Feature 3 February 2005
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Page 67
The difference between pay settlements and earnings growth
Special feature
67
Special feature
The difference between
pay settlements and
earnings growth
By Sarah Miller, Incomes Data Services
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The Average Earnings Index
(AEI), the official measure of
earnings growth, shows a higher
annual growth rate than
aggregate data from pay
settlements compiled by Incomes
Data Services (IDS).
Over the six years from 1998 to
2004, the median annual
percentage rise from pay
settlements has been around 1.0
to 1.5 percentage points lower
that the annual growth in
earnings measured by the AEI.
The reason for the gap is that
different things are being
measured. The AEI captures the
impact of bonuses, pay
progression, interim adjustments
and pay restructuring outside of
the annual pay review, as well as
changes in workforce
composition.
The gap between earnings
growth and pay settlements is
commonly termed ‘pay drift’.
Some of this drift may not be
particularly controlled, but some
may be intentional and planned.
Introduction
he difference between
earnings growth and pay
settlements is a common
source of confusion. Why is it that
the measure of average earnings
growth across the whole economy
published by ONS is typically a
percentage point or more higher
than the median level of pay
settlements published by Incomes
Data Services (IDS)? This article
looks at the reasons, explaining the
differences between the two
measures. The gap between earnings
growth and pay settlements is
commonly termed ‘pay drift’.
T
The IDS Pay Databank
The median pay settlement level
recorded in the IDS Pay Databank,
published by IDS, has been fairly
stable during 2004 at 3 per cent.
However, growth in average
earnings, as measured by the Average
Earnings Index (AEI), has been
more volatile, but has consistently
been running at a significantly
higher level. The whole economy
figure, for the three months ended
October 2004, was 4.1 per cent on
the measure including bonuses, and
4.4 per cent excluding bonuses. Over
a six-year period from 1998 to 2004,
earnings growth has been running
on average at around 1.25 percentage
points higher than median pay
settlements (see Figure 1).
The reason for the gap is that
different things are being measured.
The measure of average earnings
growth is more straightforward and
precise in that it captures the totality
of changes in all elements of pay. By
contrast, the measurement of pay
settlements is a far less exact science.
When seeking to understand how
pay is changing over time, to get a
rounded picture it is important to
look at the measures both of average
earnings and of pay settlements, and
to understand what each is
measuring.
What is a pay settlement?
The IDS Pay Databank, published in
the fortnightly IDS Pay Report,
records around 1,000 settlements a
year covering altogether some 8.5
million employees across the
Office for National Statistics
• Labour Market Trends • February 2005
▼
Key points
Feature 3 February 2005
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The difference between pay settlements and earnings growth
Special feature
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1/2/05
economy. The settlements recorded
in the databank include both the pay
rises that are collectively bargained
between unions and employers and
also non-negotiated pay awards. The
data are gathered directly from
employers and unions, and are based
on asking about the percentage rise
applied to wages or salaries in the
annual pay review. Where the
percentage rise varies (for example
differing according to individual
performance) the figure recorded is
the average increase, or the increase
received by most employees. The
median settlement level is the point
at which half of all settlements are
above and half are below. Unlike the
AEI measure, the pay settlement
figure does not capture money paid
out as non-consolidated bonuses or
lump sums, nor the effects of any pay
restructuring implemented outside of
the annual pay review. The other
main difference is that any changes in
workforce composition that impact
on the paybill are not reflected in the
settlement figure, whereas they are in
the AEI (see Box 1).
In some cases the settlement figure is
completely straightforward to
Box
Figure
1
Annual growth rates in the AEI, RPI and IDS Pay Databank; January
1998 to October 2004
Per cent
7
Average earnings growth (including bonuses)a
Median pay settlementa
6
Retail Prices Index
5
4
3
2
1
0
1998
2000
1999
2002
2001
2004
Sources: Office for National Statistics; IDS Pay Databank
a Three-monthly averages.
ascertain – for example, where all
employees in a company received a 3
per cent rise in salary. But with the
growing emphasis in recent years on
variable pay such as non-consolidated
bonuses, and on differentiating pay
rises by individual performance or
market factors, the task of determining
1
What is being measured?
Pay settlements in IDS Pay Databank
Average Earnings Index (AEI)
Included:
Included:
Consolidated increases in basic pay
Performance-related pay rises
Basic pay
Overtime pay
Bonuses
Merit pay
Progression increases
Pay rises due to promotions
Market adjustments
Effects of pay restructuring
Changes in workforce composition
Excluded:
Bonuses and lump sums
Incremental progression
‘Off-cycle’ adjustments (outside the annual pay review)
Pay restructuring outside of the annual review
Changes in workforce composition
Office for National Statistics
2003
• Labour Market Trends • February 2005
Feature 3 February 2005
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The difference between pay settlements and earnings growth
Table
Special feature
69
1
Numbers of pay settlements by month and range of increase; May 2003 to October 2004
2003
May
June
July
August
September
October
November
December
1
1
3
0
0
0
0
0
0.1 to 1.9
1
0
0
0
0
2
0
1
2.0 to 2.9
13
8
16
4
8
14
9
3
3.0 to 3.9
12
18
48
25
11
43
15
4
4 0 to 4.9
4
3
8
5
4
7
1
0
5.0 to 5.9
1
6
4
3
1
4
0
0
6.0 to 6.9
0
2
2
1
0
2
1
0
Range of increase
(per cent)
Freeze
7.0 to 7.9
0
1
0
1
0
7
0
0
8.0 or more
1
1
2
0
2
1
0
0
33
40
83
39
26
80
26
8
January
February
March
April
May
June
July
August
September
October
Freeze
9
1
1
4
0
0
0
0
0
2
0.1 to 1.9
3
0
0
2
1
1
0
1
0
5
2.0 to 2.9
48
10
8
95
11
7
23
4
4
17
3.0 to 3.9
123
18
28
160
22
11
31
18
7
5
4 0 to 4.9
14
0
7
24
4
3
7
5
1
1
5.0 to 5.9
8
0
2
9
0
1
5
3
0
1
6.0 to 6.9
2
3
0
1
2
0
1
1
0
0
Total settlements
2004
Range of increase
(per cent)
7.0 to 7.9
2
0
0
0
1
3
0
1
1
0
8.0 or more
4
3
2
6
0
1
1
0
0
0
213
35
48
301
41
27
68
33
13
31
Total settlements
how much a pay settlement is worth in
annual percentage terms has become
far more complex.
This has particularly been the case in
the financial services sector, where the
increase awarded on salaries in the
annual pay review is only one element
in the whole picture of changes to the
remuneration package. The annual
profit-sharing bonus and individual
or job family market-related
adjustments outside the annual pay
review are just as important.
A further complication is where
pay deals span more than 12
months, or are paid in several stages.
Arriving at a single percentage figure
to record the settlement in the IDS
Pay Databank often involves a
certain amount of judgement.
Table 1 gives a month-by-month
breakdown by percentage intervals
of the settlements in the IDS Pay
Databank over the 18 months from
May 2003 to October 2004. The
month indicates the effective date of
the increase, or the first-stage
increase in the case of settlements
that are implemented in more than
one stage over the year. As this
Office for National Statistics
• Labour Market Trends • February 2005
▼
Source: IDS Pay Databank
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Page 70
The difference between pay settlements and earnings growth
Special feature
Figure
2
Median and interquartile range of pay increases; May 2003 to
October 2004, three-monthly average
Per cent
4.5
4.0
3.5
3.0
2.5
Upper quartile
Median
Lower quartile
The AEI is published monthly by
ONS and measures how fast
earnings are growing (it is not
designed to measure levels of
earnings). The index measures how
earnings in the latest month
compare with those for a year ago,
with the index currently based on
year 2000. The AEI is based on
information obtained from ONS’s
Monthly Wages and Salary Survey of
around 8,500 organisations. The AEI
captures the total paybill for the
month divided by the number of
employees, and includes all forms of
pay whether consolidated or not,
including bonuses, lump sums,
market supplements, progression
increases, overtime pay and the
effects of pay restructuring.
Changes in the composition of the
workforce, such as the proportion of
the workforce employed full-time or
part-time or in skilled or unskilled
Office for National Statistics
October 2004
September 2004
August 2004
July 2004
June 2004
May 2004
April 2004
March 2004
February 2004
January 2004
November 2003
October 2003
September 2003
The Average Earnings
Index
August 2003
July 2003
0
June 2003
shows, the effective dates of pay
reviews are not evenly distributed
through the year, but rather are
heavily concentrated in certain
months, principally January, April
and July. January is the most
important review month for private
sector reviews, while April is the
principal month for pay reviews for
public sector employees.
Figure 2 shows the same data,
giving the trend in the median and
interquartile range of increases over
the 18 months to October 2004.
These data are presented on a rolling
three-month basis rather than by
individual month, in order to give a
clearer view of the trend. For
example, the median settlement level
of 3.1 per cent shown for October
2004 is based on a total of 77
settlements with effective dates in the
three months up to 31 October 2004.
May 2003
▼
70
1/2/05
December 2003
Feature 3 February 2005
Three-month period to end
Source: IDS Pay Databank
Note: the median is the level at which half of the settlements are above and half below; the
lower quartile is the level at which a quarter of settlements are below; the upper quartile is the
level at which a quarter of settlements are above.
capacities, can and do affect the AEI.
For example, a growth in the
number of part-time employees who
are earning less than full-timers will
have the effect of depressing average
earnings. In manufacturing there has
been a long-term decline in the
number of lower paid manual
workers and a reliance on fewer
more skilled workers and this leads
to a growth in average earnings,
aside from any impact from pay
settlements.
Seasonally adjusted series
ONS publishes a seasonally adjusted
AEI as well as an unadjusted series.
The latter accurately reflects the
• Labour Market Trends • February 2005
fluctuations in monthly pay due to
the payment of bonuses at certain
times of the year. For example, the
unadjusted series for the financial
services sector shows huge peaks
each year at around February/March
when large sums are paid out in
annual bonuses. The seasonally
adjusted series generally takes out
these peaks and troughs, but can be
affected by changes in the timing of
bonus payments when compared
with previous years. To give a better
guide to the growth in regular pay,
ONS now publishes a seasonally
adjusted series excluding bonus
payments (see pp575-80, Labour
Market Trends, November 2003).
Feature 3 February 2005
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Page 71
The difference between pay settlements and earnings growth
How big is the gap?
Figure 1 shows the trend in both pay
settlements and whole economy
seasonally adjusted average earnings
growth since 1998. The average
earnings line plots the three-month
average figure in annual earnings
growth. For example, the figure for
October 2004 (4.1 per cent) is the
average year-on-year rise in August,
September and October. Similarly
the pay settlement trend line shows
the median settlement level in each
rolling three-month period. The
trend in the annual rate of inflation
(all-items measure) is also given,
showing that both settlements and
earnings have been running
comfortably ahead of the rise in the
cost of living.
Over the past few years there has
typically been a gap of around 1.0 to
1.5 percentage points between
settlements and average earnings
growth. Occasionally the measures
have coincided, and at other times
the gap has been wider: for example,
in spring 2000 average earnings were
growing at more than 5 per cent a
year while settlements were some 3
percentage points lower. The high
Special feature
growth in average earnings at that
time was due to the millennium
effect – for example, extra bonuses
in the IT sector and stronger
economic activity in parts of both
manufacturing and services.
Pay drift and pay drive
As we have seen, the key difference
between the AEI and pay settlements
is that the former reflects the impact
on pay packets from bonuses, pay
progression, interim adjustments
and pay restructuring outside of the
annual pay review. This is what is
termed ‘pay drift’, which implies a
process that is not particularly
controlled. However, in some cases
the factors leading to higher earnings
growth are coming from planned
pay restructuring moves, and so
could more accurately be termed
‘pay drive’.
The Government has been
concerned about pay drift,
particularly in the public sector.
While the headline settlement levels
in the public sector in recent years
have been not dissimilar to the
private sector, the growth in average
earnings has at times been much
higher. For example, for most of
2003 the public sector earnings
growth rate was running at more
than 5 per cent, compared with a
rate of 2.5 to 3.0 per cent average
earnings growth in the private
sector. The explanation for the
public sector earnings growth was
not that basic pay awards were much
higher than the private sector, but
rather reflected the impact of the
major pay restructuring moves for
public sector groups. These included
the new shorter pay spine for
teachers and higher London and
South East pay for nurses and police.
There was also an impact from the
timing of pay reviews.
Further information
The IDS Pay Databank monitors pay
settlement levels across the
economy and is published in the
fortnightly IDS Pay Report.
For further information, contact:
Sarah Miller,
E-mail:
sarah.miller@incomesdata.co.uk,
Tel: 020 7250 3434.
www.incomesdata.co.uk
Office for National Statistics
• Labour Market Trends • February 2005
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