Salary increases going back to ‘cautious normal’

Average national wage hike of 2.9 per cent predicted for 2011

When it comes to compensation outlooks for 2011, the experts pretty much agree — Canadian employers are planning salary increases in the range of 2.9 per cent. Salary surveys by six firms (Aon, Hay Group, Hewitt, Mercer, Morneau Sobeco and Towers Watson) predict the 2009 economic crisis’ downward impact on salaries is subsiding.

“We’re considering it sort of back to cautious normal,” said Shelley Peterson, a principal at Mercer’s human capital business in Toronto. “The vast majority of organizations are planning to grant increases and budgets are perhaps a little lower than, let’s say, five years ago, but within a reasonable, expected range.”

The 2.9-per-cent salary increase planned for 2011 is up over the increases awarded in 2010 (2.7 per cent) and well ahead of 2009 (two per cent), found Mercer’s survey of 600 Canadian employers. And the number of employers that froze salaries dropped from 31 per cent in 2009 to six per cent in 2010. For 2011, only two per cent are planning freezes.

“Organizations have weathered the challenges fairly well in Canada and they recognize, after a year or two of low or no increases, that it’s time to grant a salary increase,” said Peterson. “There’s a need to recognize what’s going on in the marketplace and to obviously balance market activity with affordability of the business, but also to consider what budget is required to meet their needs from an employee engagement and retention perspective.”

More organizations are planning to grant increases to employees and are planning structural changes in terms of the salary ranges, said David Gore, leader of the reward practice at Towers Watson in Toronto.

In 2010, employers with salary budgets were increasing awards, whether merit or performance increases, “but were holding salary ranges kind of tight,” he said. For 2011, they’re planning to make both changes.

Almost all (98 per cent) of Towers Watson’s 200 survey participants projected salary increases for 2011, up from 95 per cent in 2010 and 70 per cent that granted increases in 2009. Base salaries are expected to rise next year by an average of 3.1 per cent for executives, three per cent for management and hourly employees, and 2.9 per cent for professional, technical, administrative and support groups.

“(Employers are) more comfortable and confident in terms of their predictions now,” said Gore. “I don’t sense really any hesitation at all for next year.”

There is perhaps more optimism than cautious optimism, said Stephen Paré, a vice-president at Aon in Montreal. The increases that companies are forecasting for 2011 — three per cent, according to Aon’s preliminary survey of 184 organizations — are the same as 2010, but the budgets for salary increases are higher so there is more money available.

And for next year, only one out of 25 participants plan to freeze salaries, compared to one out of six that did so in 2010 and one out of three in 2009. But when Aon asked organizations if they planned to deliver increases, freeze salaries or do a combination of the two, about 38 per cent were unsure.

“There’s definitely people who aren’t sure exactly what they’re going to do, which speaks to a bit of the cautious optimism,” said Matthew Walker, Toronto-based manager of rewards surveys at Aon.

According to Hewitt’s survey of 500 employers, the average pay increase for next year will be 2.9 per cent, compared to 2.6 per cent in 2010 and 2.2 per cent in 2009. The economy is better in Canada and doing better than the United States, but it’s still a cautious growth, said Prashant Chadha, a Toronto-based consultant at Hewitt.

“Organizations don’t want to get too excited and start rewarding big increases and then realize their largest cost, their labour cost, is now going to get hit because there’s a bit of a tremor in the economy again.”

The evil word “layoff” is still lurking in the background, said Chadha. Last year, 37.5 per cent of employers surveyed did layoffs and it’s expected that will fall to 11 per cent for 2010-2011, found Hewitt.

“That is another sign employers are being cautious. They are saying, ‘If push comes to shove and there is another hiccup in the economy’ or ‘We do have certain areas of business not doing well at all,’ (layoffs are) a possibility.”

Hay Group’s annual survey is predicting increases to actual salary of 2.6 per cent, from a low of 2.2 per cent for government employees to 2.8 per cent for bank workers. And the overall adjustment for the salary range is expected to be 1.8 per cent, said Karl Aboud, director of the Canadian reward practice at Hay Group in Toronto.

The degree of anticipated freezes of actual salary is six per cent for 2011, compared to 15 per cent in 2010, found the survey of 561 employers.

“The numbers are reflecting more optimism than this time last year... but the numbers are still not as high as two years ago,” said Aboud.

Despite the fragile economic recovery, organizations expect salary increases of 2.7 per cent in 2011 — with a range of two per cent to 3.5 per cent — according to Morneau Sobeco’s survey of 305 respondents, compared to 2.2 per cent in 2010.

Few variations across sectors

Employers are predicting similar increases for all categories of employees, from executives to clerical, at 2.8 or 2.9 per cent, found Mercer. For the last few years, budgets for executives tended to track one percentage point above the others.

“Budgets for the executive population have come more into alignment with the broader population,” said Peterson, and this group also had the largest percentage of projected freezes.

Increases seem fairly tightly clustered among these groups, said Gore, with hourly and executive employees seeing slightly higher increases but a practical operative range of 2.7 per cent to 3.4 per cent for all staff.

Across the country, there is not a great variation in numbers, found Mercer’s survey, though it is largely made up of national employers that don’t differentiate budgets by geography, said Peterson. The range is also pretty tight among industries, from 2.7 to 3.4 per cent, she said.

Newfoundland is expected to see the highest increases, followed by Saskatchewan, said Aboud of Hay Group, while Ontario and British Columbia are tied for the lowest. Mining and credit unions are the two highest sub-sectors, according to Hay Group, while forestry and health care are the two lowest sectors.

Pay for performance sticking

There’s also a continued commitment to pay for performance in the Canadian marketplace, as employers strive for differentiation between top performers and even solid performers, said Peterson.

But organizations are still struggling when it comes to differentiating and paying better performers, said Gore.

“There seems to be some preponderance of variable pay coming back and being more prominent again.”

More than one-quarter (27 per cent) of employers hold some of the compensation budget in reserve to provide additional pay increases to the highest-performing employees, found Hewitt’s survey, and 14 per cent provide discretionary restricted stock or stock options. And 84 per cent offer variable pay programs.

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