Caution ahead

Employers keeping forecasts low when it comes to salary increases for 2017
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/17/2016

Characterizing the mood as “very cautious,” Gordon Frost says salary survey forecasts for 2017 are the lowest he’s seen in years.

“In the 20 years since we’ve done this survey, this is actually the lowest number we’ve gotten,” says Frost, Montreal-based market leader of Mercer’s talent business in Canada.

Continuing economic uncertainty and cost reduction initiatives are leading to projected increases of 2.6 per cent across all employee groups, found Mercer’s survey.

But that still varies by industry, says Frost, citing the energy sector where the economy is not as strong as it used to be, largely because of the price of oil. “The job market is not nearly as tight as it was,” he says.

When anticipated salary freezes by employers are taken into account, overall salary increases in 2017 are expected to be even lower at 2.3 per cent, found the survey of nearly 500 Canadian organizations.

“We’re actually seeing fewer companies projecting salary freezes this year, so that’s probably good news for most Canadians. The only real segment of the economy that is projecting salary freezes is energy. Right now, 40 per cent are planning a freeze for at least some of their employees next year, which is down from 60 per cent last year,” says Frost.

Outside of the energy sector, only five or six per cent of employers are planning a freeze, so it’s really a story of two different segments, he says.

Even lower increases were found in Morneau Shepell’s survey, which predicted salaries to rise by an average of 2.1 per cent in 2017. This is down from the 2.5 per cent forecast for 2016 and includes expected salary freezes while excluding promotional or special salary adjustments.

It’s about poor economic growth, lower oil prices and poor-performing pockets across the country, says Randal Phillips, executive vice-president and chief client officer at Morneau Shepell in Toronto.

“These are the lowest expected salary increases that we’ve seen in more than two decades.”

Actual salary increases for 2016 averaged just 2.1 per cent, found the survey.

“I suspect most people in Canada thought we would come out of last year’s dip a bit more quickly but we haven’t,” he says. “It’s slow growth… so people are settling in, being a little more conservative in their expectations.”

Canadians can expect to see average base salary increases of 2.2 per cent in 2017, including zeroes, according to a Korn Ferry Hay Group survey of almost 700 employers.

In looking at the organizations that are not freezing pay, the average is 2.4 per cent,  says Phil Johnson, global solutions leader for work measurement at Hay Group in Ottawa.

“It’s in line with what we’ve seen in previous years,” he says. “There is a slight trend down, I would say, over the last four or five years, from something closer to 2.9 per cent in 2013, and it’s been steadily dropping by 0.1 or 0.2 per cent per year.”

“Everybody is being cautious and while we’re talking about positive growth for Canada, we’re not talking about large-scale growth.”

For all organizations, the actual base salary change realized in 2015 was 2.2 per cent, lower than the 2.4 per cent projected a year ago, found Hay Group.

Broken down, those respondents that have not yet made a final decision on compensation for 2017 are predicting 2.3 per cent, while those that have made a final decision are at 1.8 per cent, says Johnson.

“There seems to be a trend for people to make decisions later and be watching what’s happening before making the final commitment. In a sense, that’s a bit surprising because it’s not like the world is very volatile in terms of wild swings — it’s pretty much steady as she goes for the economy and compensation, but organizations are just not wanting to commit themselves.”

Pay for performance still important

Organizations continue to provide higher-than-average salary increases to the highest performing employees, with the top seven per cent of employees projected to receive an average salary increase of 4.3 per cent in 2017 and the bottom nine per cent looking to see increases of 0.2 to one per cent, says Mercer.

With such limited budgets, it’s certainly more challenging for employers to recognize high performers, says Frost.

“If they’re saying a top performer can get a 4.3 per cent increase, is that really that engaging or that motivating?”

Employers need to take much more of a holistic, total rewards or total employee value proposition view by offering incentive plans to top performers, he says, such as enhanced training and development or special projects. Some employers are focusing on career development or bonus plans while others look to the work environment.

“The smart companies are the ones that really think about what’s uniquely relevant to their organization and then focus on that,” says Frost.

Employers also have to spend more time focusing on leaders so they’re equipped to have discussions with people.

“If I think about the days when a top performer would get a top raise, ‘Here’s your 10 per cent, you’re doing (great),’ but now when you have to be more sophisticated in the discussion you have, you need better-trained managers.”

With average increases of 2.5 per cent, there’s not much room to differentiate between top performers and average or low performers, says Johnson.

“If the difference is going to be a fraction of a per cent between average and top, is it worth it? Is it worth going through the trouble, process, potential anxiety, labelling somebody… if it’s not going to have a material impact and it’s not going to be material enough to affect the behaviour of people to dangle a tiny little carrot in front of them?”

So the trend in performance management is to think less about the direct link to compensation, “which can at times corrupt the whole process,” he says, and instead say everybody will get the same increase while a handful of people at either end of the curve — high flyers and low performers — see bigger gains or losses.

“For 80 to 90 per cent, (they’re) not going to bother to differentiate between them,” he says, adding it’s consistent with the notion of not doing an overall ranking of people.

Most organizations continue to use performance ratings when making salary adjustment decisions — only four per cent have either eliminated such ratings in 2016 or plan to do so, found Mercer — but a further nine per cent are considering it.

“A lot of organizations and managers are doing it more from a compliance perspective because they have to, but employees aren’t feeling they’re getting a really robust experience out of it. So organizations are trying to rethink it — is there a different approach we can take that is more effective and engages our people?” says Frost.

That could mean, for example, discretionary pools where a manager is free to distribute a pool of money based on her evaluation of people’s performance.

“The evaluation still has to happen, it may be less formalized, they may not give a score or rating but somebody has to do that, and the difficulty there is at least with a rating system, most organizations are giving specific guidance… (around) skills, caps, results they’re expecting — ‘Here’s how to evaluate a strong performer’ — whereas in the discretionary pool, it can be the Wild West,” he says.

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