlines, and Walmart, have already announced one-time bonuses — typically $1,000 — for workers.
More notable, because they involve much larger cash outlays, are wage increases. For example, Walmart raised its starting minimum hourly wage from $9 to $11. Wells Fargo said it would hike its hourly minimum from $13.50 to $15. Fifth Third Bancorp is both raising wages and handing out bonuses.
Wage increases are likely to be less prevalent than bonuses. In a poll of 250 human resources managers by Aon Hewitt, 11% of the participants said their companies are planning to increase spending on salaries as a result of tax savings, compared with 17% who said the same about bonuses.
Those numbers could rise. While 53% of participants said there were no plans to increase salary budgets, 36% of them were unsure what their companies would do. About the same percentage were unsure of plans for bonuses.
Still, Aon Hewitt characterizes the poll results as evidence that by and large, companies aren’t going to be transferring their tax savings to employees. “The message employers are sending is that they’re not going to get increased productivity or ROI by spending more on wages,” says Ken Abosch, the firm’s compensation practice leader.
Would a company change that stance if a direct competitor were to implement a compensation increase? “That remains to be seen,” Abosch says. “We’ve seen specific organizations make high-profile moves to increase minimum wages in the past two years without seeing an industrywide response. If that’s any indication, it’s going to be a selective, company-by-company decision.”
And even among the polled companies that are planning pay increases directly attributable to the tax windfall, about four in five said the average hike would top out at 1%, and half said the raises would be no greater than 0.5%, according to Abosch.
He acknowledges that even such a small increment of extra pay could boost employee morale, considering that employers’ annual payroll increases have been holding steady at about 2.9% for many years. An announcement that such spending will instead grow by, say, 3.5% or 3.8% would draw positive reactions from employees.
Abosch questions whether that would be a lasting effect, though. “What we’ve seen in the past is that after a year or two it becomes business as usual,” he says. “Employees go back to their former perspective that there’s not enough growth in their compensation.”
Meanwhile, arguably the splashiest announcement has come from Visa. In a big change to its 401(k) plan, the payment-card company told its 12,000-plus employees last week that it would match 200% of the first 5% of a plan participant’s salary that he or she contributes. In other words, an employee that contributed 5% of a $50,000 salary, or $2,500, would receive a $5,000 match from the company.
The company was already matching 200% of the first 3% of salary that participants contributed, but the new match policy represents a massive investment in Visa’s work force.
Visa’s new matching-contribution level is very likely the most lucrative one offered by any employer, according to Gregory Marsh, managing director of Bridgehaven Financial Advisors, a member of the Wells Fargo Advisors Financial Network. It’s extremely rare for an employer to go beyond matching 100% of employees’ contributions on the first 6% of salary, he notes. “It’s a huge windfall for Visa’s plan participants,” he adds.
A Visa spokesperson says the move is “a first step” in a larger plan to “focus on long-term, sustainable investments versus one-time actions.” She adds, “Tax reform in the United States will strengthen Visa’s competitive position globally and create new opportunities to invest in our business.”
Taking a somewhat different tack than Visa, insurance giant Aflac changed its 401(k) match from 50% of employee contributions up to 6% of salary, to 100% of employee contributions up to 4% of salary. The company also made a separate, one-time, $500 contribution to plan participants’ accounts.
Marsh says that in the past, when Bridgehaven ran analyses showing clients how much their expenses would rise if they increased their 401(k) matches, most weren’t interested. Now the firm is moving quickly to reopen those conversations with clients “before they start spending the money elsewhere,” he says.
Consulting firm Mercer isn’t yet seeing activity among its clients to alter their 401(k) plans in response to the lowered tax rate, “but we are hearing conversation around it,” says senior defined contribution consultant Amy Reynolds.
It’s surprising, she observes, that companies made and announced decisions to extend some of the windfall to employees so soon after the tax bill was completed and signed into law.
Reynolds adds that raising a company’s 401(k) match doesn’t necessarily help much in terms of employees’ retirement readiness. “For someone who’s only putting in 2% of their pay, it will only push the needle a little bit,” she says.
But there are things other than boosting matching contributions that companies benefiting from the new tax law could do with their 401(k) plans. For example, some organizations haven’t adopted automatic enrollment policies because there are costs associated with doing so, Reynolds notes.