Outlook 2005

Work more, make more.

If Canadians want a larger paycheque in 2005, they're going to have to do things the old-fashioned way: they're going to have to earn it. Salary increases are expected to average a modest 3.4% in 2005. That's only a slight increase over actual average salary increases in 2004, which came in at 3.3%. Even executives will see average increases of just 3.6%, the same as the year past.

The trend in recent years has been away from large raises and toward variable pay programs–performance-related awards that must be re-earned each year and don't permanently increase base salary. Salary increases averaging close to 6% at the start of the 1990s sank to a low of 2.2% half a decade later, during the downturn in the economy. While they have risen again, increases have never recovered to those lofty levels.

Meanwhile, variable pay programs have become more popular. In 2004, 82% of the 360 Canadian organizations polled in Hewitt Associates' Canadian Salary Increase Survey offered variable pay, compared with 69% of companies in 2000 and 43% a decade ago. Average spending on variable pay is also increasing. Two years ago, these kinds of awards averaged 9.9% of base salary. For 2005, survey respondents indicated the average award would rise to 13.1%.

There's no sign this trend is abating. Employers will continue facing pressure to manage costs and deliver shareholder value. Many see compensation programs that provide a competitive base salary and a variable component that links pay with performance as an important strategy for helping meet both objectives. Given strong labour supply in most markets and low inflation, employees have largely accepted this arrangement. Tying additional salary to performance is preferable to a freeze. Only 1% of employers expect to freeze salaries in 2005, down from 4% in 2004.

It remains to be seen whether changing demographics will influence the trend toward pay-for-performance. As boomers retire and predicted talent shortages develop, employers may feel pressure to provide more secure income to attract and retain key workers. If variable pay programs are used effectively, however, this may prove unnecessary. When goals and objectives are monitored and communicated regularly, pay-for-performance can actually motivate employees to improve the bottom line.

If you want go where the money is, Calgary's the place–salaries there will increase by 3.9%. As for in-demand skills, employers are having a tough time filling holes in engineering, operations, sales, skilled labour, geosciences and underwriting. These hot jobs often garner additional base pay and sign-on bonuses.

Pay, of course, is only one factor. More than ever, workers are looking beyond cash compensation when determining where to work. Employers who can create a compelling total work experience will have the most success attracting and retaining key talent. Evidence of this shift can be seen in the growing use of non-monetary rewards, casual dress, flexible hours, telecommuting and a compressed work week.

Although modest average salary increases are expected to continue, the forecast is bright for top performers. An increase in variable pay plans creates a win-win situation: employers can control costs and motivate high performance, while still providing programs that attract and retain employees who are willing to work hard for additional compensation.

Todd Mathers is a human resources consultant with Hewitt Associates in Toronto.