Each month as part of our pay settlement analysis, IDS produces the median figure for basic pay awards across the economy. This headline figure provides a ‘typical’ increase for employees at the companies we monitor. As with all statistics, there is a complex reality hidden beneath the summary figures; there are often several components to an annual pay review which can make monitoring pay settlements more of an art than a science.

The pay settlements we add to IDSPay.co.uk can be divided into three main categories, although there are variations within each approach:

    • the settlement figure may be completely straightforward to ascertain – for example, where all employees in a company received a 2% rise in wages
    • some pay awards are variable – for example differing according to individual performance
    • some reviews combine both of these elements, awarding an across-the-board increase to employees while retaining a separate pot of money to award additional discretionary increases

With an emphasis on variable pay in some sectors and on differentiating pay rises by individual performance or market factors, the task of determining how much a pay settlement is worth in annual percentage terms has become far more complex.

In some cases, particularly where there is separate bargaining for blue-collar and white-collar staff, the type of pay settlement may vary by employee group within the same organisation. For example, a general award may be appropriate for a large group of relatively low-skilled workers undertaking very similar work, while higher-level roles might be rewarded in a more individualised manner.

In the process of our pay monitoring we are conscious of all the differences in pay settlements outlined above. Although we aim to capture all elements of a pay review in our pay settlement analysis, for the purposes of comparison, and producing summary statistics, it is necessary to arrive at a single figure.

For this reason we exclude the elements listed in the table below when calculating our summary statistics. We use our best estimates to construct a system which carefully assesses all the dimensions of a review and tries to allow for a consistent measure that is comparable across organisations. We take account of what the pay review puts in employees’ pay packets and what the cost is to the employer.

What is being measured by pay settlements in IDSPay.co.uk?

Included

Excluded

General/across-the-board increases in basic pay

Performance or competency-related pay increases

Bonuses and lump sums

Incremental progression

‘Off-cycle’ adjustments (outside the annual pay review)

Pay restructuring outside the annual pay review

Changes to working time

Pay increases through promotion


General pay awards predominate

Over two-thirds of the pay settlements collected by are general or ‘across-the-board’ increases. This form of pay settlement often provides the most clarity in relation to the overall value of the pay award. Under these awards, all employees within an organisation or bargaining group receive the same percentage increase to their basic pay. This is often linked to one of the inflation indices (RPI still being the most dominant).

This form of pay settlement is particularly common in industries where collective bargaining remains strong. For instance, in the construction industry – which is covered by a number of industry-wide agreements – 85% of settlements in the year to May 2014 were general awards. In education, another highly unionised sector, the figure for the same period was 100%.

However, while this form of increase tends to provide more clarity about the overall value of a pay settlement, there may still be grey areas. Changes to working time may be introduced as part of a pay review. During the recent recession a number of manufacturers, particularly in the motor industry, opted to reduce the working week in an attempt to cut costs. Jaguar Land Rover reduced hours for manual workers in 2009 in return for no compulsory redundancies. While IDS records the details of each individual agreement, we would not normally place a monetary value on this part of the agreement in terms of the headline pay settlement figure.

Similarly, when annual leave entitlement is increased as part of a pay settlement, although it may lead to a rise in paybill costs, we would normally exclude this element when assessing the value of a deal. This is also because employers have not always calculated (or wish to communicate) the associated rises or reductions in paybill costs.

As part of an annual pay review, employers sometimes decide to create an additional grade within their pay structure. This is relatively common in the retail sector, where management grading structures may be adjusted in response to a reassessment of a store’s complexity or turnover. In 2013 Next merged the bottom two levels of its management structure and inserted a new grade further up following a period of closing smaller turnover stores and opening bigger ones. In this situation, where a handful of managers could find themselves with an increase significantly higher than the general award, IDS would usually record the average increase or the total paybill increase.

Three-tenths of organisations for which we recorded a pay settlement in the year to May 2014 informed us that they had also paid a non-consolidated bonus to staff. These bonuses are recorded on IDSPay.co.uk, they are excluded from the figures used in our data analysis as they are paid out at different times of the year. Our headline data therefore differs from that produced by the Office for National Statistics in the Annual Survey of Hours and Earnings, which includes bonuses, overtime and other variable payments.

Variable or merit-based awards

Between a fifth and a third of pay awards in the IDS database are based on a measure of individual performance rather than an ‘across-the-board’ formula. This approach is particularly popular in areas such as finance and IT. Our latest survey on pay and conditions in IT and ecommerce showed that the most common approach to pay progression in the sector was on the basis of individual merit (62.5%). These payments would be included in our pay settlement analysis where they are rolled into the annual pay award under an all-merit system.

Where progression structures are budgeted separately from the annual pay review, incremental progression would be excluded from our pay settlement figures.

Amongst the companies we monitor, performance is the most significant factor determining merit-based awards, although they may be based on a number of other factors, including a measure of competency or skills acquisition. In practice, employers take a number of criteria into account and some organisations use a matrix to determine an individual’s precise increase based on his or her appraisal rating and position within the salary band. This enables employers to direct more of the available pay pot towards high performers near the bottom of the scale, with the aim of accelerating their progression to a ‘target’ or market rate. Use of pay matrices is made by a number of the banks, including The Royal Bank of Scotland.

Where the percentage rise varies (for example differing according to individual performance), organisations typically quote the percentage increase in the paybill that is being used to fund these increases. Where possible, this is the figure we obtain. Where this figure is not available, we ask for the average pay increase awarded to employees, as this is often similar to the paybill figure. This is important for our analysis as, with many all-merit systems, the majority of employees receive the average or paybill increase. It is only the outliers – very good or poor performers – who receive less or more than the average, especially in an era of downward pressure on pay budgets.

We also ask organisations to provide the range of increases actually paid to staff, which are shown in our monthly pay settlement analysis. For example, on 1 April 2014 Zurich Financial Services paid merit-based increases worth between zero and 10% for individual employees. The average increase was 2.5% which is the figure IDS uses for pay settlement analysis.

In the civil service some departments use a ‘guided distribution’ system to vary individual awards. At the Ministry of Justice, staff in grades equivalent to executive officer up to and including grade 6 who achieved ‘effective’ ratings in their appraisal received the general increase of 1%, while ‘outstanding’ performers were awarded 2%. Staff with ‘improvement required’ ratings also saw increases of 1%, provided they were not subject to formal ‘managing poor performance procedures’. While there is a general element to this award of 1%, this figure was reached through a merit-based approach, instead of separate general and merit budgets being agreed in advance.

General and merit

Just under a tenth of companies recorded in our database pay both a general increase to staff and an additional merit-based rise. The merit-based element of these awards may be included in our pay settlement analysis, depending on the number of employees affected and an assessment of what could reasonably be considered a ‘typical’ increase for employees within an individual company or bargaining unit. For example, in January 2014 Nissan Motor Manufacturing paid merit-based increases to some 49% of staff on top of a 3% rise in basic pay for all employees. The merit-based increases averaged 1.73% for those ‘in band’, with lump sums worth 1.18% on average for those at the top of their bands. The details of this deal are recorded by IDS, but due to the fact that fewer than half received it, the median figure used for analysis was 3%.

Effects of the National Minimum Wage

To either match the increasing levels of the National Minimum Wage, or to move an organisation’s lowest rate above the minimum wage, employers may make underpinning increases, which are often flat-rate. This frequently means that there are higher percentage increases at the bottom of the grade structure and more modest percentage increases at the top of the structure. This disproportionately affects low-paying sectors such as retail. Mothercare’s most recent review resulted in a pay freeze for most employees. However, there was a small increase for those aged over 18 at the bottom of the scale to bring them in line with the 2013 National Minimum Wage. The headline settlement figure we record will depend on the numbers of employees affected. If the majority receive a pay freeze, the overall reward will be recorded as zero. However, in some companies where the majority of employees earn the minimum wage, the figure recorded would reflect the paybill increase.

Note

A version of this article was previously published on ids.thomsonreuters.com

 

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