Canadian organizations are relying on variable compensation— performance-related rewards that must be re-earned each year and do not increase base salary—and perquisites to attract, retain, incent and reward key employees, according to Hewitt Associates.

Its 30th annual Canada Salary Increase Survey finds that because the supply of workers with special skills or training (such as engineering or information technology) is so low compared with the demand, 36% of companies make special compensation arrangements outside of base salary to attract and retain them. Employers also go to special lengths to recruit and retain workers in certain parts of the country, particularly Alberta.

The most frequently offered monetary arrangements are sign-on and/or retention bonuses and a living/housing allowance while non-monetary rewards include a cellphone, computer, flexible work arrangements, car allowance, help with finding housing, and extra vacation time.

Still, employers find that creating and implementing a successful variable pay program is harder than they think. Two-thirds reported difficulty in designing pay programs that give employees a clear line of sight between their achievements and their reward. In addition, 61% cited enabling managers to have effective pay conversations with their reports as a challenge.

Successful variable pay programs have the ability to help employers drive business objectives as well as keep employees focused on their goals in order to realize their earning potential, says Jeff Vathje, a senior compensation consultant in Hewitt’s Calgary office. He adds that the program must be designed appropriately and administered properly.

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“However, it is also critical that employees understand how the variable compensation plan works,” Vathje explains. “Without a clear grasp of what they need to accomplish in order to help the organization succeed and be rewarded themselves, the program isn’t going to work. Employers run the risk of losing key talent to competitors that appear to pay more when that happens.”

The survey also finds that salaries across the country are not expected to increase in 2009 as they have in years past. The average increase is forecast to be 3.6%, compared to a 3.8% rise in both 2007 and 2008.

Even in Alberta, where salary increases still exceed those in the rest of Canada, they are expected to be smaller. Projected average increases are 5% in 2009, compared to increases of 6% in 2007 and 5.6% in 2008.

In addition, the data from the survey reveals that fewer employers in Calgary and Edmonton saw a need to compensate workers at a higher rate than those in other parts of the country.

In 2008, 42% of employers paid workers in Calgary more than those doing similar work in other locations, down from 52% last year. Edmonton also experienced a 10 percentage point drop, with 15% of employers providing a higher salary to workers in that city compared to 25% in 2007.

But there were two locations in Alberta where there wasn’t a decline in employers offering extra pay: Fort McMurray was steady at 23% while 12% of companies in Grande Prairie offered employees more, up from 6% last year.

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