Compensation outlook improving but Canadians won't make up lost ground from
2009 just yet, says Towers Perrin study

Companies cautious about economic recovery; concerned about key talent retention

TORONTO , Dec. 7 /CNW/ - Canadian companies took even more severe measures than originally planned for 2009, with hiring freezes, salary freezes, and a range of other measures designed to manage expenses in line with dramatically reduced revenue, and their outlook for 2010 can best be described as "cautiously optimistic". Views on the timing of recovery are divided -- with one third thinking it will happen in the next 8 months, another third not until late 2010, and a final third not until 2011 or later -- but there are some signs of modest recovery in terms of compensation practices in 2010, according to new research from Towers Perrin.

Although nearly half of the 143 Canadian companies surveyed froze salaries in 2009 (a much higher proportion than was anticipated in a similar January 2009 survey), only 11% anticipate a general salary freeze for 2010, although that number increases to 18% when it comes to senior executive salaries. And plans to reduce workforce-related costs in other areas look very different to 2009, with fewer companies looking to reduce costs further in areas such as salary reductions, training, benefits and overtime. Further, the number of companies planning significant workforce reductions in 2010 is far lower than 2009 (10% rather than 34%).

Perhaps because of doubt around the timing of the economic recovery, companies are being conservative with their salary budgets. The median salary increase for employees is 2.5% -- an increase relative to 2009 for many companies, but down about 1% from pre-crash norms in Canada .

"In the current environment, it's not surprising that companies are exercising caution about returning to pre-crash levels of compensation", said Fiona Macdonald , Managing Principal with Towers Perrin. "In fact, this period may signal a new approach to compensation altogether, with companies rethinking their total compensation policies and budgets and implementing better pay-for-performance linkages across the organization, not just in the executive suite."

2010 SALARY AND BONUS PROJECTIONS

At both executive and general employee levels, the downward pressure on bonuses will continue for the second consecutive year. More than half of respondents anticipate lower or no bonuses for 2009 with projections as follows: about 10% of companies will have zero bonuses for the second year running; half will be the same or somewhat less than last year, and approximately 25% will be significantly lower. Only 15% intend to pay higher bonuses than last year.

Overall, salaries are flat, or up modestly, target bonus levels are unchanged, and actual bonuses are flat or down in most cases. The most significant change at the management level relates to long-term incentives, traditionally used by companies to align management and shareholder interests. The findings show that the theoretical value of long-term incentives granted in 2009 is less than in 2008.

"The big question that companies have been trying to figure out is whether the declines we have seen are an anomaly or whether overall compensation for executives has adjusted to a new, lower level," said Macdonald. "A key indicator could be that 2010 long-term incentive grant values will look like 2009 - half plan to provide the same value, 30% plan to provide a lower value, and 20% anticipate providing a higher value. This suggests that the pay for performance model is working, that companies have responded to the difficult economic environment by managing their compensation costs, and in particular by reducing the level of long-term incentives."

RETENTION IN THE RECOVERY - A RENEWED FOCUS ON KEY TALENT

Almost seventy percent of companies are concerned about retaining their high performing critical talent as a result of cutbacks made during the recession, and especially as pay stagnates for a second year. This talent flight concern appears warranted as many companies indicated that they plan to increase hiring next year, and will almost certainly look at competing organizations in their industry or region as a possible source of talent.

Companies are taking measures specifically to retain top talent, including greater pay differentiation through targeted salary increases (55%), differentiated bonuses (21%), and retention awards in cash (29%) or stock (25%). In addition, 40% of respondents are responding by enhancing their talent management programs.

"To successfully execute a differentiated pay strategy, companies will need a strong, properly integrated, well-understood performance management tool, and potentially a change management initiative to assist managers and employees with what will be a significant mind-set shift. Employees at all levels will need to rethink their salary expectations, from the better of cost of living or merit, to living with the same salary as last year unless they have done something to increase their value to the organization," said Macdonald. "The good news for companies that have cut or frozen pay is that they haven't lost as much ground competitively as they might have anticipated. The bad news is that there's always a good market for the best talent."

A GLOBAL PERSPECTIVE

Canada is not alone. Companies in many countries around the globe share Canada's conservative outlook on 2010, with projected median salary increases averaging around 3.0% or less. On the opposite end of the spectrum, employers in the BRIC countries ( Brazil , Russia , India and China ) and certain high-inflation economies are projecting faster salary growth, with expected 2010 salary increases of 7.0% or higher, according to Towers Perrin's 2009-2010 Global Compensation Planning Survey conducted in summer 2009.

Methodology

Towers Perrin's most recent compensation and hiring research was conducted online in late October 2009 , as part of a series of ongoing surveys to gain insight on how organizations are responding to the economic turmoil and balancing key talent and cost objectives. In total, 143 respondents provided information on their Canadian operations. The same survey was conducted in the US with 330 companies participating.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States , Canada , Europe , Asia, Latin America, South Africa , Australia , New Zealand and the Middle East . More information about Towers Perrin is available at www.towersperrin.com.

For further information: Laura Snell, [phone], [email protected]