More employers budgeting separately for promotional increases
Despite rumours of a recession and the uncertainty of a minority government in Canada, talk of a tight labour market is pushing concerns about the attraction and retention of employees, leading to more innovative approaches around compensation — and a “slight uptick” in raises, say the experts.
“What we’re seeing is... a reaction [to] a fairly robust and stable economic environment at the moment, and company performance being pretty positive overall, combined with a fairly tight labour market,” says Ken Abosch, a partner and compensation practice leader at Aon in Chicago. “That’s causing these numbers, I think, to escalate slightly over where they have been historically.”
Base salary predictions
Employers in Aon’s survey are projecting increases of three per cent for 2020, compared to an actual increase of 2.8 per cent in 2019 (and a forecast of 2.9 per cent).
“That’s very good news for employees… and is a slight uptick in these numbers from what we’ve seen over the last five to 10 years,” he says.
Employers in Canada are expecting base salaries to rise by an average of 2.7 per cent in 2020, according to Morneau Shepell’s 2020 survey. This is an increase from the actual 2.6 per cent average increase in 2019. The forecast includes increases in salary structure, length of service, cost of living and merit pay, and it excludes salary freezes and promotional adjustments.
The outlook has been steadily improving, with an uptick since 2017, says Anand Parsan, vice-president of compensation consulting practice at Morneau Shepell in Toronto.
“Even though in the backdrop we’re seeing a potential slowing in the economy, there’s still a very tight labour market,” he says. “We’re in a situation where we’re practically at full employment… In the U.S., the unemployment [rate] hit a 50-year low. So, when you have these kinds of conditions, you’re definitely trying to retain your talent.”
Gallagher Benefit Services (Canada) Group is predicting an average base salary increase of 2.5 per cent next year, according to its survey of 384 companies. That matches the projections for 2019.
“We have seen fairly consistent investment in base salary increases for the last number of years, and we expect to see that continue,” says Melanie Jeannotte, national president of Gallagher in Calgary. “It’s a little bit more of status quo as opposed to aggressive investment in that, for the most part, employers are very focused on the fact that there is a war for talent, the unemployment rate remains quite low, and if they’re not doing the right thing to attract, retain and engage now, then they’re not going to be in a position to realize the growth that they’re anticipating by 2021.”
Merit-increase budgets are expected to increase by 2.6 per cent in 2020 — the same as they did in 2019, according to Mercer’s report. Prior to 2019, these budgets held steady at 2.5 per cent for the preceding three years.
The biggest driver is the continued low unemployment, especially among highly skilled workers, says Gordon Frost, a partner and career business leader at Mercer Canada in Montreal.
“The economic indicators are still good. Certainly, there’s some people that are concerned about ‘Is there a recession on the horizon?’ or things like that… Nobody has a perfect crystal ball.”
Only 3.2 per cent of the 652 respondents say they are anticipating a salary freeze in 2020, down from 6.7 per cent this year, he says.
The two top reasons for projecting a higher merit increase budget? Greater competition for the workforce or anticipated labour shortages (28 per cent) and a change in the base salary strategy (22 per cent), found Mercer.
Focus on retention
With the average turnover rate for 2019 at 9.8 per cent, competitive compensation is still employers’ top tactic for resolving retention issues (68 per cent), found Gallagher, followed by career development and training (65 per cent), performance feedback (50 per cent) and recognition programs (41 per cent).
“We spend so much money attracting, hiring and training employees that, when we lose them, the cost to the business can be substantial,” she says. “Engagement obviously drives retention, so much so that with just a 16-per-cent increase in an engagement score for an organization, you see over a 40-per-cent drop in turnover.”
There’s a high level of concern among many organizations, says Abosch.
“We hear anecdotally that this is a seller’s market, that talented employees really have the ability at this stage to pick where they would like to work. And so that creates retention challenges for organizations,” he says, adding the time-to-fill statistic has also increased substantially.
“And for certain... unskilled labour positions, it’s become extremely challenging to find enough prospects to fill the pipeline.”
Mercer found the top factors influencing 2020 compensation are retention concerns (72 per cent), attraction concerns (70 per cent) and to strengthen a performance-based culture (50 per cent).
“You’re trying to make sure that you’re keeping everybody competitively paid; you’re trying to make sure that you’re paying your high performers more, and moving them more quickly through your salary structures. You also are trying to maintain pay equity… in your organization [so] the person coming in from the outside shouldn’t be vastly different from the person who’s been with the organization on the inside for a long time,” says Frost.
“And it’s very difficult to successfully address all of those challenges [on] a budget of three per cent… People are revisiting their pay strategy to look at more than just base salaries. So, they’re trying to think through it from more of like a total rewards perspective or the overall employee value proposition.”
Mercer found that 41 per cent of organizations budget separately for promotional increases, consistent with last year, and the average promotional budget represented 1.1 per cent of payroll in 2019.
“That delta between the total increase budget and the merit budget is continuing to grow. So… organizations are recognizing that they need to have additional money available to do off-cycle increases or special adjustments or things like that, because the market is becoming so competitive,” says Frost.
While Willis Towers Watson is predicting employers will hold the line on budgeted pay raises in 2020, 26 per cent of organizations are reporting separate promotional budgets to supplement employee salaries — a 35-per-cent increase over last year.
“Organizations are carving out specific budgets for promotion because it’s long been a difficulty with the merit increase that it also had been expected to include money for those that are being promoted, because it automatically takes away from good performing people that also deserve salary increases,” says Amanda Voegeli, managing director of rewards at Willis Towers Watson in Toronto.
“This notion of the promotion budget has become more prevalent or at least... there’s more awareness around it,” she says.
“To me, what that’s saying is that organizations don’t want to punish the broader population or keep the organization in a steady state, because you do need people to be promoted and you need to raise your talent. And if you don’t have enough money to do that or don’t carve off enough money to do that, then you can imagine that there’s the unintended consequences.”
Pay for performance
On the pay-for-performance side, companies are also budgeting slightly smaller increases for executives (2.4 per cent in 2020 versus 2.6 per cent this year) and management (2.7 per cent in 2020 versus 2.8 per cent this year), found Willis Towers Watson.
Employees receiving the highest possible rating were granted an average increase of 4.9 per cent this year, 88 per cent higher than the 2.6-per-cent increase granted to those receiving an average rating.
“It seems like there’s more companies that are willing to have a conversation around bonus pools... There’s a natural affinity to be a little bit conservative on salaries, not knowing what the year is going to be like and that, and to potentially be more generous or whatnot, depending on performance, on the bonus pool,” says Voegeli.
Over time, companies may increase the salary budget pools because there’s a a lot more conversations around hot skill premiums, which don’t always fit into the salary budget, she says.
“Organizations are now thinking about paying premiums to different people or jobs based on specific skillsets that they need in the marketplace.”
Looking across the entire employee population, the average spending as a percentage of payroll was 14.6 per cent, says Abosch.
“That’s a pretty spectacular compensation element and then we’re projecting that that number will actually increase to 19.5 per cent for 2020.”
The two categories of employees influencing that the most are: entry-level supervisory roles and professional roles, with spending in 2019 at 10.1 per cent increasing to 13.5 per cent in 2020; and middle management, which was at 16.8 per cent this year and increasing to 20.5 per cent for 2020, found Aon.
There’s definitely more of an emphasis around pay for performance, says Frost, with employers trying to highlight the type of increase that a top performer can get relative to what they might have received in a prior year.
However, the differentiation of 1.85 or 1.9 per cent is roughly similar to what we would have seen last year, he says.
“It still presents a lot of tension for employers because they’re trying to keep everybody because of the hot job market. But then they’re also trying to give some people more, so it’s creating a real challenge.”
Another key differentiator is found in the industry and job segments. Not surprisingly, tech is getting a lot of attention, with the total budget increase at 3.9 per cent, says Frost.
“That segment of people is absolutely being targeted, because I think that’s where some of the hottest competition is.”
Also popular is life sciences with jobs that require skillsets that are hard to come and may require more education or training, he says.
“It’s harder to find them, harder to train them, so the competition for those jobs is more intense.”
On the other hand, the public sector, consumer goods, retail and wholesale are seeing somewhat lower gains, says Frost, possibly because some of these positions are lower skilled and there is a greater availability of labour.
The highest increases for 2020 were in the professional and scientific and technical services, says Parsan of Morneau Shepell.
“It was a very strong 3.3 per cent, and then construction was at 3.1 per cent… and then on the lower lower side of things, lower than average increases, we saw educational services, two per cent, agriculture, forestry, fishing, hunting, that was 2.2 per cent.”
The chemicals sector and financial services sector, along with construction and engineering, could see higher gains, with a projected salary increase of 3.2 per cent, says Abosch.
“And then everyone else is running with the pack, for the most part, around three per cent... and there’s nobody that’s particularly the bottom of the barrel so to speak,” he says. “In this tightened labour market, everybody pretty much understands they have to be at the same point of competitive opportunity in order to attract and retain their talent.”