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, 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.

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.

The number of companies planning significant workforce reductions in 2010 is far lower than 2009 (10% rather than 34%).

With doubts about 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”, says 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.”

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.

Almost 70% 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.

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.

Towers Perrin’s most recent compensation and hiring research was conducted online in late October 2009. In total, 143 respondents provided information on their Canadian operations. The same survey was conducted in the United States with 330 companies participating.