Setting salary budgets for 2005? Think 3.3%

Surveys forecast overall average increases between 3.1 and 3.4 per cent

Low inflation, an uncertain, though brightening, economic outlook and a still growing interest in pay for performance, are among the major factors why Canadian salary budgets will increase by 3.3 per cent in 2005.

Several salary surveys were released this month, all of which forecast overall average increases between 3.1 and 3.4 per cent with variation by region, sector and job level.

Interpretations of the forecast increases vary. Some said increases are proof employers are fairly optimistic and see a brighter economic horizon. They point out expected increases appear to be at least as good as last year’s. What’s more, almost no employers are expecting salary freezes.

Hay Group concluded, from its survey of more than 500 employers, that an overall 3.2-per cent increase is indicative of “stronger-than-expected employer confidence.”

Mercer Human Resource Consulting is predicting a 3.4-per-cent average increase, better than its predictions in the last two years. Less than one per cent of employers are expecting salary freezes for 2005, proving employers are feeling better about the future than they did at this time last year when nearly five per cent were expecting freezes.

By sector, oil and gas employers indicate raises will be 4.1 per cent, with employees in the West enjoying the best pay hikes, according to Mercer.

On the other hand, some of the compensation experts describe the raises as “modest” or “subdued.”

Employers are still looking to contain costs, they say. They may feel the business climate is improving but are being cautious when it comes to salaries.

WorldatWork’s survey of 245 employers found executives can expect smaller raises next year than they got this year. Last year, employers were projecting increases of 3.9 per cent for execs, though in the final analysis they only got 3.7 per cent. Next year, the forecast is for 3.4 per cent.

Many HR departments are feeling the pressure being exerted upon CFOs by shareholders to keep costs down, and employee compensation is a huge cost, said Pierre Geoffrion, senior vice-president, of Aon’s human capital consulting practice.

Based on its survey of 338 employers across the country, Aon is projecting average increases of 3.3 per cent in 2005, down slightly from actual increases of 3.4 per cent this year.

Increases are still pretty conservative, said Geoffrion. “They’re not expecting a brilliant economy, so it is basically inflation and a bit of a merit increase.” When inflation is taken into account, actual merit increases for workers will barely hit one per cent in 2005.

Slow business growth is to blame for the modest hikes. At times like these employers have to make sure they are using compensation budgets to optimum effect, said Geoffrion.

In recent years, standard practice has been to give a cost-of-living increase to match inflation at about 2.5 per cent and then another one-point increase for merit, he said. But in broadly following that guideline, employers risk underpaying younger employees because it takes so long for them to move from an entry-level salary to mid-level salary for their position.

A one-per-cent merit increase makes it difficult for less experienced employees to move from entry-level salary to the mid-point salary for that position. It should take a person about four or five years to be fully qualified at her job and therefore entitled to the mid-level salary for that job, he said. “But if I am increasing (that person) at only one per cent above that 2.5 per cent it will take 15 years to get to the mid-point.”

While base salary increases remain relatively flat, employers still need to reward and retain top talent. Not surprisingly, organizations have a great deal of interest in, but some difficulty administering, variable pay programs.

Hewitt Associate’s survey of 360 organizations illustrated how widespread pay-for-performance programs have become with 82 per cent of respondents having some form of broad-based variable pay plan.

“Salary increases have levelled off due to ongoing cost containment measures being taken by employers, a relatively strong supply of available labour in most markets, and ongoing low levels of inflation,” said Todd Mathers, a compensation consultant in Hewitt’s Toronto office.

Though variable pay programs are widespread, 58 per cent of Hewitt respondents do not track or measure plan effectiveness, though 14 per cent said they believe variable pay programs have helped improve their business results.

Watson Wyatt’s survey of 429 employers forecasts 2005 average increases of 3.1 per cent.

Base salary increases aren’t rising rapidly, so employers are using incentive plans to reward key staff, said Graham Dodd, national practice director of Watson Wyatt’s human capital group.

According to the Watson Wyatt survey, 86 per cent of organizations now have some form of short-term incentive plan. The numbers prove the continued high level of interest in variable pay programs, said Dodd, but this practice also poses a number of challenges to HR departments.

“One is, make sure there is a return on the investment. That the right dollars are going to the right people for the right reasons.”

The other concern is governance. Since more pay is discretionary, the organization has to make sure it has the right structures and processes in place to ensure discretionary pay is correctly managed, he said.

According to Morneau Sobeco’s survey of 302 employers, average salary increases for 2005 will be 3.3 per cent, with 2.5 per cent increases for non-unionized hourly staff and 3.2 per cent for executives.

Morneau Sobeco also surveyed respondents about top HR issues for the year ahead. Health-care and pension costs topped the list, with 22 per cent of respondents saying they intend to introduce or increase employee health-care cost-sharing.

Pension plan performance is a concern, though just 10 per cent are thinking about converting to a defined contribution plan.

For a full look at the public survey results click on the related articles link below.

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