Slight gains in salary predictions for 2018

Pay for performance important with tight budget
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/16/2017
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Judging by the results of the latest salary surveys, Canadian employers are feeling more hopeful going into 2018. Canadian HR Reporter illustration

Judging by the results of the latest salary surveys, Canadian employers are feeling more hopeful going into 2018.

The mood among employers is optimistic, according to Sophie Fleming, associate client partner at Korn Ferry Hay Group.

Individual base salaries are forecast to increase by an average of 2.6 per cent in 2018, excluding zeroes, or 2.5 per cent including zeroes, found its survey of 724 organizations.

That’s compared to 2.6 per cent in 2015, 2.4 per cent in 2016 and 2.2 per cent in 2017.

“We’re back up, which is optimistic, and good news,” said Fleming. “Of course, for Canada, our normal seems to be around 2.5 per cent — the days of three-plus per cent are long, long gone in Canada — but at least we’re seeing a trend up.”

But there’s also some hesitancy among employers when it comes to making final decisions, and generally businesses are being more careful because of continued uncertainty, she said.

“While those who have decided seem optimistic, there’s still a number of employers on the wait-and-see (side), and maybe delaying their decision, so there’s a little bit of careful attitude towards salary planning this year.”

However, freeze numbers are low, said Fleming, “so I think overall we have an optimistic labour outlook in Canada, which is good.”

“Generally optimistic” is how Lucille Raikes, senior consultant, rewards, at Willis Towers Watson in Montreal, describes the outlook of employers when it comes to salary forecasts for 2018.

“The economy is turning around and employment rates are down, the indicators are out there, the Bank of Canada is increasing interest rates — all of that points in the direction of a better situation for next year.”

Just six per cent of employers are predicting salary freezes, compared to 10 per cent last year, and employers are planning 2.8 per cent average salary increases for next year, found Willis Towers Watson’s survey of 312 companies.

“It feels like 2.8 is a little bit lower than we might have expected given the economic indicators we’re seeing — we did used to be in that three ( per cent) pretty consistently — but in a context where there’s increased automation and technology coming in, there’s a lot of pressure for organizations to manage their costs, and I think they’re becoming more cautious about how they spend their compensation dollars,” said Raikes.

Paula Allen is also seeing optimism among employers as they expect salaries to rise by an average of 2.3 per cent in 2018, including salary freezes, according to Morneau Shepell’s annual survey. This is up from an actual 2.2 per cent average increase in 2017.

“It’s not an overwhelming difference but directionally, for sure, we are seeing some positive indicators,” said Allen, vice-president of research and integrative solutions at Morneau Shepell in Toronto.

“Even though we have some pretty strong indicators, people are actually not feeling, on an actual day-to-day basis, that the economy is necessarily on fire. But there is optimism for the future, so I think Canadians, generally speaking, are fairly prudent — you walk before you run.”

Although the Canadian economy has been growing strongly and unemployment is low, employees should not expect significantly higher salary increases for 2018, according to Aon’s 2017/2018 Canadian Salary Planning report.

Base pay is projected to rise by 2.8 per cent in 2018, up slightly from the average actual compensation increase (including salary freezes and pay cuts) in 2017 of 2.7 per cent, found the survey of 378 companies.

But only 1.9 per cent of respondents froze salaries in 2017, down from 2016 (4.5 per cent) and what’s expected for 2018 (0.9 per cent).

“What we see in the Canadian data is similar to trends in other countries during this long, slow recovery,” said Yanina Koliren, global compensation surveys and solutions leader at Aon Hewitt in Chicago.

“You might expect strong growth in employment and GDP growth to create a tight labour market and therefore significantly higher pay, but the reality is that employers remain focused on enhancing productivity and mitigating risk. That’s reflected in the modest pay increase expectations.”

There’s cautious optimism, according to Suzanne Thomson, senior consultant, global data solutions, at Aon Hewitt in Toronto. And part of that is due to changes in the oil and gas sector, where the actual average salary in 2016 was 1.2 per cent, and this year, it’s at 2.3 per cent.

“It’s almost double, which is very encouraging,” she said.

When organizations that have implemented a salary freeze are taken into account, Mercer projects salaries will rise by an average of 2.4 per cent in 2018 — up slightly from 2.3 per cent in 2017. When organizations implementing a salary freeze are excluded, the projection is 2.5 per cent.

Retention is key, said Allison Griffiths, principal and leader of workforce rewards at Mercer Canada in Toronto.

“We have a 2.5 per cent merit budget, we have a three per cent total budget — it’s not a lot of money, and kind of the nirvana question that people are asking us is ‘How are we going to retain our employees without spending a lot of money?’”

Variable pay trends

Although salary increases are holding steady for average performers, top performers are slated to receive a salary increase 1.8 times higher than average performers in 2018, according to Mercer.

“We’re seeing companies provide bigger increases to some employees, and no increases to others, and as Canadians, I feel like we’re really uncomfortable with that, but we’re moving the needle a little bit. The peanut butter approach of giving everyone a really small increase, I think we’re getting away from that because we’re realizing if retention is key, the small increase for everyone isn’t a retention factor,” said Griffiths.

There’s a continuing trend around the de-risking of compensation, such as short- and long-term incentives, she said.

“Companies are saying, ‘We can’t add to our annual payroll line but if you performed well, we’re willing to pay out more money for that,’ so that’s the variable pay.”

Employers are also willing to pay more for top performers, people in top jobs or with skill sets, future leaders or jobs they need to buy, said Griffiths.

When it comes to pay for performance, companies are rewarding star performers with substantially larger increases while granting minimal increases — if any — to their weakest performers, said Raikes.

“If you’re an average performer, you can’t expect to get an average budget anymore because we’re going to take away dollars and give them to the key employees… we’re being wiser about how we allocate our dollars… that makes a lot of sense.”

Employers are doing a better job at allocating dollars through segmentation, so they’re making clear differences in budgets for key functions or roles, she said.

“They’re not necessarily splitting budgets equally across the organization, they’re really putting them where it counts, and it’s not only about the current state, but also the future state — ‘Where do we think our growth areas are? Let’s put our dollars more wisely towards those functions that are going to be critical to our future success.’”

Companies are relying more on variable pay, such as annual incentives and discretionary bonuses, to recognize and reward the best performers, found Willis Towers Watson.

For example, professional/client management (sales and non-sales) employees who received high performance ratings were granted an average salary increase of 4.6 per cent this year, compared to the 2.4 per cent increase given to employees receiving an average rating. Companies gave salary increases averaging 0.8 per cent to workers with below-average performance ratings.

“It speaks to the fact these compensation dollars are more and more limited, so companies are trying to be a bit more creative in terms of how they can reward and recognize their people,” said Raikes.

Aon Hewitt found 85 per cent of surveyed companies have variable pay and bonus plans; top performers on average received an increase in 2017 of 4.3 per cent, compared with 2.7 per cent across all performance tiers.

A continuing commitment to variable pay allows employers to attract, retain and award top performers, said Thomson.

“When you have a limited range, there’s only so much you can do. You’ve got 2.7 per cent to work with, and you have to factor in your top performers and your critical talent, and then factor in everyone else… you have to be more strategic about how you use it.”

When your average is 2.6 per cent, you’re not going to see a whole lot of swing in budgets, said Fleming.

“It takes a bolder organization to implement matrices where the gap is wide because, obviously, you need to be aggressive on the zeroes in order to provide the strong increases for your top performers, so… it’s a lot easier to have strong distinction in the performance when you have larger budgets.”

There’s not a lot of room to manoeuvre and it requires difficult decisions to not grant salary increases to lower performers, she said.

Provincial, industry differences

Provincially, Quebec and Saskatchewan are looking the strongest, according to Korn Ferry Hay Group, with base salary increases expected to rise, on average, by 2.8 per cent. Manitoba follows, at 2.7 per cent, along with the Atlantic provinces, at 2.6 per cent, British Columbia, at 2.5 per cent, and Ontario, at 2.4 per cent.

Not surprisingly, Alberta is expected to lag, at 1.9 per cent. But last year the province was predicting 1.3 per cent, said Fleming.

“They’re still the lowest in the country, after having enjoyed leading the pack for so many years, of course. It’s still based on oil and gas recovery, so they’re still lagging behind the country but they’re probably on the up again. And there’s not a whole lot of discrepancy between the rest of the provinces, so they’re kind of all around that average base salary increase forecast of 2.6 per cent.”

Regionally, the highest projected salary increases for 2018 are in British Columbia and Ontario (3.1 per cent), followed by Alberta and Manitoba (three per cent), Saskatchewan and Quebec (2.9 per cent), Atlantic Canada (2.8 per cent) and the northern regions (2.7 per cent), according to Mercer.

“It’s pretty flat, it’s pretty boring, there’s not a lot of differentiation,” said Griffiths. “Five or eight years ago, there were red hot zones and cool blue zones and everything in between, and now it’s really quite consistent when you look across the country.”

Reflecting the different mix of industries by province, Alberta and Prince Edward Island are expected to have the lowest salary increases next year, at 1.8 and 1.9 per cent respectively, according to Morneau Shepell.

Quebec is expecting the highest salary increases next year, at 2.6 per cent, while salary increases in other provinces will be close to the norm.

Industry sectors expecting higher-than-average salary increases in 2018 include utilities, at 2.9 per cent, and manufacturing and wholesale trade, at 2.7 per cent, found Morneau Shepell’s survey of 370 employers. Expected salary increases in sectors such as finance and insurance are also expected to remain strong at 2.7 per cent next year.

Lower-than-average increases are expected in industry groups that face more uncertain economic circumstances, found Morneau Shepell. This includes mining and oil and gas extraction, at 0.8 per cent, public administration, health care and social assistance, at 1.7 per cent, and educational services, at 1.9 per cent.

Sectors in which employees can expect higher-than-average increases include engineering, mining and professional services (all at 3.3 per cent), as well as automotive (3.1 per cent) and forest and paper products (3.1 per cent).

Lower-than-average increases are expected in energy and health care (2.5 per cent), as well as telecom (2.3 per cent), found Aon.

The oil and gas sector appears to be more optimistic this year,  reporting a 2.5 per cent increase — up from 1.2 per cent reported in 2016.

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