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Sep 1, 2015

Budgets for salary increases remain lean

But employers still need to address the pay issues that may be percolating internally

By Claudine Kapel

If you’ve been hoping 2016 will mark the return of more generous budgets for salary increases, the answer is…nope.

In fact, in Canada, the actual budgets for salary increases in 2015 came in lower than what had been projected, reports WorldatWork. Employers had projected a 3.0 per cent average budget for 2015 increases, but the actual average budget came in at 2.8 per cent.

And things aren’t much brighter for 2016. The projected average budget for next year’s salary increases is 2.9 per cent. WorldatWork’s Canadian figures reflect responses from 428 organizations.

Does that mean modest levels of salary increases are here to stay?

“With the slowing of growth in budgets for salary increases, there is speculation of a new normal,” says WorldatWork.

Looking at its U.S. data, WorldatWork notes that for the 15 years leading up to the last recession, salary increase budgets hovered between 3.5 and 4.5 per cent. The same trends generally apply to Canada as well.

But “after all-time lows in 2009 caused by prevalent pay freezes, followed by the thawing of those freezes and a partial recovery in averages, salary increase budgets have reached only the 3.0 per cent mark,” notes WorldatWork.

It suggests there are several forces that may be keeping budgets for salary increases at modest levels, including ample access to qualified labour, a low rate of inflation, and the drop in oil prices.

“Most organizations are targeting the market median in terms of pay and are not faced with pressure from anywhere to raise wages more aggressively.” To that end, “modest salary increase budgets with little to minimal growth year over year may be here to stay until significant wage pressure comes from somewhere in the economy.”

WorldatWork suggests multiple pressure points will likely be needed to fuel a shift, as individual factors such as low unemployment or job creation on their own have not been enough to change the current course.

“If organizations can attract and retain the talent they need to achieve business goals, they will likely continue budgeting around 3.0 per cent and look for other ways to motivate and reward employees.”

The picture is even less rosy for Canada. “Canada has been experiencing an economic contraction so far in 2015,” says WorldatWork. “Low oil prices appear to be impacting many economic indicators and the reported decline in the size of the 2015 salary increase budgets seems indicative of the current economic landscape.”

That means there is “clearly less upward pressure on wages in Canada” relative to the U.S., given the economic picture here. “Even if the Canadian economy picks up in the near future, employers may still be able to attract and retain needed talent with modest pay increases.”

While budgets for salary increases continue to be lean, that shouldn’t be taken as a signal to put compensation management on autopilot. Compensation challenges related to external market competitiveness and/or internal pay fairness can lead to lower levels of employee productivity and engagement, even – and perhaps especially – when people don’t see themselves as having reasonable options for getting a job elsewhere.

Here’s what employees will be particularly mindful of, given the continuing emphasis on modest salary increases:

  • Does the distribution of pay increases seem fair? What criteria are used to determine the size of an individual’s increase?
  • On a percentage basis, how much are top performers getting relative to average performers?
  • On a percentage basis, how much are employees getting relative to what is being awarded to senior leaders? Relative to unionized workers?
  • Do internal pay levels seem competitive with what they might earn elsewhere in a comparable job?
  • Do internal pay levels seem fair? Are people in comparable jobs, with similar levels of performance and experience, earning similar pay?
  • Are bonuses being paid out fairly, or do there seem to be overt winners and losers?

It’s a given market forces will influence how much organizations budget for pay increases. But without looking at this budget within a broader compensation and talent management context, an organization may find itself eroding organizational performance.

For example, the WorldatWork notes most organizations seek to position their internal pay levels against the market median. If your organization’s pay levels are lagging the market, a lean budget for pay increases won’t close that gap unless you have separate, additional dollars for market adjustments.

So while budgets for salary increases may be a little on the sleepy side, you should resist the urge to press the compensation snooze button.

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