The Decline of the Annual Pay Raise and the Rise of Health Benefits

All Executive Health June 28, 2016

The effectiveness of the annual pay raise is fading. Typically, this tactic has been used to drive performance, boost satisfaction, and retain and reward employees. But the job market is changing, and it’s time for employers to begin changing with it.

Old School

So what’s the problem with annual pay raises?

On the one hand, it’s just not what employees want. Four out of five U.S. employees prefer a new benefit to a pay raise.

Employers also aren’t finding them that effective. According to a Willis Towers Watson survey, only 20% of employers found merit pay to be effective at driving individual performance. Similarly, only 50% found annual bonuses effective in this regard.

This could be because an annual pay raise only provides a one-time pat on the back that employees forget about. Or it could be that the pay raise just isn’t providing the same impact, compensation or otherwise, as an innovative benefit.

On the retention side, pay raises aren’t as realistic in today’s job market where employees are more willing to leave an employer for new opportunities. The annual pay raise has been called an “old school” technique that works on the assumption that employees will remain at a company for 10 years or more. But if an employer waits a whole year to reevaluate compensation, they risk losing employees who didn’t want to wait around for a raise when they can instead simply find a different job.

New Frontier

So what now? Where can employers find a new way to incentivize performance, boost satisfaction and retain and reward key employees?

As stated above, employees prefer a new benefit to a pay raise. The #1 preferred benefit is health insurance.

In fact, employer ratings increased by at least 1 star (out of 5) when employees were provided health coverage. Providing this benefit also showed a .34 increase in overall benefits satisfaction. Health benefits also have the ability to make or break an employee’s decision to stay at or leave a company. And health coverage is used throughout the year, so it can serve as a constant reminder of the employer’s appreciation, unlike a once a year pay raise that can be easily forgotten. Providing great health benefits really checks all the boxes.

Ultimate Health, the leading insured supplemental healthcare reimbursement plan, provides up to $100,000 in coverage, which is far more value than a similar taxable bonus can deliver.  That means it provides a huge compensation bang for your buck. This plan saves employees from spending after-tax money on their health expenses and offers additional benefits like access to top doctors and travel services. It can even be offered to select employee classes. Welcome to the new frontier.

These Are The Best Employee Benefits and Perks.” Fast Company.
“Core Benefits Drive Satisfaction More than Niche Offerings.” SHRM.
“Companies Rethink the Annual Pay Raise.” SHRM.

Subscribe to our blog

to get the articles delivered to your inbox