Low inflation factors into salary forecasts

Lower inflation is a significant factor when it comes to salary forecasts for Canada in 2015, according to recent surveys predicting hikes ranging from 2.6 per cent to three per cent.

The numbers are the same as last year in absolute percentage terms. Employers followed through with their forecasts last year, which suggests they’ll do the same again, said Karl Aboud, director of the Canadian reward practice at Hay Group in Toronto, which is predicting an average gain of 2.6 per cent.

"But in an era of even reduced inflation and reduced interest rates from where we were a year ago... you can’t argue for much more than our 2.6 per cent," he said. "Organizations have to consider the affordability of the increases and increased costs of goods, inflation and Canada’s overall macro-productivity metric, which is always lower than the U.S."

Productivity metrics in the United States are always higher, said Aboud.

"Unless we boost the GNP (gross national product) without boosting our total country payroll, or reduce our payroll if we’re not going to boost our GNP... how are (Canadian employers) going to give more than the Americans are giving if our productivity standards are less, or inflation is low? It’s all tied in, so 2.6 per cent in 2015 is probably as positive as 3.6 per cent was in 2007, before the economic downturn, when inflation was much higher. So I think it’s a number that people can’t complain about."

The 2.6 per cent projected increase is lower than the 2.9 per cent projection for 2013, found the survey of more than 400 Canadian public and private sector employers in June and July. But 83 per cent of employers will provide
employees with base salary increases in 2015, while 13 per cent of respondents to the Hay Group survey have not decided — and just four per cent are planning a freeze.

"That 13 per cent is up from 10 per cent last year, so those committing to an increase are down by two points and those committing to a freeze are down by one point but, as an offset, those who are undecided, at 13 per cent, are up by three points," said Aboud.

One-quarter of employers had board approval for a salary increase of 2.4 per cent, meaning there’s a slight difference between approvals and forecasts, he said— but the difference is small.

"People seem to be coming in where they forecast, the board commitments are very close to the assumed forecast, so I think the 2.6 holds well for itself."

Mercer, however, is predicting an average raise in pay of three per cent in 2015 — the same as the actual increase in 2014, according to its survey of 696 Canadian employers.

The energy sector continues to lead the country with the largest actual and projected increases year over year, and when this sector is removed from the national sample, the average projected salary increase drops to 2.9 per cent, said Allison Griffiths, Mercer’s Canadian workforce rewards practice leader.

"This year’s results are not surprising. Over the last five years, we’ve observed a differential between the national projection and energy sector of approximately one per cent," she said.

Canada has a teeter-totter situation, with the west up, Ontario in the middle and the east down, according to Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, speaking at a Mercer event. "It’s a very uneven story across the country."

Unlike the United States, where the economic situation is improving — it has seen sustained job growth every month for the last three years — Canada is stuck in a rut, he said.

"We’re not shrinking but we’re not growing very rapidly," he said, adding hopefully the situation will improve next year as the U.S. strengthens. "We know that labour markets are tightening, we haven’t seen a lot of job creation in the last year, unemployment is stuck around seven per cent nationally."

Private investment is really the weak spot, with many firms still sitting on cash, said Hodgson.

"For the moment, it’s holding back our recovery."

However, real wages are rising, so employers should expect to be paying workers beyond the inflation rate, he said.

Respondents to Morneau Shepell’s annual survey are predicting a raise of 2.8 per cent in 2015, which is up from the 2.6 per cent expected for 2014 and includes expected salary freezes while excluding promotional or special salary adjustments.

Employers are relatively optimistic, according to Michel Dubé, a principal in Morneau Shepell’s compensation consulting practice in Montreal.

"Those expecting a significant increase in revenue, operating budgets and staffing outnumber those expecting decreases by four to one. Despite this optimism, employers are still cautious about the salary increases, which likely reflects reduced competitive pressures in an environment of relatively high unemployment and low inflation."

The actual increase for 2014 was 2.7 per cent so 2.8 per cent is a little optimistic but it’s also typical of what’s been seen in the last few years, he said, adding 12 per cent of respondents expect to increase their workforce by more than 10 per cent.

But the differences among job categories are much less significant because of the low inflation, he said. And when it comes to variable pay, the targets are a little bit higher than the actual, other than for executives, said Dubé.

"These targets don’t move on a year-to-year basis very significantly but we did observe this year that the actual grants were a little bit lower than the targets... for all job categories other than executives."

In breaking down the numbers, the mining and oil and gas sector expect average increases of 3.4 per cent, down from last year’s expected gains of 3.9 per cent, found the Morneau Shepell survey.

Professional, scientific and technical services will also be higher than the national norms, at three per cent on average, reflecting growing competition for talent.

Lower than average increases (2.4 per cent) are expected in industries that face more challenging economic circumstances, such as wholesale and retail trade, said Morneau Shepell.

Hay Group also found the highest increases continue to be in the oil and gas sector, at 3.8 per cent, where demand for key skills continues to outweigh strategic supply challenges.

Chemicals (3.3 per cent), credit unions (3.2 per cent) and financial services (three per cent) have forecasts higher than the national average of 2.6 per cent, reflecting a demand for key skills and experience, said Hay Group.

While Mercer also found the energy sector continues to have the highest salary increases in both 2014 (3.9 per cent) and projected for 2015 (3.7 per cent), the transportation equipment, consumer goods and retail/wholesale industries are projected to see the smallest salary increases at 2.6 per cent, 2.7 per cent and 2.7 per cent respectively.

Provincially, Alberta has the highest projected average salary increases in the country (3.2 per cent), followed by Saskatchewan at 3.1 per cent, found Mercer. Comparatively, the lowest projected salary increases are in Quebec and Atlantic Canada, each at 2.8 per cent.

Hay Group also found Alberta (3.1 per cent) and Saskatchewan (2.9 per cent) are expected to lead the country with projected overall base salary increases higher than the national average, while all other provinces are predicting increases of 2.1 to 2.6 per cent. Workers in Calgary (3.2 per cent), St. John’s (3.1 per cent) and Saskatoon (three per cent) will see the highest salary increases (see sidebar).

Finally, Canadian organizations are rewarding high-performing employees with greater than average salary increases, said Mercer. The highest performers received an average five per cent base salary increase in 2014, compared to 2.9 per cent for middle performers and 0.3 per cent for the lowest performers.

This is expected to continue in 2015 — Canadian employers are projecting a 5.2 per cent salary increase for the highest-performing employees, found Mercer.