Canadian employers are taking a cautious approach to salary increases for the coming year after having made dramatic cuts to salary budgets in 2009, according to the 31st annual Salary Increase Survey conducted by Hewitt Associates, a global human resources consulting and outsourcing company. In June/July, 387 organizations from across the country representing more than 710,000 employees responded to the survey.
The average salary increase is projected to be 2.8 per cent nationally in 2010, up from the 2.2 per cent increase actually awarded in 2009. Employees in some provinces can expect their salary increases to better the national average. Organizations in Alberta and Manitoba are projecting average increases of 3.0 per cent and 3.2 per cent respectively, while those in Saskatchewan are forecasting 4.2 per cent increases-the highest in the country.
"The recession obviously had a profound impact on 2009 salary increase budgets," says Jeff Vathje, Hewitt's Calgary-based national compensation leader. "A year ago, Canadian organizations were forecasting increases of 3.8 per cent nationally, with 5.1 per cent raises projected for jobs in Alberta. When Hewitt re-surveyed employers in October, after the start of the economic downturn, those projections had been modified to 2.8 per cent nationally and approximately 4.0 per cent for Alberta." A further poll of Alberta-based organizations conducted in February 2009 saw salary increase figures drop to between 2.0 per cent and 2.5 per cent, depending on the position.
"Feedback from employers across the country indicates there is a feeling of guarded optimism with respect to 2010 salary increases and the economy generally," states Vathje. "Half of the respondents indicated that they reduced their 2009 salary increase budgets due to economic conditions, but will increase them in the coming year due to the more favourable outlook. Others are budgeting for higher increases because they expect strong company performance in 2010, while 7.0 per cent are doing so because they realize their pay levels are below market."
As for the buoyant salary increase outlook in Saskatchewan, Vathje suggests this could be due to the fact that Saskatchewan has a broad-based economy-agriculture, mining, and oil and gas-that is seemingly more recession-proof than other sectors across Canada.
Spike in salary freezes
One of the most telling figures gathered in this year's Salary Increase Survey is the number of organizations that reported a salary freeze in 2009. "We've been asking employers about projected salary freezes for the last decade," says Prashant Chadha, a compensation consultant in Hewitt's Toronto office. "This number is usually very low-typically less than two per cent. Last summer, 1.8 per cent of employers were forecasting salary freezes for 2009. In fact, 29.2 per cent of organizations froze salaries this year, providing no increases, the highest we've seen in 10 years."
For 2010, 6.5 per cent of employers are planning to freeze salaries. Another one-third of respondents are unsure about whether they will do so, preferring to hold off on making a decision until there are clearer indications that the economy is picking up.
Employers willing to pay more for performance and scarce skills
Aside from regular salary increase budgets, about 20 per cent of employers have extra funds available to reward employees who are high performers or who have "hot skills." These "special adjustment" budgets were 0.9 per cent of overall salary increase budgets in 2009, but are expected to increase to 1.2 per cent in 2010.
"Hot skills" that are in demand include information technology and engineering.
In addition, one-third of organizations are setting aside separate budgets to reward employees who are promoted during the course of the year. In 2009, employers expected that their promotions budgets would amount of 0.8 per cent of their overall salary increase budget. In fact, they actually spent 1.2 per cent to grow talent within the organization and reward those they identified as having high potential for the company. This budget is expected to increase to 1.4 per cent in 2010.
Employers also continue to rely heavily on variable pay programs to incent and reward employees. "Under these programs, employees receive a bonus if certain corporate, divisional and/or individual goals are attained," explains Chadha. "There has been a slight shift in emphasis in 2009, however, that is expected to carry over into next year. When we surveyed companies last year, 69 per cent said that corporate performance was a factor in determining variable pay amounts. This year, that figure was 74 per cent. It's not a huge increase, but it does suggest that employers are encouraging higher performance across the organization, rather than rewarding only individual performance."
Sending the right message
"The good news is that 61 per cent of organizations discussed the impact of the recession on salaries with employees," says Leslie Dutton, a senior communication consultant with Hewitt in Toronto. "Hopefully, that message started at the top. The last thing organizations should do in tough times is cut down on or stop communicating. Employees crave information, especially from leaders, to help them make sense of the times and understand how the business is positioned to win, what they need do to help the organization succeed, and what's in it for them."
If the message is simply "a bad economy means no increases", employees could well expect to receive raises as soon as the economy turns around. "If expectations aren't managed, organizations run the risk of losing employees they wish to retain," says Dutton.
It is also imperative for organizations to equip managers to have the right conversations with employees. "Managers need to understand the organization's compensation philosophy in the context of current (and future) business realities, and be equipped with the tools to help them have effective pay discussions and deliver consistent messages," Dutton says.
In addition, the Salary Increase Survey results indicate that less than half (45 per cent) of employers provided total rewards statements during the last year. "Some employers believe that giving employees a statement only drives home bad news," said Dutton. "But these statements are designed to focus on the big picture of pay, benefits and opportunities. The pay story is just one aspect that makes working for the employer a rewarding experience."
"The bottom line is that it is never too late to start communicating, particularly as there are still a lot of employers who are undecided about salary increases for 2010," says Vathje. "Hewitt will again conduct periodic checks on salary increases throughout the year to see the effect economic and other factors are having on salary increase budgets in Canada."
Copies of the Hewitt Associates' 31st annual Canada Salary Increase Survey are available at www.compensationcenter.com.
Organizations that are interested in pay-for-performance programs may wish to participate in Hewitt's Variable Compensation Measurement survey. Please visit www.hewitt.com/canada for more information.