The real reason for all those Trump bonuses

Senior Columnist
Yahoo Finance

Back in 2015, Walmart’s stock plunged 10% in a single day when the company said wage hikes were hurting profitability.  And that helps explain why scores of companies are suddenly boosting pay now that the Trump tax cuts are going into effect.

More than 150 companies have announced bonuses or raises so far in 2018, as a sharp cut in the corporate tax rate produces a rare phenomenon–found money for corporations. Many CEOs credit the Trump tax cuts with boosting the competitiveness of U.S. businesses and generating more confidence about the future.

But CEOs aren’t normally altruistic, and it’s unlikely they’re throwing money around just to be generous. Instead, they’re responding to a tightening labor market by sweetening the deal for workers, at a time when Wall Street isn’t likely to care about rising labor costs–because the tax cuts will boost profits anyway.

The unemployment rate, at 4.1%, is at the lowest level in 18 years. There are roughly 6 million unfilled jobs in the U.S. economy, with more firms saying they can’t find the workers they need. Many economists think that should have pushed pay up by now—but it hasn’t, really.

“Wages have by and large not risen,” says Peter Kenny, senior market strategist for Global Markets Advisory Group. “Employers are being forced to address that as the employment picture continues to tighten. These steps are meant to improve morale, increase retention and boost productivity.”

Big companies obviously earn a bit of goodwill by announcing moves that are good for workers. But there’s ordinarily a downside, since anything that raises labor costs alerts Wall Street analysts to the possibility of declining profits. And there are myriad instances of analysts dinging stocks when labor costs rise, which makes CEOs wary of ever raising pay unless business conditions require it.

The Trump tax cuts provide a unique opportunity for companies to boost pay without getting punished by Wall Street. Big companies are just now beginning to estimate the net effects of the tax cuts, and so far, the forecast is for a roughly 8% jump in after-tax profits in 2018, according to Credit Suisse. That’s a big boost, and it gives CEOs plenty of wiggle room to address labor shortages and concerns about workers bolting for better-paying jobs.

Even so, companies are being stingier than some of the cheerful PR suggests. A Yahoo Finance compilation of all the recently announced moves shows that most companies are offering one-time bonuses rather than permanent raises. That’s a lot cheaper than across-the-board pay hikes that permanently raise labor costs. “The bonuses are the most suspect because that’s a one-time hit, likely made up in the first year,” says David Nelson, chief strategist for investing firm Belpointe. “It’s different when you raise wages. You can’t take it back.”

Companies may also be giving workers a lift now, because they see moves coming later this year, such as stock buybacks, that will primarily benefit shareholders. So bonuses and raises could be an effort by companies to inoculate themselves from criticism that their response to the tax cuts primarily benefits the wealthy. “We do not expect corporate tax cuts to lead to a meaningful boost in business investment,” Moody’s says in a recent report. The debt-rating firm expects companies to “prioritize activities such as share buybacks, M&A and paying down existing debt” instead.

If Moody’s is right, then the Trump tax cuts won’t trickle down to workers over time in the form of sustained pay raises and broadly improving living standards. The biggest boon for workers could end up being the one-time windfall we’re seeing now. It’s better than nothing, but it doesn’t necessarily mean happy days are here again.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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