In addition to raises and bonuses, some employers are sweetening their benefits packages. Yet, not everything is employer-paid, such as some types of insurance or the employee portion of matched group RRSP contributions.scyther5/iStockPhoto / Getty Images
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Facing a tight labour market, with 5.2 per cent unemployment in April, along with restless employees who may not see their jobs as fulfilling as before, some employers are raising salaries to retain talented workers.
That’s a smart move as two in five (41 per cent) employees say a salary increase is the most important retention incentive their employer could offer them, according to a new workplace study from Hamster.
Of course, higher compensation – whether in the form of salary, bonuses or benefits – provides opportunities for advisors to add value by steering clients toward the best use of extra cash flow and helping them minimize any associated taxes.
Kevin O’Hagan, financial advisor with Edward Jones in Calgary, says that among his clients, oil and gas company employees and realtors, in particular, have seen their incomes rise significantly over the past couple of years.
He focuses on getting a full understanding of each client’s priorities – what they want from their money – before discussing options for spending, saving, or repaying debt.
“Recently, [I worked] with a guy who had a $70,000 bonus. He wanted to potentially upgrade his home and buy a car in time. … He also wanted to take advantage of some [registered retirement savings plan (RRSP) contribution room] because he was facing was a larger taxation year,” he says.
“We picked some different buckets, founded on those priorities, and ended up with some [tax-free savings account] and RRSP contributions … It was really about the big picture.”
Mr. O’Hagan uses the analogy of a jar of M&Ms to explain to clients that their objective is to keep their savings as full as possible, but that sometimes everyone has to take out money to pay current expenses – whether a vehicle breaks down or a pandemic comes along.
That said, he tells clients to keep that full jar in their mind as a goal and get back to filling it up as soon as possible. A big bonus is a perfect opportunity to top up retirement savings, especially as a contribution to an RRSP provides a tax deduction that eases the pain of leapfrogging into a higher tax bracket.
“Number one is to work hand-in-hand with [the client’s] accountant so that we understand their tax scenario, what the accountant is trying to achieve, and how we can help them define some strategies on the personal financial planning side,” Mr. O’Hagan says.
Be aware of the total compensation package
In addition to raises and bonuses, some employers are sweetening their benefits packages – yet, not everything is employer-paid such as some types of insurance or the employee portion of matched group RRSP contributions.
Mr. O’Hagan says thatt may mean employees see more money taken off their paycheques to cover the extras their employer is offering.
“If, all of a sudden, … you need to now provide more to your employer for benefits or retirement savings, [and that can] lead to ultimately a higher expense,” he says. “In today’s inflationary world, you really have to be aware of [a client’s] cash flow needs.”
That requires helping clients understand what it means to them on a ground level from a budgeting perspective and how do we sustain that now.
Michelle Connolly, senior vice-president, advanced wealth planning, at Wellington-Altus Private Wealth Inc. in Toronto, stresses the importance of being aware of the total compensation package as well.
“It’s also recognizing that the various compensation components may differ as to type or nature of income,” she says.
On an after-tax basis, it matters if compensation comes in the form of salary, taxable benefits, stock options or restricted stock units, for example. The timing of when compensation is received matters as well.
“Our role, as financial planners, is as always to educate and translate, in terms of what matters [and] why it matters to them, or [how it] ties back to their distinct goals and needs,” she says.
Also critical is identifying gaps in a client’s compensation – for example, if there’s no pension plan. That can be at least partially addressed by boosting RRSP contributions in response to a salary increase or bonus. If a bonus is contributed entirely to an RRSP, the employer doesn’t have to withhold taxes at the source.
It may also be possible for clients to choose their tax bracket in subsequent years strategically by waiting to claim part of the deduction for this year’s RRSP contribution in a future year, Ms. Connolly points out.
On the other hand, if a client’s employer suddenly introduces a group RRSP, but the client maximizes RRSP contributions for the coming year routinely in January, it’s critical for advisors to let them know that – regardless of how well-intentioned the employer’s offer is – they should not participate because that will result in an overcontribution.
Inflation and allocation of extra cash flow
A raise isn’t worth what it used to be, thanks to higher inflation. With costs for basics such as groceries and gas rising, many clients won’t be able to divert as much of a pay increase to savings as they would’ve liked. They may also need to keep more money accessible to give them flexibility during a period of rising prices.
That said, the confluence of a higher-inflation environment and tight labour market may give clients leverage to ask for higher compensation.
“Canadian employers are looking at the cost of living and … the cost to replace an employee versus foster [that employee with the] recognition that life’s a little bit more expensive,” Ms. Connolly says. “Several large employers in the news of late [have said] that they’re actually doing mid-year raises [as] an ‘inflationary bonus.’”
Advisors can help clients define their optimal mix of salary, bonus and benefits so they know what they want going into a negotiation. Sometimes, a client’s priorities may come as a surprise.
“I have learned from talking to clients [that] saving the most amount of taxes or getting the most money in [their] pocket … isn’t the end game for most,” Ms. Connolly says.
“There are other aspects that are driving their decisions, and it’s a matter of identifying [these] and empowering them then to negotiate to get what they want.”
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