With predictions for 2014 salary increases staying fairly steady compared to 2013, experts say next year’s bonus outlook should remain relatively stable.
But while estimates for salary increases were conservative — ranging from 2.6 to 3.1 per cent — those numbers could still fluctuate a small amount.
“What we’re seeing, generally, is that although you get about 500 companies responding, they break down into sort of two (groups) — those who’ve already agreed on their pay review for next year and it’s already locked in, and those who are giving us basically an estimate,” says Nick Bishop, senior principal at Hay Group in Calgary.
About 20 per cent of respondents have already set out what their salary increases are, while the remaining 80 per cent are estimating, he says.
“There’s been a bit of a difference between those who’ve already agreed and those who are (estimating). So, generally, what we’re seeing is that those who’ve definitely got a number locked in, they’re about half a per cent lower than those who are still making an estimate,” says Bishop.
“(There are) concerns that maybe, at the end of the day, increases might not be as strong as people were estimating.”
Expect many bonuses to hit target
Even if 2014 increases aren’t quite as strong as initially predicted, there shouldn’t be any drastic surprises.
“Our estimates are usually pretty accurate,” says Bishop. “Usually they come out within 0.1 or 0.2 (per cent).”
Hay Group’s prediction for 2013 was 2.9 per cent for overall base salary movement, and it came out at 2.8 per cent.
So if salary increases do come out close to 2.6 per cent in 2014, what kind of climate will that create for bonuses?
“Bonuses next year, I think, are going to be pretty similar to the ones that emerged this year,” he says.
“You don’t necessarily have to have a buoyant base pay and employment economy for bonuses still to be quite good.”
As long as there’s a good balance between costs and revenues, many bonuses could still meet target — despite less-than-dramatic salary increase budgets.
“On the private side, really, most annual bonuses are just driven by this year’s results, so provided people are keeping their costs under control and their revenues are still (strong), then we’re still expecting a lot of bonuses to be hitting target,” says Bishop.
“Where you’ve got more strategic uncertainties is probably in long-term incentive plan payments rather than the short-term bonuses.”
Wide gap between large, small organizations
Morneau Shepell forecasted an average salary increase of 2.6 per cent for 2014, with survey respondents heavily based in the services and manufacturing industries.
That number is quite similar to the projected and actual increases for 2013.
In terms of bonus projections, there was a very wide gap between large and small businesses in terms of last year’s actual bonus payments as a percentage of target, says Michel Dubé, principal at Morneau Shepell in Montreal.
“If we look at small and large organizations, there’s a difference of (about) 20 percentage points between small and large in terms of bonus payments as a percentage of target,” he says.
“As an example, in small organizations, executives earned 83 per cent of their target, and in large (organizations), 105 per cent of their target. As a matter of fact, the difference between the earnings was a little bit higher than the distance between the target for 2013.”
Bonus targets for 2014 also show a gap between small and large organizations, with the smallest being five per cent and six per cent, respectively (for operation or production staff), and the widest being 20 per cent and 34 per cent, for executives.
“The targets are quite large for very large organizations for certain job categories,” says Dubé in reference to the executive category.
“We observe as well that large organizations tend to be in a position to better recognize employee contribution and performance through salary adjustments than very small ones … realistically, we can understand that in very large organizations there is a margin of maneuver that is more important to focus on the right place.”
Increased budgets must be used effectively
Focusing variable pay in the right place is a critical strategy when dealing with limited increase budgets, says Stephen Hornberger, principal at Mercer in Toronto.
Mercer is predicting an average of 3.1 per cent in salary increases — just slightly lower than the 2013 actual increase of 3.2 per cent.
“I don’t look at those numbers and view them with any real surprise,” he says. “The fact that they’re tending to three per cent is sitting comfortably within historic norms during a steady state in the economy.”
With limited increase budgets, it becomes even more crucial to develop effective allocation strategies.
“You’d still need to understand how to use that increase budget effectively,” says Hornberger.
“Mercer definitely is a proponent of differentiating higher performers with increases, and even recognizing that employers would have a range of base salary for a given role or a given level within an organization.”
The debate then becomes whether to use the more traditional bonus pay approach, or to use a model of pay differentiation for performance.
“The first questions are… do we want to drive a pay for performance culture? And, if so, do we want to differentiate pay and, if so, by how much?” he says.
“So those are really challenging questions for organizations, because some historically have used a bonus approach to the variable pay — whereby the plan might be funded based on a certain level of profitability, and then that pool distributed in a relatively egalitarian way. There’s a move that we’ve seen over the years to go from that model to something more sophisticated to truly drive individual performance.”
Those salary increase numbers should represent a range that is higher for higher performers, which makes performance management systems a critical tool, says Hornberger.
“(It) is a difficult question that organizations continue to grapple with,” he says.
“What we are seeing a lot of lately is our clients are asking us to review their incentive plan designs… and they’re trying to get an understanding as well of what (their) competitors for talent do in terms of pay for performance.”
2013 Actual Bonuses
Payout as percentage of 2013 target
Management and professionals
Technical and administrative staff
Operation or production staff
2014 Bonus Targets
Operation or production staff
Source: Morneau Shepell
© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.