Average salary increases will remain below ‘watershed’ three per cent mark: Forecasts
When it comes to salary increases across Canada, more of the same can be expected come 2019, according to forecast surveys from several HR consulting firms, with bumps expected to range between 2.5 and 2.8 per cent.
An average of 2.6 per cent seems to be the consensus, and is backed up by the results of a Morneau Shepell survey of 356 organizations.
That would match the actual increase in salaries experienced in 2018 and includes 4.6 per cent of employers that are expecting to freeze salaries, said Anand Parsan, vice-president of compensation consulting at the global company with headquarters in Toronto.
Pay raises continue to be in line with inflation, which is expected to be 2.5 per cent, he said.
“The number has been pretty consistent in terms of the salary increase in and around that 2.6, 2.7 range,” said Parsan. “But what’s quite interesting is that — given that there’s a tight labour market in Canada and unemployment is low — we’re still not seeing those high increases in salaries. You would think that it would be higher.”
Accompass is also predicting a 2.6 per cent increase, according to Anne Peiris, vice-president of compensation in Toronto.
“While it is less than three per cent, which seems to be the benchmark… it is slightly higher than what was forecasted last year,” she said, citing data from 143 organizations compiled in the company’s Salary Budget Report.
“Last year, while people predicted a 2.5 per cent increase, they actually spent 2.7 per cent. If I look at those same numbers for the previous year… they predicted 2.5 per cent, but they spent 2.6. Even though it’s a very small difference between last year and this year, when you’re dealing with a small budget to begin with, even a 0.1 per cent difference can be a storyteller.”
According to Aon’s Canada Salary Planning Report of data from 365 companies, salary increases will be slightly higher at 2.8 per cent in Canada — a hair more than 2018’s actual rise of 2.7 per cent.
Of note, Aon’s data indicates just 0.3 per cent of employers will implement a salary freeze, said Suzanne Thomson, senior consultant, talent, rewards and performance in Toronto.
“The salary upside might be limited, but so is the downside, since fewer organizations expect freezes this year,” she said.
However, Mercer Canada’s Compensation Planning Survey polling 598 organizations has salary increases coming in slightly lower at 2.5 per cent.
And Hays Canada’s Salary Guide, a survey of 4,000 employers set to be released in November, indicates that 50 per cent of employers will increase pay by less than three per cent next year.
The conservative increases are a combination of competitive markets, uncertain political environments, low inflation rates and memories of a recession, according to Rowan O’Grady, president of Hays Canada in Toronto.
Anything less than a three per cent pay rise is considered conservative, he said.
“That three per cent mark is the watershed,” said O’Grady.
“Once you’re open to three per cent-plus, now it’s actually making a real difference to people and they can notice a difference in how much they’re getting paid. It’s going to make a significant difference to the bottom line or the cost line at least on a company’s P&L (profit and loss statement).”
Situations creating economic uncertainty are definitely to blame, said Thomson.
“There’s been so many issues where organizations have kind of adopted a wait-and-see attitude,” she said, noting situations such as the USMCA (United States-Mexico-Canada Agreement) trade negotiations and the Trans Mountain pipeline delays.
“Right now, we’re in a state of flux.”
“The unknown is always a higher risk,” said Thomson.
“The more you can know and assess, the more likelihood your plans will show the results that you’re hoping for.”
News of a deal in principle between Canada, Mexico and the U.S. will help to stabilize the economy, though that may not amount to a more significant increase in wages, said O’Grady.
“There is a bit of a hangover from the past,” he said.
“(And) who’s ever heard of a trade war with the U.S.? It’s just unusual, and it’s uncertain. Is it just bluster and it’s all going to come to nothing (and) we can all get back to normal?”
“I think the confidence in the economy is just as high as it was last year. (But) we’ve seen a trend over the last few years, that regardless of how confident people feel about the economy, or how much they hire, there’s been a… consistent increase in the percentage of companies who are giving out less than three per cent.”
In the meantime, employers are taking “relatively small” budgets and attempting to spend more strategically, said Peiris.
“They’re putting more of that budget into their top-skilled top performers, and maybe less of it into other groups,” she said.
Companies are also funding smaller compensatory increases throughout the year that aren’t captured in a one-time merit budget increase, said Peiris.
“There’s a lot of effort — and rightfully so — that’s put into this one point in time in the year where there’s a salary budget established and distributed,” she said.
“An equal amount of time needs to be put into the money that gets spent over and above the merit budget process, and I don’t know if that’s happening.”
Labour market tightness has employers becoming more creative with compensation tactics, according to Gordon Frost, career business leader at Mercer Canada in Toronto.
“People are still concerned about competitiveness… and keeping their costs under control and those kinds of things (and) we’re seeing more investment in incentives or bonuses.”
Pay for performance
Eighty-six per cent of employers continue to use individual performance to drive base salary adjustments, according to Mercer’s survey.
“Incentive-based pay or variable pay continues to be a tool that organizations want to use more and more,” said Frost.
Pay for performance has become a best practice for compensation as employers search for ways to retain top performers, said Peiris.
“It’s about spending a pool of money wisely,” she said. “It’s about being thoughtful about the expenditure. I’ve seen too many organizations that give their lowest performers an increase or their lowest performers a bonus, and that’s money that could probably be used elsewhere.”
Organizations are using tools outside of the merit budget to pay top performers, said Peiris.
“If an organization has a bonus program, the focus is often to pay those top performers. So it really comes down to how an organization intends to use this annual salary budget versus how it intends to use a performance bonus program. And I think that’s been fairly consistent for years,” she said.
“(Organizations) want to make sure that they have the funds available to do that and the funds in terms of salary budget — it’s only one piece of the puzzle. It’s one piece of a total rewards offering and even beyond total rewards, some people will call it a total value proposition. It’s one piece of it, but it’s an expensive piece. So it needs to be spent wisely.”
Many employers remain “guarded” on compensation in an effort to put more funds into variable compensation, often doled out via the performance management process, said Parsan.
“Instead of putting a lot of money into the fixed component of compensation — that being the base salary — if they’re putting more emphasis on the variable pay, that could fluctuate over time, so you’re not locking in your expense.”
Performance remains the key driver of pay decisions, and top employees should expect to be compensated above and beyond general salary increases in 2019, said Thomson.
“Pay for performance… is probably the single largest factor influencing pay decisions,” she said. “High performers continue to receive higher-than-average increases… ranging from about 3.3 to 4.1 per cent.”
Variance by region, sector
The western provinces are expected to see slightly higher-than-average salary increases, according to Morneau Shepell, with British Columbia’s average expected to come in at a high of 2.8 per cent and Alberta at 2.7.
“When we look at Western Canada, they’re taking the lead in terms of the growth in the country,” said Parsan.
“Both Alberta and British Columbia are posting the strongest piece in terms of GDP growth, so it makes sense that they would have the higher-than-average salary increases.”
Meanwhile, Aon’s data predicts Saskatchewan employees will receive the highest pay bumps at three per cent, while Atlantic Canada comes in lowest at 2.5 per cent.
Among industries, media and non-bank financial services employees are expected to pull in a 3.3. per cent increase, while banking, telecom and transport workers could have a lower raise at 2.4 per cent, according to Aon.
Morneau Shepell data indicates real estate, rental and leasing workers will receive the highest raises at 3.8 per cent, while information and cultural workers weigh in at a low 1.5 per cent.
Still, the variance in those increases is immaterial at this point, said Parsan.
“You’re kind of splitting hairs,” he said. “These increases really show that there’s not a lot of large base salary increases to be had across industries. It’ll vary within a percentage point here or there, but I think the real story is more around what employers are doing outside of the base pay increases.”
In Ontario, employers are watching legislative changes closely as the potential revamp of labour reforms could significantly alter the compensation picture, said Peiris.
Many organizations will see compensation for low-wage staff rise through legislative increases, ultimately leading to more conservative gains for salaried employees, according to Frost.
Implications for employers
Flat salary increases are a signal that employers will need to work harder to attract and retain talent, said Parsan.
“In today’s tight labour market, employees have multiple opportunities available to them,” he said. “Therefore, employers need to up their game in order to retain their top talent.”
The compensation package is no longer simply about base pay, but rather a total rewards package including intangibles such as flex work, benefits and coaching, said Parsan.
“It’s hard to look at base pay just in isolation,” he said. “You really have to add everything together to get a perspective of what that employee is getting.”
Evolving workplaces and the pursuit of innovation are also affecting compensation, as employers struggle to come to grips with what the future of work will look like, said Frost.
“(Employers) know that the workplace is evolving; they know that it’s being impacted by things like artificial intelligence and digitization and having a more global workforce — having a workforce that is more like the gig economy,” he said. “But it’s not clear to them yet what they need to do to prepare for it, or how it’s going to impact their specific organizations.”
As a result, organizations are diverting more funds into technological solutions, upskilling and job restructuring, said Frost.
“While they still want to pay competitively, they’re like ‘We can’t put all of our dollars in the pay bucket. We need to do this other stuff, too.’”
Because of this, compensation conversations are shifting towards total employee value propositions, with more focus on career pathing and employee development, he said.
“Organizations are starting to realize that it’s not just fluff — it actually is meaningful to people. And in an environment where everybody’s got 2.6 per cent, and everybody has a group RSP (retirement savings plan) and everybody has the same core benefits offering, how do we really differentiate? It’s on those other elements.”
This story has been updated to correct an error in Anand Parsan's name.