Slowdown cripples wage increases

Employers tightening belts, employees losing ‘arrogance’
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 05/04/2009

The economic slowdown and stock market collapse are dragging salary increases down with them. Before the economic crisis hit hard in September, Canadian employers were predicting relatively lofty salary increases.

That was then, this is now: A recent poll of 180 corporate leaders by the Conference Board of Canada after the market collapse found the average increase for 2009 could fall to three per cent, a significant decrease from the results of a summertime survey that predicted an average increase of 3.9 per cent for non-unionized employees.

And the reduced number includes increases for employees in Alberta, where wage increases are still expected to outpace the national average, so gains in Ontario might not even reach three per cent and will probably be closer to two or 2.5 per cent, said Prem Benimadhu, vice-president of governance and HR management at the Conference Board.

“The trend is going downwards,” he said.

The recent poll shows the suddenness of change is impacting all sectors of the economy. Even the oil patch is reconsidering its investment in Fort McMurray, Alta., he said.

“There’s a likelihood all the conditions that impacted pay and HR during the last five years will change,” said Benimadhu, as the tight labour market is loosening, employee confidence is plunging along with consumer confidence, and job hopping will not be as common for the next two to three years. The “arrogance” of employees will also go down, though they still, for the most part, hold the balance of power, he said.

“There’s a new frugality and companies will discover the beauty of thrift,” said Benimadhu. “Companies will remain very disciplined on labour costs and improved efficiency.”

A recent survey of 150 organizations by Towers Perrin also shows a significant drop in salary increases, from its previous forecast of four per cent this summer to 3.5 per cent, said Fiona Macdonald, Vancouver-based managing principal at Towers Perrin.

“My best guess is we’ll see something lower than 3.5 per cent,” she said, adding it could go closer to three or 2.5 per cent, or even two per cent for Ontario.

Many employers are in a planning cycle and taking a wait-and-see, too-early-to-tell approach, said Macdonald. But for those that have decided, frills are definitely being cut, such as travel, entertainment and holiday events.

“There will be very dramatic responses to this downturn and then when companies come out of it, people will say, ‘Don’t we ever learn, we shouldn’t have done such dramatic cuts.’ But, honestly, companies will feel it would be foolhardy not to.”

Among the one-half that have decided to take action, one-half are likely to have a hiring freeze, reduce training budgets, reduce salary increases and reduce annual bonuses, finds the Towers Perrin survey. They might also do a targeted reduction in head count, though only five per cent are considering a significant cutback, said Macdonald. And only 10 per cent say cutting staff is “very likely” while 19 per cent say it is “somewhat likely.” Forty-three per cent are also likely to consider a freeze or reduction in hiring.

“You always go for head count first and salary freezing second because it’s easier to spread the work you’ve got around fewer people than make everybody bitterly unhappy about not getting as much as they thought they’d be paid,” she said.

What will probably happen is greater differentiation across an organization based on individual performance. When companies are more constrained, they can’t take the “peanut-butter” approach and spread the benefits around, so they must start weeding out weaker performers while retaining high performers, said Macdonald.

“You’ll see much clearer differentiation, whether it’s salary increases, annual bonus payments or long-term incentives,” she said.

It’s definitely going to be a challenge, dealing with tighter budgets while still trying to keep high performers, said Jeff Vathje, a Calgary-based senior compensation consultant at Hewitt.

“It puts a lot of pressure on (employers) to utilize and be more effective in how they’re using the cash compensation,” he said.

A recent survey from Hewitt predicts a full percentage-point drop from 3.8 per cent to 2.8 per cent (similar to results for the United States, from 4.1 per cent to 3.1 per cent) for salary increases in 2009. The poll received 411 responses from across Canada, considerably more than usually received for the annual salary survey in the summer, said Vathje.

“This is uncharted territory from an economic perspective and these guys are trying to avoid a knee-jerk reaction as well — the markets are fluctuating so dramatically, they really don’t know where it’s going to settle down,” he said. “There is a huge interest from our client base in seeing how people are responding and reacting.”

When asked about their plans, more than one-third (36 per cent) of respondents said they are considering lowering their salary forecast based on recent events. There was variation across Canada for salary increases, with British Columbia dropping from 3.6 per cent to 2.3 per cent, Ontario dropping from 3.5 per cent to 2.7 per cent and Quebec going from 3.5 per cent to 2.2 per cent. Alberta could go from 5.1 per cent to four per cent, said Vathje.

“It isn’t like Alberta is panicking, it’s just that it’s starting from a higher level and bringing things down to a more reasonable amount,” he said. “Until (Alberta employers) see true weaknesses, they’re saying we can’t afford to make those changes.”

A recent survey of 400 organizations by the Wynford Group in Calgary also found its original prediction of four per cent as a national average for salary increases will fall one percentage point to three per cent. And for Alberta, that will mean a fall from 5.25 per cent to close to 4.25 per cent, said Gail Evans, president of the firm.

Anecdotally, in talking to employers in Calgary, there is still strong concern about the tight labour market, “so they don’t want to be too dramatic in adjusting their levels for fear of losing people,” said Vathje.

“They’ve found they were basically dealing with shortages, so this helps ease that burden, with less pressure on the retention and those kinds of things. Unless this is a really long, deep setback, they’re actually liking the breather. Whereas in other areas of the country, Eastern Canada, they’ve already seen the writing on the wall a bit sooner, they’ve seen the slowdowns, so they’re facing a stronger economic reality.”

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