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The Tax Reform Bonus

Walmart store exterior
photo by Mike Mozart

Walmart became the latest and largest U.S. company to announce significant pay boosts for employees as a direct result of the new tax law, a pattern that had earlier led The New York Times to characterize such moves as possible “publicity stunts.”

The Times’ skepticism is not hard to understand. Its New York City newsroom is largely free of any substantial knowledge of how successful businesses are actually run, including (but not limited to) its own. And in both the news and opinion sides of the editorial operation, Times journalists seldom encounter a tax increase that seems ill-advised, or a tax cut that is the opposite.

So how could the Times not suspect that a company like Walmart is trying to pull a fast one by raising its minimum U.S. salary to $11 an hour, and by handing out bonuses of up to $1,000 to at least 400,000 employees?

For what it’s worth, the actual number of bonuses will probably be higher. Walmart said it is taking a $400 million charge to cover the cost of the bonuses, but since tax savings will make the money go further and some employees will get less than the maximum amount, it seems likely that the number of beneficiaries will be in the high six-figure or low seven-figure range. Walmart, which is the nation’s largest private employer, currently employs around 1.5 million workers in the United States; the bonuses will range from $200 to $1,000 depending on a worker’s length of service. Walmart is also expanding its parental leave program.

If you are a worker at Walmart – or at Wells Fargo, AT&T or any of the other companies that are boosting compensation following the new law’s passage – your attitude toward such behavior is likely to be something along the lines of, “If this is a publicity stunt, sign me up!”

Memo to Times journalists: Corporate managers, whose compensation ultimately is tied to company earnings and stock prices, don’t hand out millions of dollars in bonuses as a “publicity stunt.” There are many ways to get more bang for the marketing buck.

Corporations do, however, like to take credit for positive things they would have had to do anyway. And in the current environment, boosting payouts to rank-and-file workers is one of those things.

It is no secret the labor market has tightened substantially. The pace of that tightening, as well as accompanying wage growth, has accelerated in the past year, coinciding (whether one attributes it to this or not) with the incoming administration’s push to cut business costs through reduced regulatory and tax burdens. By the end of 2017, the unemployment rate reached 4.1 percent, its lowest level in the past 17 years.

Companies were already under pressure to protect their workforce from poaching by competitors. Then the tax bill came along, reducing the top corporate tax rate from 35 percent to 21 percent.

A basic rule of business is that you can only spend a dollar once. If the government takes more in taxes, businesses have less to spend on everything else, including wages. If government takes less, businesses can spend more.

Of course, this does not mean managers will automatically hand out the entirety of the business’s tax savings as wage increases. They won’t. Some will go to other costs; a lot will go back to shareholders through increased earnings, dividends and share buybacks. Managers also know that while taxes can go up as well as down, once a wage level is established it is very hard to cut back on base wages later. They can cut compensation costs mainly by reducing overtime and bonuses or laying people off, both of which hurt morale. So managers tend to be conservative when they set their pay scales.

But if other businesses have more cash to spend on wages thanks to a tax cut, then companies like Walmart and Wells Fargo have to send a message to employees that the grass is not apt to be greener elsewhere. The benefits of the corporate tax cut help fuel a compensation arms race that was already getting underway as companies compete to attract and retain the workers they need. The tax bill did not start the trend toward higher pay for lower-paid workers, but it accelerated it.

A publicity stunt? Think back to all the times corporate stock prices improved when managers announced cost cuts, such as staff reductions. Investors do not reward management for needlessly inflating costs. If compensation is going up, it is because business realities are driving it up. The tax cut corporations received this year is one of those realities.

Journalists at the Times will just have to get past their assumption that corporate taxes are somehow borne by someone other than the people who draw their sustenance from those corporations. When reality intrudes on dogma, it isn’t a stunt. It’s life.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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