About Those Tax Reform Bonuses…

Today we step away from corporate compliance for a short detour into financial reporting, tax policy, and corporate governance. All those companies announcing bonuses, raises, and new employee benefits as a result of tax reform may not be as honest about their motives as their breathless press releases say.

I did a quick analysis of how much cash the S&P 500 have been reporting in recent quarters, and those numbers look good — great, in fact. Total cash reported for third-quarter 2017 was $1.65 trillion, the highest amount we’ve seen since at least the start of 2014. Sure, the totals gyrate from one quarter to the next, but overall cash is up 15.5 percent in the last 15 quarters, and the trend line (below, in red) clearly points in the right direction.

 

We can also say the same for average cash per firm in the S&P 500: an increase of 14.3 percent, from $2.9 billion at the start of 2014 to $3.31 billion last fall. Again, the trend line in red says it all.

 

That’s a lot of cash. So it raises the question: How much would Corporate America have rolled out bonuses, pay raises, and other employee benefits anyway, even without tax reform?

After all, the primary driver of wage growth isn’t the corporate tax rate; it’s a tight labor market, and the United States has one right now. Unemployment among college-educated workers fell from 2.5 to 2.1 percent over the course of 2017, and unemployment even among those with only a high school diploma fell from 7.6 to 6.3 percent.

Meanwhile, most companies announcing new goodies for employees are announcing bonuses or new fringe benefits: AT&T, Home Depot, Comcast, JetBlue, Waste Management, and others. Yes, some are awarding pay raises, too, but as we can see from the chart below, the single largest category of reward is a one-time bonus.

One-time bonuses are easy to award when you have plenty of cash. Other perks, such as extended parental leave (Walmart) or education benefits (Boeing, Disney) are easy to award too, because when recession hits in the future, a company can always scale those benefits back. And stock grants (Starbucks, Apple, Verizon) are always easy to award, especially when Wall Street is booming.

Increased wages, however, are a more delicate matter. They become permanent, fixed costs, much more difficult to rescind if times turn tough and the cash gusher dries up. Not surprisingly, then, fewer companies are announcing broad-based wage increases.

Republicans enacted tax reform on Dec. 22, and almost immediately companies started touting reform as reason for their new bonuses, benefits, and pay raises. But as we can see, Corporate America already had a great third quarter in the can. Presumably most companies were putting the final touches on a great fourth quarter, too. We’ll find out in coming weeks as earnings season picks up.

So cynics might say Corporate America was already planning to give out lots of goodies to employees this year, because the tight labor market is finally tilting toward employees’ favor. Then tax reform, which always had dicey political prospects, actually did arrive, showering Corporate America with a huge, permanent tax cut. Now companies are returning the favor by churning out press releases crediting tax reform, which gives Republicans that much more chance to remain in power and pass more tax cuts and deregulation in the future.

Good thing nobody in this country is cynical, right?