Salary increases on the table for 2012

Forecasts in 3 per cent range, but recent market turmoil could dampen optimisim
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 09/11/2011

While the dramatic market fluctuations of recent weeks have made for uncertain times, Canadian employers are predicting salary increases of 2.8 per cent to 3.2 per cent in 2012 — though the forecasts are based on surveys done in June and July.

Employers are projecting average base pay increases of 3.1 per cent for 2012, according to Mercer, based on a survey of 675 organizations and excluding zero budget increases. Employers actually awarded pay increases of three per cent in 2011, up from 2.7 per cent in 2010 and two per cent in 2009, found the Mercer Compensation Planning Survey.

“It’s a little bit higher than it was last year so, from an employee perspective, it’s certainly encouraging and to the extent it’s somewhat indicative of how strong the economy is or the market and labour is, it’s likely to be viewed positively,” said Iain Morris, Toronto-based human capital business leader at Mercer in Canada.

Base salary increases of 2.8 per cent in 2012 are predicted by respondents to Hay Group’s survey of 655 organizations. That compares to 2.6 per cent predicted for 2011, where the actual rate was 2.7 per cent.

“There’s a degree of optimism — at least stability,” said Karl Aboud, director of the Canadian reward practice at Hay Group in Toronto, adding the survey was done three months before the market turmoil.

“So we’re a bit conservative from pre-recession but we’re a little bit optimistic from last year.”

Only five per cent of employers are going to freeze payroll adjustments, he said, and without factoring in zero budget increases, the 2.8 per cent becomes three per cent. But 2.8 per cent is still a full percentage point less than the 3.8 per cent of pre-2009 recession, said Aboud.

“So maybe there’s some cautiousness built into the numbers because, even though inflation is about the same as it was back then, we’re not being as optimistic as before the recession — that’s still carrying some nerve endings for a lot of folks.”

Salary budgets for next year are not affected by the United States and European Union economic woes — so far — according to Morneau Shepell’s compensation survey of more than 250 organizations. Respondents are tabling average salary increases of 2.8 per cent for 2012 in Canada, including salary freezes.

“Their optimism is a little bit higher than last year, both with regards to profitability and also staff levels,” said Michel Dubé, a principal at Morneau Shepell in Montreal.

“There is a little bit of inflation coming up, I think, in the salary market. However, there is a lot of variance between provinces with regards to inflation in prices.”

Expectations are very low relative to salary freezes, he said, varying between four per cent and six per cent depending on job categories, with an average of five per cent.

“We’re getting back to the situation that we have seen in 2008, in this regard, where people were expecting very rare situations of freezes,” said Dubé. “However, I think there will still be more freezes than what was given to us at this point because of the economic uncertainty and the woes. We live in a very uncertain environment right now.”

Having surveyed 434 employers, Aon Hewitt is predicting overall salary budget increases of 3.1 per cent in 2012, including salary freezes and cuts. The results are not surprising, said Suzanne Thomson, a senior associate at Aon Hewitt in Toronto.

“Certainly the economy is rebounding so we’re looking at modest increases.”

Actual numbers were up a little bit in 2011, at 2.9 per cent compared to the 3.1 per cent projected, found the survey.

Effect of market swings uncertain

As for the recent market fluctuations, organizations will be cautious and make compensation decisions late in the year to see where the market’s going to land, said Morris.

“The stock market isn’t the economy, necessarily, and we need to be a little bit careful that we don’t see one that’s headline news and assume it’s representative of what’s happening in the economy,” he said.

However, Canada will be impacted by developments in the U.S. and Europe as there are many subsidiaries in this country, said Morris.

“Although many of them try to act locally, there’s some pressure to follow reasonably closely what they would do domestically and it’s a little unclear at this point how confident we should be about the U.S. economy continuing to rebound.”

One-quarter of respondents to Morneau Shepell’s survey said they expect significant growth in revenues and profitability while only a minority anticipate significant shortfalls.

“The optimism is higher around here than in the U.S., that’s for sure,” said Dubé. “In Ontario, however, it’s not the place where we have the most important optimism. Optimism is very high in Western Canada, in Quebec as well… relative to growth and profitability and staff levels.”

Regionally, the West is looking at higher increases, with a forecast of 3.3 per cent for 2012, said Morris, while Toronto may come in slightly below the national average at 2.9 per cent.

Newfoundland and Labrador and Alberta will lead the way in 2012, according to Hay Group, with increases of 3.4 per cent each, followed by Saskatchewan at 3.2 per cent, Quebec at 2.8 per cent and Ontario at 2.7 per cent. Manitoba and British Columbia are expected to follow at 2.5 per cent each, with Atlantic Canada coming in last at 2.4 per cent.

In looking at sectors, mining (3.8 per cent) and oil and gas (3.7 per cent) will lead the way for 2012, along with services (3.3 per cent), credit unions and banks (3.2 per cent each), construction (3.1 per cent) and consumer durables, pharmaceutical and medical and chemicals (three per cent each), found Hay Group. Bottoming out the list of increase projections are retail (2.3 per cent) and health care (1.3 per cent).

The benchmark organizations are mostly from the manufacturing, services and finance industries, found Morneau Shepell. The average salary budget increases in these industries are 2.6 per cent, 2.7 per cent and 3.2 per cent, respectively. The mining and oil and gas extraction sectors reported the highest budgeted increases (3.4 per cent) while the lowest increases were reported for the public sector (two per cent).

Paying for performance

The bigger payroll adjustments are going to variable pay programs, such as incentives, bonuses, goal shares and gain shares, said Aboud.

“Companies are being more aggressive in putting money into those short-term incentive packages that align to corporate and group performance,” he said. “Companies are a bit more supportive of going overboard in that vehicle as opposed to higher base wages, which then pull up the higher pension costs, benefit costs, regardless of corporate performance.”

Overall, with modest pay increases, employers will need additional incentive programs to attract and retain high performers, said Susan Hunter, national leader of rewards at Aon Hewitt. It’s a perennial challenge to differentiate among employee groups.

“When you’re looking at these kinds of salary budgets, it’s a challenge but necessary.”

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