Salary surveys show employers are looking beyond across-the-board pay raises as a way to compensate employees
Employees in Canada who are hoping for large pay increases next year may be disappointed.
Surveys on expected base salary increases for 2016 show that, on average, employees will likely see their pay go up by no more than three per cent.
"Three per cent seems to be the new norm. It’s been the new norm for quite some time," says Sandra McLellan, North American practice leader, rewards, for Towers Watson.
"The number of companies that are giving raises has risen steadily since the recession in 2008 and budgeted increases for next year are not much of a departure from what we have seen for a number of years. Since 2009, increases have typically hovered around three per cent," she says.
Towers Watson’s 2016 salary survey finds 98 per cent of Canadian employers are planning to give employees raises next year, with a projected increase of 2.9 per cent across all employee categories.
Salary surveys from other companies show similar results, with Mercer projecting a 2.8 per cent average increase, Morneau Sheppell forecasting 2.5 per cent, Aon Hewitt expecting three per cent and the Hay Group showing 2.4 per cent.
The numbers are a reflection of what is happening in the economy and in the job market, says McLellan. "Companies are generally finding and retaining the people they need with the budgets that they have and a little bit of that is that we have also had relatively low inflation in the same period," she says.
"In the years of larger increases back in the 80s and 90s, there was also quite high inflation. Salaries move with some of the economic indicators."
The size of salary increases will likely also depend on the industry in which employees work. Aon’s survey forecasts that employees in some industries in the services and manufacturing sectors, such as accounting, IT, aerospace and pharmaceuticals, can expect to see average pay raises above three per cent.
Employees in resource-related sectors will likely see pay raises below three per cent. Regardless of the industry, salary surveys show some employers are planning to freeze salaries.
Overall, employers are being cautious with salary budgets, says Gordon Frost, market business leader for Mercer’s Canada talent business.
"As base pay increases remain flat, organizations are recognizing that the days of big pay raises may be a thing of the past. As they struggle to do more with less, they are focusing on other types of rewards," he says.
Surveys show many employers are opting to provide variable pay raises based on employee performance rather than general increases for all. For instance, Mercer’s survey found that in 2015, employers gave their highest-performing employees average base pay increases of 4.6 per cent, compared to 2.6 per cent for average performers.
"Greater differentiation of top performers allows employers to allocate limited resources to those employees that will contribute most to the company’s success," Frost said.
Spending the money on high performers not only rewards them for contributing to the employer’s success, it’s a way to retain sought-after employees, says McLellan.
"When we ask employers ‘Are you having a hard time attracting and retaining employees?’ they will typically say no. When we ask the same question about top performers or what they would call their critical skills jobs, we’re seeing more and more pressure in the marketplace," she adds.
"In an age where we all network more, where it’s easier to have a social media presence, for competitors to know who the really good people are, the people who are known to be high performers are more difficult to retain. They are more marketable and so are commanding higher salary increases."
As employers focus on employee performance, they are also using short-term incentives, such as bonuses, to motivate employees. Mercer’s survey found this year 84 per cent of employers had such programs in place for at least one employee group.
"Employers are recognizing that annual bonuses are an effective way of aligning performance with rewards without increasing fixed costs," said Frost.
Tied in with incentive pay are changes to the way employers set up their performance management system. Some are either eliminating formal performance reviews altogether or taking a "ratingless" approach to them.
"Performance isn’t just about a single number that is delivered in one conversation during a year," says Allison Griffiths, leader of Mercer Canada’s workforce rewards practice. "It’s really about how you manage performance and coach employees to perform better on an ongoing basis."
In light of this, bonuses may begin to play a bigger role in employee performance than annual pay raises, says McLellan.
"Many organizations are rethinking whether linking base salary increases primarily to last year’s performance makes sense or if this should be the role of short-term incentive and bonus programs."
Other types of rewards employers are considering in an era of low annual pay raises include improved benefits, training and development, and flexibility.
"It’s no longer all about base salary," says McLellan. "While our research consistently shows the importance of pay when employees decide to stay (at) or leave an organization, we also know their decisions are not just about the money," she adds.
"Opportunities for career development, learning development and challenging work are top drivers of retention. It’s the value of the total package—compensation, benefits and nonmonetary rewards—that makes the difference. As a result, companies are paying closer attention to understanding how employees value these elements,’ McLellan says.
"A lot of things that motivate people are not so much their
annual increase, but the fact that their work is interesting. The fact that it changes. The fact that they can stay in one company and change jobs and do slightly new things," she says.
As employers strive to compensate employees with smaller pay raises, Griffiths says some companies are trying to frame for employees that work is about more than money.
"More and more, organizations... are thinking about their employee value proposition more broadly and how that fits in with their total rewards package and how you communicate that to employees and remind them that they are coming here not just because it is a pay cheque; it’s a great place to work because of x, y, z," she says. "Flexibility is becoming increasingly important to employees."
Being flexible about when and where employees do their job may benefit employees in all stages of their life, whether they are dealing with eldercare or childcare issues or just like to have a flexible schedule.
"There is not such a clear division between work and play," says Griffiths. "They are kind of blending together, so during the day you might go to the gym and have a workout and see some friends for lunch and grab a coffee with whoever, but then you might go home at night and do a couple of hours of work.
As we become more diverse and as organizations try to retain female employees, some of these other HR policies and work-life balance programs are coming into play as part of the overall value proposition of why a company wants to keep its employees, Griffiths says.
Despite the low base salary increases and the focus on other types of rewards, annual pay raises are not expected to disappear any time soon for most employers and employees.
"This would be a big change in the employment deal, so I think it would take a pretty brave organization to do that and they would probably have to have a pretty unique culture and a unique value proposition and with that a very well articulated one. It could happen, but it’s a really big switch," says Griffiths.
"While inflation might be low, it’s not non-existent and the cost of kids’ swimming lessons (for example) still goes up every year. Part of the increase is about keeping employees whole, as well as rewarding performance, so it would be tough to take away."
Going forward, there may be more of a mix between base pay and other compensation, says McLellan.
"The base salary is how I manage the certainty of my income (if I am only working for one employer). There is some portion of it that is going to remain part of the equation," she says.
"We should be open to the idea that there might be some flexibility in how people ask to have their pay structured between various components and that we should be open to the fact that that level of flexibility could be something of the future," she adds.
