The last few years have been turbulent for inflation and economic impact. How much would your own salary or wage have to increase to keep pace with inflation, so you remained "whole" in your buying power? How much would it have to increase for you to actually see a "raise" or increase in your net pay and buying power? Most Canadian organizations have reported having a 3.7% pay increase budget for 2026. Does the budget that you have available to you for your employees meet either or both of these scenarios?
When I am providing support to clients on annual pay adjustments, we break the situation down by focusing on cost of living (inflation), merit or performance-based pay, and clear communication of the value of the total rewards package.
Maintaining Employee Buying Power Through Cost-of-Living Adjustments
Generally, to keep an employees’ compensation whole against inflation, which means that their new salary or wage has the same economic buying power in today’s economy as it did a year ago, they need to see an increase at least 0.1% higher than the rate of inflation (since there are general fluctuations). This is usually referred to as a cost-of-living adjustment or a COLA. With the current Consumer Price Index at 2.3%, this would require an increase of 2.4% effective for March 2026.
If you are using salary ranges or pay grids, addressing COLA requires you to shift the entire range or grid by 2.4% and then keep the employee at the same position in their salary range on the updated pay grid, ultimately shifting their base pay by 2.4%.
Tying Pay to Performance
If you have the average 3.7% pay increase budget, and 2.4% is going to be applied to COLA, how do you distribute the remaining 1.3%? To see a "raise," you or your employee would need to receive a minimum of 0.2% more than the rate of inflation. However, I doubt that the minimum amount would be considered a raise by anyone—even on a $100,000 salary that would only be $100 per year, which would only be $0.048 per hour!
By creating a realistic merit or performance pay budget that is separate from inflationary (COLA) adjustments and aligning it with the results of your performance reviews and employee career plans, you can clearly determine pay adjustments for performance and competency growth.
Not every organization is in the position to provide significant salary or wage adjustments to keep pace with inflation, so what else can they do? Recent examples in total rewards approaches have included increasing paid emergency days or floating holidays (each day represents the equivalent of a 0.04% increase in pay). "Offsetting" existing employee benefits premiums is another example: if an employee is eligible for supplemental health insurance benefits and pays a portion of the premiums—say a 25%/75% split between the employee and the employer—the employer could offer to change that formula to a 20%/80% split. The employee then brings home more cash (without a salary or wage adjustment), and the employer receives beneficial income tax treatment from the government for the premium payment (so they really are only paying about 2% of the 5% increase in their share of the premium). It may seem convoluted, but it could be one way of leveraging the investment in total rewards to retain and attract employees.
How to Highlight Total Rewards to Increase Understanding
Regardless of whether your pay increase budget only covers COLA or extends to recognize performance or competency growth, communication is key. Although receiving cash from a paycheque is a significant reason that most employees work, there are additional elements of employment that include indirect pay. Benefits, well-being, and employee development, as well as aspects relating to non-monetary recognition, intrinsic satisfaction, and employee value of community contributions or lived experience, together are considered total rewards.
A total rewards strategy is the art of combining the elements into tailored packages designed to achieve optimal attraction, engagement, and retention. For the strategy to be successful, employees must perceive monetary and non-monetary rewards as valuable and be aware of what they receive from the organization.
Crafting and communicating the total rewards of a position is a great addition to just sending your employees a letter with their annual COLA or pay adjustment. Do they understand what the organization contributes to benefits plans, the value of paid time off, professional development or training program dollars, wellness programs, employee discounts, and more? To help build employee understanding of their total rewards package, it is recommended that all communications about base compensation or benefits include individualized Total Rewards Statements, so that employees see the direct financial value and non-financial investments that the organization makes in an employee.
Don’t forget that many benefits service providers such as medical, extended healthcare, EAP, and wellness programs include webinars, lunch and learns, or other communication tools within their client service packages and contracts. It is of value to engage your service providers in the best way to communicate your benefits offerings and their value directly to employees.
As we walk the fine line of balancing our people budgets and engaging our employees, remember that focusing on cost of living (inflation), merit or performance based pay, and clear communication of the value of the total rewards package can help build employee understanding of what they receive for working with you and your organization, which ultimately adds value to your bottom line.
If you want a comprehensive overview of your Total Rewards contact us for a free consultation to explore our Total Rewards Health Check
From the Owl Insight team (formerly Lisa Isaac HR) and lead collaborator, Rebecca Wilkinson. Rebecca.Wilkinson@owlinsighthr.ca
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Owl Insight HR
Blog Photo by: Imágenes de Kiki Nunchi
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