Mercer Canada | Compensation Planning

Small salary increases, and even smaller compensation budgets

Strategies to Win in the Year Ahead


As Canadian organizations plan for the year ahead, the outlook for employee base salary increases are the lowest projected in more than 20 years, according to Mercer’s 2016/2017 Canada Compensation Planning Survey. The survey results, which focus on non-union employees in Canada, show that on average companies are projecting a 2.6% salary increase budget for 2017. This is just slightly above where actual salary increase budgets landed in 2016 (2.5%) and falling behind where we were in 2015 (2.8%).

Why are the projected increases so low?

While it is easy to point the finger at the oil patch and a lower Canadian dollar, there are many other considerations that are weighing on employers’ minds as they plan for 2017. Both global and domestic economic uncertainty is at the forefront, resulting in companies taking a more conservative and “wait and see” approach. 

What does it mean for employees?

It is not a great year to ask the boss for a raise and they likely need to head into 2017 with lower expectations than years past. 

What does it mean for employers?

It will be more difficult to differentiate base salary increases based on employee performance. As many Canadian organizations attempt to pay top performers more, this year’s budget really limits their ability to do so. While top performers can expect to receive an average salary increase in 2017 of 4.3 per cent, nearly double the average projected increase, the real-dollar spread between average and top performers has narrowed. As a result, companies may consider allocating their dwindling pool of funds more strategically going forward.

Strategically Allocate Funds

One strategy is to distribute the budget evenly across all employees, regardless of how well they performed or underperformed. This is certainly the easiest option to administer, as everyone receives the same percentage increases and may be appropriate if the traditional merit matrix isn’t working properly or is particularly cumbersome. In addition, it has the benefit of encouraging a team-based culture and that ‘we’re all in this together’. But it also perpetuates internal inequities, which are typically addressed at year-end, and creates a higher risk of turnover from top performers who feel unrewarded for their superior achievements. Even though the base salary increase discussion has been simplified, managers still need to have meaningful performance discussions with their employees. With 89 per cent of companies linking employee pay to performance ratings, it strongly counters existing company culture at most firms.

A second approach is to eliminate the base salary increase for the majority of employees, focusing instead on the top performers, as they represent the employees organizations most want to retain. In addition to allowing employers to strategize their budget spending, it also provides an opportunity to make some salary corrections. This strategy is problematic for companies that have difficulty identifying top performers and has the potential to harm the morale and engagement of the broader employee population, who will not be receiving an increase. This approach requires careful communication and an almost surgical approach to identifying top performers.

A third strategy in this era of smaller salary budgets is to focus on the broader employee value proposition. The employee value proposition or employment brand includes all the other ‘good stuff’ employees get from working at the company. This approach recognizes that for many employees, money alone is unlikely to be enough to retain them. A lot of organizations undervalue the effects of a great leader or boss, a flexible work environment or challenging projects – focusing on these things and highlighting them as part of the employee value proposition can help drive engagement. Articulating the entire employee package can be a difficult exercise that requires buy-in from leadership, employees and the Board.

Regardless of the strategy, companies want to make sure that they are spending their budgets wisely – and depending on the business environment and company culture, need a strong communication and change management plan so that employees and managers aren’t surprised. 

Learn More from Mercer’s 2016/2017 Canada Compensation Planning Survey Report –

 

 

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