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- Lucas: If you got a raise this year, you probably felt it in your hourly rate or your salary. But there's a whole other part of your pay that's moving in the opposite direction — and it might explain why that raise doesn't feel as big as you hoped. Luna: You're talking about bonuses, right? The variable stuff, not the base pay. Lucas: Exactly. Bonuses, commissions, profit-sharing, even things like signing and retention bonuses. The Bureau of Labor Statistics tracks all of this in the Employment Cost Index, and the latest data from the first quarter of 2026 shows that while hourly wages are up about 2.4 percent year over year, the incentive pay component actually shrank. Luna: Shrank meaning employers are cutting back on bonuses, or just not paying as much? Lucas: Both, really. The ECI's wage and salary sub-index rose, but the portion that's categorized as 'nonproduction bonuses' and other incentive payments fell by about 1.1 percent in the first quarter compared to the same period last year. That might not sound huge, but for a worker who typically gets a five or ten thousand dollar annual bonus, a one percent cut is real money. Luna: And this is happening while the overall labor market still looks pretty tight. The ADP report from last week showed private payrolls grew by 122,000 in May — stronger than expected. So why are companies pulling back on bonuses? Lucas: That's the puzzle. I think there are a couple of forces at play. One is that after the pandemic-era labor scramble, a lot of employers used signing bonuses and retention bonuses to attract workers. Now that turnover has normalized, they're letting those expire. The other factor is uncertainty. We've got the May jobs report coming out Friday, but we also have this backdrop of escalating trade tensions — the U.S. just proposed fresh tariffs on sixty economies. Luna: Right, that new tariff proposal from Thursday. So companies are hesitant to lock in higher fixed costs, but they're also cautious about committing to big variable payouts when the outlook is murky. Lucas: Exactly. Bonuses are discretionary. If you're a CFO and you're not sure whether your input costs are about to spike because of tariffs, you'd rather keep that money on the balance sheet. The data backs this up: the share of total compensation that comes from variable pay has been declining steadily since late 2023, and it's now at its lowest point in about three years. Luna: So who gets hit hardest by this? I imagine it's not evenly distributed. Lucas: Not at all. If you're a salaried professional at a large company, your bonus might be a nice chunk of change, but you can probably absorb a cut. But for workers in retail, hospitality, sales, or manufacturing, variable pay can make up twenty, thirty percent of total compensation. A shrink in that category means a real drop in take-home pay, even if their base hourly wage goes up. Luna: That's the thing about the 'average hourly earnings' number we always cite. It includes bonuses and overtime, so when those shrink, the headline wage figure might look better than the reality for a lot of people. Lucas: Right. The average hourly earnings for private-sector workers in May was $37.50, up from $37.41 the month before. That's a small gain, but if you strip out the bonus component, the underlying base wage growth is probably a bit slower. And for the worker who got a forty-cent raise but lost a thousand-dollar bonus, they feel the squeeze. Luna: And this connects to another story we've been following — long-term unemployment. The latest data shows that the number of people out of work for 27 weeks or more is surging. If companies are cutting back on incentives, it might signal they're less desperate to hold onto every worker. Lucas: That's a really good link. Long-term unemployment is a lagging indicator, but it tells you that even though the headline payroll numbers are okay, there's a pool of workers who are struggling to get back in. And if employers are trimming bonuses, it suggests they have less need to compete for talent. The dynamic has shifted from 'we'll pay anything to get someone in the door' to 'we can be more selective.' Luna: And for the workers who are in the door, a smaller bonus means less ability to build savings or pay down debt. That has ripple effects — less consumer spending, more reliance on credit. Lucas: Yeah, and that's exactly the kind of thing the Fed is watching. The ten-year breakeven inflation rate is at 2.36 percent, basically flat. If wage growth stays moderate and bonuses shrink, that might ease some of the inflation concerns from the labor side. But it also means consumers have less firepower. Luna: So if someone is listening and they're wondering, 'My raise felt small, maybe this is why' — what should they look for in their own compensation? Lucas: First, look at your total compensation statement. Separate the base pay from any bonuses or incentive pay. See if your bonus percentage changed year over year. Second, pay attention to how your company talks about performance — if they're tightening budgets, bonuses often get cut before layoffs happen. And third, if you're job hunting, ask not just about salary but about the likelihood and history of bonus payouts. A high base salary is worth more today than a promise of a fat bonus next year. Luna: That's smart. And I think it's part of why walking through the economy with us is valuable — you start to see these patterns before they hit your wallet. Lucas: That's exactly the idea. And we deliberately keep this show free of ads so we can talk about stuff like this without any sponsors influencing what we cover. If you find value in that, and you want to support it, the link is buy me a coffee dot com slash fexingo. No pressure, just an option for folks who want to help keep this ad-free. Luna: Yeah, it's a small way to say this matters to you, and it really does help us keep going. Anyway, back to the trend — one thing I'm curious about is whether this bonus shrinkage is cyclical or structural. Is it just a post-pandemic normalization, or are companies permanently shifting how they pay? Lucas: That's the million-dollar question. Some economists argue that the pandemic created a temporary spike in variable pay as companies scrambled, and now we're just receding to the mean. But others — and I lean this way — think we're seeing a structural shift toward more predictable, lower-risk compensation. Companies want to avoid the wage spiral they saw in 2021 and 2022, so they're putting more weight on base pay and less on variable incentives. Luna: Which means workers might have to get used to smaller year-end surprises, but steadier paychecks throughout the year. Lucas: Exactly. And for personal financial planning, that's actually not terrible. A steady paycheck is easier to budget around than a big bonus that might or might not materialize. But it does mean that if you were counting on that bonus to cover a major expense, you need to adjust your expectations. Luna: So keep an eye on the Employment Cost Index when it comes out next quarter. If the bonus component keeps dropping, it's not a blip — it's a new normal. Lucas: Exactly. And we'll be right here to break it down when it does. Thanks for listening, and we'll talk to you next time.