Off-cycle increases, internal equity and total rewards should be key considerations, say experts
When asked about the compensation outlook for 2023, Guylaine Béliveau calls it a perfect storm.
“On the one side, employers have to cope with inflation and on the other side, they have to cope with labour shortages. So it's tough for the employers, it's very tough,” says the associate partner at LifeWorks in Montreal.
Almost two-thirds (65 per cent) of employers responding to its survey have reported a rise in compensation costs because of market pressure, and 58 per cent reported the need to adjust salaries of current employees in terms of internal equity, she says.
As further proof, 28 per cent of employers surveyed said that it has been more challenging to achieve financial objectives because of inflation and labour shortages, and 44 per cent said that it was more challenging to control salary budgets.
“They have to be very careful about their operation costs, and compensation costs [are] one of the most significant costs… for most of the employers. So if there's a raise, for sure there will be some impact on services or on clients.”
Conflicting activity
There’s definitely a lot of uncertainty in the economic environment that Diane White, principal, compensation, at Normandin Beaudry in Toronto, hasn’t seen in her 30-year career.
“We have the conflicting activity: we have the high inflation, which we usually see with high unemployment — the uniqueness here is clearly we still have historic low unemployment.”
Back in July, employers were predicting that they were going to spend about 2.8 per cent on their salary increases, now that’s 3.4 per cent, she says.
Marc Chartrand
“For two years in a row now, we have seen historic highs, increases, but [employers are] also demonstrating their agility — which hasn't traditionally been a common practice for organizations — in appreciation of a lot of the conflicting activity between the market and the unemployment.”
And the big questions remain, says White: “Is there a recession looming? Will that lead to some layoffs that are going to change the trajectory of these the challenges with the labour supply?”
It’s a “special time” for organizations, with the combination of inflation, labour shortages and a potential slowdown of the economy, says Marc Chartrand, senior consultant at PCI Compensation Consulting in Montreal.
Employers “need to act on that but also need to be relatively conservative in terms of making the right decisions and giving some flexibility if they need to adjust six months after from a salary perspective,” he says.
In 2021, the projected salary increases were about three per cent and now employers are saying 4.1 per cent, says Chartrand.
“The question is: Are we going to see the same thing in 2023? Will it be 4.1 or four per cent or 3.9? Or it will be five? Or are they going to be conservative?”
Strategic budgeting and internal equity
Really, it’s about using the compensation budget strategically, and planning for different scenarios, says Elizabeth English, principal at Mercer in Toronto.
“HR professionals are really stuck in the middle, often with their finance departments telling them that they need to rein in the increased budget to keep cash on hand in case there's a recession. But, on the flip side, they're hearing from the leaders and the people managers and the employees that there's an expectation of big increases.”
It’s advisable to plan for low-, medium- and high-increase budgets, she says, “because it's impossible to tell what the economy's going to do in the next couple of months, as well as the labour market.”
In addition, employers should prioritize their spend on three groups: hourly workers — to attract high-calibre talent and “because these workers are often struggling the most in a continued inflationary pressure” — along with loyal, high-performing, tenured talent and, thirdly, to address equity issues created with new hires coming in at a higher salary than current employees, says English.
“It's important that companies consider their own unique situation when setting their increased budget,” she says.
“Just because you know three per cent is the most common response in the compensation planning survey, organizations need to consider their current market competitiveness, any internal equity issues they have in their workforce, their finances situation, their ability to attract and retain talent and really build an increased budget that works for them.”
With employers paying more to attract people externally, they also have to make sure that they adjust the salaries for those who are already employees internally, says Béliveau.
“It's another source for the employers to have a raise in compensation costs at the end of the year.”
Internal equity should be top of mind for employers, not only because pay equity is an important consideration legally, but to ensure both new and old employees are compensated fairly, says White.
“Now's a really good time to also appreciate the positioning of all of your employees’ pay within the structure. If you have a lot of people who are paid lower in the range, this is the time to care about them. It goes with the internal equity piece, and it goes with the broader appreciation that you want to retain your talent right now.”
Off-cycle increases
In 2022, only 16 per cent of employers said that they had a separate budget for ad hoc, off-cycle salary increases; in 2023, it’s more than 25 per cent, says Béliveau.
“Most of the time, I think that these off-cycle salary increases… are really to target the most important employees for the organization, those that are essential for the realization of the financial objectives,” she says.
“I think employers must be proactive with these employees, rather than waiting for them to come in your office and say, ‘Oh, by the way, I have a better offer from another organization.’”
For retention purposes, off-cycle increases such as bonuses are being used by almost half (45 per cent) of employers, finds Normandin Beaudry.
But it’s important to remember that increases to salaries can have a domino impact on other expenses such as bonuses and benefits, says White.
“We like to caution our clients [that], in these years — the last year and this year — of these high increases in wages, look at your bonus programs and appreciate how you're going to fund the incremental spend there,” she says.
“If you have financial metrics, do you need to increase the threshold performance against those financial metrics before payment begins to ensure that the organization is making enough money to pay out the higher bonus amounts?”
With off-cycle increases, it’s recommended the adjustments are budgeted to make sure that investments are targeted and don't create more equity issues, says English.
“One of the things organizations should think about is the use of different retention mechanisms or incentives that don't increase the total payroll, so that it gives them a little more flexibility going forward.”
Counter-offers are definitely driving off-cycle adjustments, she says.
“What we also suggest is that companies have a process and an escalation route to deal with these efficiently within their organization. And to make sure that the counter-offers are fair, and also don't create more problems down the road. A lot of it is understanding the skills that the employee brings as well as their performance — you may not decide to counter every offer.”
The same is true for hiring bonuses, which have also risen in usage but should be targeted “for select or critical jobs that you'll need in the organization today and going forward,” says English.
Looking beyond pay
Pay isn’t the only thing that should be taken into consideration, with the Normandin Beaudry survey suggesting flexibility is a top reason for retention.
“More than ever, it's important to reconsider your employee value proposition,” says White, citing other offerings such as employee development, career management, DEI initiatives and corporate social responsibility.
“Those are things that may not have been at the forefront pre-pandemic. So there's a broader, holistic view that is really important to take into consideration beyond just pay and salaries.”
Employers have a lot of tools in their total rewards toolkit, and focusing on benefits, financial wellness, vacation or flexibility is going to be key for a lot of organizations to highlight the total package, says English.
“An important thing for employers to do is to understand what's actually important to their employees. So, things like conjoint analysis allow you to understand your employees’ needs and allow you to try to deliver on high-value, low-cost benefits, like flexible working.”
After the pandemic, the definition for being competitive can include offerings such as telecommuting, flexible hours or improved benefits, says Chartrand.
“There's so many things, and I think that it’s a combination of all those elements that… probably will have the strongest impact on the turnover, on retention.”
Read more: Record salary increases predicted by PCI
Employee communications
An important part of the salary forecasts and budgeting should include employee communications, given the uncertainty and greater focus on pay transparency.
“A lot of it is going to be around equipping leaders and managers to share a compelling message and understanding how transparent you want to be with your compensation cycle,” says English.
“This might be the year where you share a little bit more, maybe the salary range, than you might have done in the past.”
There are going to be “some really tough conversations this year,” she says, with employers worried about the cost of labour and the supply and demand of talent, while employees are concerned about the cost of living.
“This is a really important distinction that employers are going to have to start communicating.”
There’s no point putting a lot of effort into designing a total rewards program if you don't communicate it well, says Chartrand.
“If it's the best secret in town, you won't have any success with it, so you need to communicate.”
As preparation, employers should visualize putting detailed salary information up on a wall, he says.
“If you were to do that, do you have answers to explain the decisions you have made? And I think that if you say yes to that, I will encourage you to be more transparent, at least in terms of: what's your philosophy, what's your policy, and what is really related specifically to one employee,” says Chartrand, such as the salary range, bonuses and promotions.
“[That way,] if I do receive calls from competitors, I know what I have, now I know it works. But I also know where we're going.”
Communication around compensation is not something that most of employers like to do, says Béliveau.
“However, I think that, based on the current situation, employers should look at the way that they communicate, what they offer in terms of the global compensation envelope,” she says.
“They should be able to brand what they offer, not only the base salary and the bonus, it's also about all the benefits that you offer, all the flexibility, all the compensation elements that you can offer, the professional development as well… training, et cetera, et cetera — this is something that is very valuable for an employee.”
