Slight slowing in wage hikes

Conference Board predicts 3.8-per-cent gains for 2008

A new report from the Conference Board of Canada predicts the 2008 pay environment will be affected by a tight labour market, the “Alberta effect,” slowing interprovincial mobility, rising voluntary turnover rates and the drive to attract talent.

“The pendulum of power has switched to employees,” said Prem Benimadhu, the Conference Board’s vice-president of governance and HR management, speaking at a recent conference in Toronto.

Employees are convinced of their value, he said, increasingly willing to switch organizations and quit without a job, more sophisticated in how they compete in the marketplace and opinionated and voluble, asking employers, “What will you give me?”

In Compensation Planning Outlook 2008, the Ottawa-based group is forecasting base-pay increases, for the 13th year in a row, will exceed inflation. The average wage increase is projected to be 3.9 per cent for non-unionized employees (and 4.1 per cent for the public sector). Broken down into regions, Alberta should still lead the way with increases of 5.2 per cent, followed by Saskatchewan and Manitoba (4.6 per cent), British Columbia (4.2 per cent), Quebec (3.6 per cent), Ontario (3.4 per cent) and the Maritimes (3.2 per cent).

However, the Alberta Federation of Labour (AFL) said the study’s assertion that wages across Canada are on the rise due to wage pressure in Alberta is “methodologically flawed” and does not reflect actual wage patterns in the province.

“The reality for Alberta workers is one of stagnant real wages,” said Calgary-based AFL president Gil McGowan. “Workers are not getting ahead in this boom. They are, at best, treading water.”

The study does not factor for inflation, running at about five per cent in Alberta, he said, and for the first seven months of 2007, average hourly earnings in Alberta “show no increase whatsoever, even before factoring in inflation.”

The problems, according to the AFL, are bad labour laws, aggressive employer tactics, the growing use of temporary foreign workers and spiraling inflation.

Increases higher than forecast

Looking back at 2007, the Conference Board study shows average salary increases have been higher than forecast. For example, Alberta saw gains of 6.0 per cent compared to forecasts of 5.1 per cent while B.C. saw increases of 4.5 per cent compared to predictions of 4.0 per cent.

However, the increases vary by type of performer, as satisfactory performers averaged a 3.6-per-cent increase while outstanding performers enjoyed a 5.5-per-cent increase. But with 92 per cent of all employees receiving an increase, the spread leaves little room for differentiation among low and high performers, said Benimadhu.

Salary budgets are expected to fall slightly in 2008, to 4.1 per cent from 4.3 per cent in 2007, demonstrating a concern by organizations over escalations in base pay as they try to hold the line, he said.

Attraction and retention tools

When it comes to attraction and retention, 68 per cent of the 319 employers surveyed in the summer of 2007 are making adjustments to base pay (and in the West, they may do that two or three times per year). In addition, 56 per cent use signing bonuses, 42 per cent offer referral bonuses and 41 per cent offer retention bonuses (averaging one per cent to 15 per cent of base pay).

Voluntary turnover rates are definitely on the rise, though more so among satisfactory performers who have been at a company for one or two years, said Benimadhu. Employee turnover went from 7.9 per cent in 2006 to 8.5 per cent in 2007 but, for top performers, the average was just 2.5 per cent, he said, and 3.8 per cent for those with critical skills.

As for variable pay, cash bonus or incentive plans are the most common form, used by 83 per cent of organizations that have at least one of these plan types. Profit-sharing plans rank a far second at 16 per cent, followed by gain-sharing at eight per cent and team-based incentives and lump-sum payments at six per cent each.

The actual cost of annual variable pay plans averaged 12.2 per cent of total base pay spending in 2007. These costs are higher for the oil and gas sector (averaging 19 per cent) and lower for the government sector (averaging six per cent).

Medium-term plans that pay out after two or three years have seen growth yet again. In 2007, nearly 18 per cent of organizations offered these types of incentives, up from 13 per cent in 2006 and eight per cent in 2005. This trend suggests boards of directors are asking companies to use variable pay to retain talent, said Benimadhu.

The prevalence of long-term incentive plans remains stable (at 48 per cent) and while stock-option plans remain the most common, they continue to decline slowly in popularity. About one-half (52 per cent) of organizations with a long-term incentive plan currently have this plan in place, down from 73 per cent 10 years ago.

Benimadhu also warned of the impact of the upcoming labour shortage on compensation, using charts to show the declining rate of labour force participation starting in 2010, the decreasing labour force growth anticipated over the next 20 years and falling or flat fertility rates in Europe, North America and Asia.

By the numbers

Annual variable pay

Average payout by employee group in 2007 as a percentage of base salary

Employee groupTarget payoutActual payout
Senior executives38.647.3
Technical and skilled trades7.29.1
Clerical and support5.77.3
Service and production6.08.9

Source: Conference Board of Canada


Specific compensation strategies

Percentages based on organizations reporting at least one strategy

Formal strategyAd hoc approach
Adjustments to base pay1543
Signing bonuses746
Referral bonuses366
Retention bonuses1226
Milestone or project bonuses419
Enhanced relocation support715
Stock options or grants118
Hot skills bonuses68
Enhanced variable pay programs75
Stay bonuses110

Source: Conference Board of Canada

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