I don't think it's improper per se, but I do think when operating in a performance based environment, it's a very fine line. My approach would be to address the subpar performance with the contractor, give specific examples of the problems noted, and ask them how they plan to fix the problem. If the working relationship is good, this might generate some discussions, at which point, it might be appropriate to provide a suggestion with the caveat that it's up to the contractor to fix the problem and an emphasis on the fact we don't care how they get the job done, as long as they get it done.
In general though, I don't think it would be necessary to provide this suggestion--if the contractor is having high turnover, they are probably going to know already that they need to increase wages in order to keep people. In which case, they are going to make a decision as to what is the lesser of two evils, losing people and possibly hurting their past performance rating, or losing money.
On the CO's part, I think rather than suggesting how they fix the problem, it would be more effective to let them know that their subpar performance is going to affect their past performance rating which in turn will affect their ability to obtain future contracts. I think the only time suggestions would be effective/appropriate would be when there's a problem the contractor doesn't know how to fix and is seeking advice.
Staci