Tax Reform, Six Months Later

Company chiefs are being conservative on using new tax windfalls for raises but may shift to a different talent area: skills development.

It’s been half a year since the United States government passed its historic tax reform bill that came with a host of promises and expectations. And to date, tax savings are already leading to more buybacks, more capital expenditures, and higher corporate profits. But there's one area that isn’t seeing much change yet: disposable income.

Widely used as a measure for wage growth, disposable income actually declined from the first quarter to the second. Clearly, much of the tax savings realized by corporations so far isn’t going into the pockets of employees. “It’s still unclear if the potential savings will channel into new talent and leadership programs or be used to create tighter alignment between workforce skill and need,” says Ron Malachuk, a principal in Korn Ferry’s Global Industrial Markets practice.

Part of the reason for that, according to a recent Korn Ferry survey, is because organizations are still reluctant to increase their fixed labor costs. Only 25% of CEOs, CFOs, CHROs, and chief total rewards officers polled by Korn Ferry said they planned to increase base salaries at a faster rate due to tax savings. Even fewer, only 22%, said they planned to increase the value of employee benefits.

“What we are seeing is that, as far as investing in labor, organizations are leaning towards providing cash incentives to employees tied to current rewards programs,” says Korn Ferry senior client partner Tom McMullen. Indeed, while the one-time cash bonuses organizations paid out in the immediate aftermath of the new law’s passing garnered lots of media attention and praise from the White House, going forward, increased bonuses and incentives are likely to be conditioned on meeting certain performance benchmarks.

But if workers aren’t seeing straight salary hikes, they may have noticed organizations redeploying tax savings for training and development. Of the executives polled by Korn Ferry, 38% said they planned to increase investment in that area. Conversely, though organizations are now armed with a more robust war chest to attract and retain outside talent, only 19% of executives surveyed plan to increase hiring activity at a faster rate. That means that organizations believe they can best support their business and drive higher employee productivity and engagement by training and developing their current workforce instead of hiring outside talent for skill and need.

Another explanation for the juxtaposition could be the tight labor market, says Ron Porter, a senior client partner in Korn Ferry’s Global Human Resources Center of Excellence. Porter says historically low unemployment, high job vacancies, and the raging pay-equality debate is creating more workforce churn, which, in turn, is prompting organizations to focus attention on how to keep their best talent.

In the end, though, experts say that given current economic and labor-market conditions, the extra training and skills only make those workers more valuable—and command the kind of money they may have hoped to see from tax reform.