Salary increase projections are unchanged for 2027, but the forces have shifted. Normandin Beaudry's Darcy Clark explains what's driving employer caution
Recent findings from Normandin Beaudry show that Canadian employers are projecting salary increase budgets of 3.1 per cent for 2027, a figure that mirrors last year's forecast and actual spend almost exactly.
According to Darcy Clark, that flat line number may be the most telling data point in Normandin Beaudry's latest annual salary increase survey. When employers factor in additional funds set aside for targeted compensation adjustments, the all-in number edges up to 3.3 per cent, still roughly 0.2 percentage points behind the US forecast of 3.5 per cent.
External markets affect salary increases
“The story here is there is no big story, which is a story in itself given what's going on in the external markets,” said Clark, senior principal of compensation at Normandin Beaudry.
“The quantum hasn't changed, but I think everything around that number has changed,” he added, noting that inflation has been declining, and salary budgets have followed suit. If the Bank of Canada holds course and inflation stays where it is, he sees no reason to expect sharp swings in either direction.
“It’s a little bit of ‘Let's all just take a breath and stay where we are.’ Not everyone is, but that macro level of people movement has subsided and so that inherently lowers retention risks,” said Clark. “There’s certain skill sets and levels of talent that’s always going to have retention risks. But by and large, on a macro level, the retention risk that we saw in 2022 and 2023 is mitigated so plan sponsors can ratchet down their salary increase budgets.”
Still, he draws a distinction between base salary increases and the targeted retention programs that sit on top of them. He noted employers can fund separate initiatives for mission-critical roles or high-demand skill sets without touching the broader salary budget.
Yet, the base increase itself is a different calculation and a permanent one as Clark explains a 3 per cent or 4 per cent raise doesn't reset the following year. It compounds into every cost tied to base salary, from target bonuses to group benefits premiums to pension contributions and rollbacks are rare and deeply unpopular.
Finance teams understand that math well, Clark suggests, noting they’re now weighing how much cash reserves they need to ride out ongoing trade and geopolitical disruption and how long that disruption might last.
That caution is a key reason employers are holding salary budgets steady rather than pushing them higher, even when retention pressures might otherwise justify it.
According to Clark, before COVID, salary projections tended to hover around 2.7 per cent with little variation, and a single annual survey was sufficient. Now, firms build pulse updates into their survey calendars as a matter of course. The updated numbers would be released in January, timed to when boards and leadership teams review and approve final budgets ahead of March or April implementation.
Before the end of the year, Normandin Beaudry plans to run a shorter follow-up survey to test whether the 3.1 per cent projection still holds. That kind of mid-cycle check has become standard practice across the consulting industry since the pandemic, when market volatility made summer forecasts less reliable by the time budgets were finalized.
While Clark doubts the projection will climb, he believes the pulse survey will reveal whether it slides or stays flat - and those late-cycle figures tend to be more dependable, since most organizations are close to locking in their numbers by that point.
AI's growing role in total rewards
While most organizations have already given HR a strategic seat at the leadership table, those that haven't will be forced to soon. AI is accelerating that shift by sharpening the tension between technology adoption and people management in ways that can't be delegated to IT alone.
He acknowledged how AI is starting to play a role in the compensation process, helping compensation teams allocate salary increases across a workforce based on factors like range positioning, performance ratings, and tenure. Those inputs feed into what the industry calls “a merit matrix”, Clark said, noting AI can process the data to recommend differentiated increases rather than blanket ones.
According to Clark, just over half of the firms Normandin Beaudry surveyed are exploring skills-based compensation - programs that pay a premium for specific, in-demand capabilities. These programs are typically time-bound, since the skills that warrant a premium shift as the market evolves. Clark noted that AI skill sets are now squarely in that conversation, but said the challenge is defining what an “AI skill” actually means when the technology and its applications are changing so fast.
“Even the best-laid skills-based programs or compensation programs are challenging because you have to identify it, measure it, and understand how long you want to compensate for that and how much you want to compensate for it,” he said, adding it remains one of the bigger unresolved questions in compensation strategy.
Human eye critical for compensation budgets
Still, he stressed that human judgment still needs to sit on top of whatever the model produces. Additionally, the bigger shift, in his view, is what AI means for workforce planning itself.
As automation absorbs more task-oriented work, employers will need to rethink where their salary investment goes - whether to double down on higher-value roles or pull back on positions that are shrinking in scope.
“We don't know what those answers are yet, but that's where the data points are going to be going to, like where the investment's going to be made in people and where the people, the shape of your organization is going to be,” he said.
