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Sep 16, 2014

Pay for performance alive and well

Survey finds budgets for salary increases holding steady for 2015

By Claudine Kapel

The news regarding salary planning for 2015 is that there’s really no big news – with average salary budgets projected to remain around three per cent.

But the steady state of salary budgets nevertheless spotlights some larger questions. How does one reward and motivate employees when the dollars available for pay increases are lean? And is pay for performance even possible under such circumstances?

Mercer’s 2014/2015 Canada Compensation Planning Survey indicates the average salary increase nationally is expected to be 3.0 per cent in 2015, matching the actual increases in 2014. The survey included responses from almost 700 organizations across Canada.

Despite the lean budgets for merit increases, the survey found pay for performance is still alive and well as organizations reward high-performing employees with greater than average increases. In 2014, the highest performers received an average salary increase of 5.0 per cent, compared to 2.9 per cent for middle performers and 0.3 per cent for the lowest performers.

Mercer reports these pay-for-performance trends are expected to continue in 2015, with Canadian employers projecting a 5.2 per cent increase for their highest-performing employees.

South of the border, Mercer’s U.S. compensation planning survey also shows organizations are continuing to link pay and performance. Further, Mercer reports the spread between increases awarded to high-performing employees and those given to lower-performing employees is getting wider.

Mercer’s U.S. research found the highest-rated group of employees received average base pay increases of 4.8 per cent in 2014 compared to 2.6 per cent for average or middle-rated performers and 0.1 per cent for the lowest performers.

The highest-rated group represented about eight per cent of the workforce. In contrast, the middle-rated group represented 57 per cent of the workforce, while the lowest-rated group represented just two per cent of the workforce.

“Differentiating salary increases based on performance has become the norm,” reports Mercer. “It’s an effective way for employers to recognize top performers without increasing budgets dramatically. Investing in those employees that are driving organizational performance has become a competitive necessity.”

Looking across Canada, Alberta has the highest projected average salary increases for 2015 in the country, at 3.2 per cent, followed by Saskatchewan at 3.1 per cent. In contrast, the lowest projected average salary increases were reported for Quebec and Atlantic Canada, each at 2.8 per cent.

From an industry perspective, the energy sector continues to lead the way. It had the highest actual increases in 2014 (3.9 per cent) and the highest projected increases for 2015 (3.7 per cent).

In contrast, the transportation equipment sector is projected to see the smallest salary increases, at 2.6 per cent, followed by consumer goods and retail/wholesale at 2.7 per cent.

If you want to create bigger differences between what top performers get versus middle or low performers, you first need some means of identifying those top-performing employees. If most employees are rated as “high performing” or “exceeding expectations,” a typical budget for merit increases obviously won’t accommodate them all getting raises of four or five per cent.

Given the limited dollars available, you may not want to rely on salary increases alone to recognize and reward top performers, even if your organization embraces pay for performance.

You may want to have more tools at your disposal for achieving this, including other forms of recognition. Salary increases are part of the equation, but organizations will need other ways to acknowledge top performers as well if they want to retain and engage top talent.

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