A guide to IRS pay statistics
We review how IRS monitors pay information and tracks settlement trends, and provide an explanation of key terms used in pay reporting.
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Key points
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For almost 25 years, Industrial Relations Services (IRS) has been a source of independent and authoritative information on remuneration for all those involved in setting and negotiating pay awards, including reward and HR practitioners and employees' representatives.
Any decision-making on pay requires accurate and up-to-date information. Labour costs are a major part, if not the major part, of most employers' costs; and when the prevailing climate is highly competitive, appropriate decisions are essential.
In this feature we look at IRS's pay data-gathering history, explain how researchers obtain, record and analyse pay information, and discuss how changes in reward practice and the pay climate have been incorporated. The feature also includes a comprehensive glossary of terms and definitions frequently used by IRS in pay reviews and data analysis.
Background
IRS began gathering information on pay in the late 1970s. At that time, the era of the statutory incomes policy was coming to an end, ushering in a period of collective bargaining, while inflation was running at high levels. The Confederation of British Industry (CBI), Labour Research Department (LRD), Incomes Data Services (IDS), the Engineering Employers Federation (EEF) and IRS all began gathering data on pay settlements around this time, responding to the need for information on and analysis of pay trends.
The methods used by these organisations for collecting pay information vary; for example, LRD obtains its information from trade unions, while members of the CBI contribute details of their pay awards to the organisation's regular surveys. From its inception, IRS has sought original information from sources within organisations, including copies of pay agreements, with additional information from trade unions and employers providing a fuller picture of terms and conditions.
How pay awards are gathered
IRS's chief source of pay data is through pay calling, where researchers contact management and trade union sources for details of the latest pay settlements. Researchers are allocated sectors, allowing them to build up knowledge and expertise in those fields, and to establish relationships with contacts. Pay awards are pursued month by month, using a pay calendar to check the customary anniversary dates of pay settlements for each bargaining group.
The researcher establishes the key details of the settlement: the percentage increase for the lowest adult grade; the effective date; the numbers of employees covered by the settlement or award; and its duration, which is most frequently 12 months. The pay call is also an opportunity to check for changes in basic working hours and holiday entitlement, details of merit pay, bonuses and other payments, and changes to other terms, conditions and reward systems, such as pensions, family-friendly provision and location allowances.As bargaining groups merge and evolve over time (for example, a separate bargaining group might be formed for white-collar staff) and organisations restructure, this regular pay call is a valuable way of updating information held by the researcher and on the databank.
Information from the pay contact can be validated or supplemented with information from other sources, including employers' organisations and trade unions. IRS also seeks to collect copies of agreements, to check for accuracy and as a source of further information on terms and conditions in addition to pay awards. Settlements that are collected some time after the due date - perhaps because of an extended negotiating period - continue to be entered onto the databank, and figures appearing in the tables accompanying monthly reviews are updated to reflect additional settlement data.
The keystone of IRS's pay analysis is the basic pay increase - a consistent measure comprising the annual percentage rise as it applies to the lowest adult grade, extended "across-the-board" to all employees in a bargaining group. This excludes other pay elements, such as merit or performance-related pay, bonuses, overtime, shift and other allowances.The focus on basic pay contrasts with information from other sources, such as the New Earnings Survey, produced by the Office of National Statistics, which also includes payments such as overtime and bonuses.
Changing times
Fifteen years ago, headline inflation reached 8.3% in May 1989, up from the January 1989 rate of 7.5%, before slipping to 7.7% in December. Figures from the IRS databank for 1989 showed a steady climb in the headline measure of pay settlements from 5.9% in January to 7.6% in December. In 2003, by contrast, inflation stood at 2.8% in December, having eased from a high of 3.2% in February. Pay deals mirrored this relative stability, with the median basic pay settlement recorded by IRS being pitched at 3% between April and December.
Given this perspective, it can be seen that many negotiations over annual pay awards are now focused on increases that are relatively small in percentage terms (though clearly still significant both to organisations' labour costs and to employees). This often leaves little room for manoeuvre for organisations looking to retain and recruit staff, especially at a time of relatively high employment levels. The rate of increase in basic pay is therefore increasingly being supplemented by a range of other strategies or enhancements to the reward package. In its regular contact with organisations, IRS collects information on these strategic developments, many of which can be recorded and monitored on its pay settlement databank (see below).
In addition, IRS gleans further information from two wide-ranging surveys: its own annual review, conducted in September and the IRS Employment Review HR Prospects spring survey, which is now in its third year.
The annual review features specific questions about pay trends, factors affecting the climate of forthcoming pay negotiations and planned changes to reward strategies, as well as requesting the most recent pay settlements for key groups of employees. These pay awards are either added to the databank or used to check against those already gathered from conventional pay calls.
The pay section of the HR Prospects spring survey seeks more detailed information on certain aspects of reward to gain more insight into organisations' reward strategies. This year, for example, respondents are being asked to indicate the relative significance to their organisation of factors such as bonuses and incentives, team reward and competency-based pay, as well as the national minimum wage, equal pay policies and pension provision.
How the data is used
Information on pay awards is added to the databank. This is used to produce data along time or sector lines. Data is produced on the level of basic pay awards each month, while sector-specific data provides the focus for round-ups on, for example, finance, retail and the voluntary sector. Each autumn, data for the previous year's bargaining round is produced and analysed for the annual review.
Organisations providing details of pay awards may opt to keep the information confidential, in which case it will be added to the PABB databank and used to produce aggregate figures only. However, IRS also aims to publish details of pay awards from named organisations, including blue-chip employers and those regarded as pace-setters within their sector. This highlights best practice or new forms of remuneration, helps to establish trends in reward practice in leading organisations and may also take the form of an entry in the pay review update, where brief details of pay awards are given.
More detailed pay reports are produced for key deals at major organisations, and where the pay award is of particular significance, such as a long-term deal, an above-average award, or where there is a move to a new reward structure. To ensure factual accuracy, organisations are provided with the opportunity to check draft pay reports.
The IRS pay databank
First established in 1984, the computerised databank was updated in 1993 to allow for more complex analysis of pay awards. It was further updated in 2002 to include more comprehensive details of terms and conditions, and now contains information from almost 4,000 organisations and more than 21,000 individual pay awards. Entries on the databank include: the type of settlement (such as basic increase, merit rise or flat-rate increase); the effective date; the duration of the award; and the numbers of employees covered. Researchers also record details of merit pay (see below), basic holiday entitlement and working hours. Additional fields include details of allowances (such as London allowances and weekend working payments), benefits (bereavement leave, pensions, private medical insurance), payment systems (including long-term deals, profit sharing and lump sum payments) and restructuring, which could apply to hours, pay or grades, or harmonisation.
How organisations are classified
The information is organised by industrial sector for recording on the databank. Employers responding to our annual surveys are also requested to categorise their organisation according to their main business activity or industrial sector.
To categorise organisations by industrial sector IRS has followed the Standard Industrial Classification (SIC) of Economic Activities, which was first produced by the then Central Statistical Office, now the Office for National Statistics. The SIC codes were published in 1992, with the most recent updating in 2003. IRS has broadly followed its pattern since 1993, classifying organisations into one of 16 sections:
1. Agriculture, hunting and forestry.
2. Mining and quarrying.
3. Food, drink and tobacco.
4. Textiles.
5. Paper and printing.
6. Chemicals.
7. Engineering and metals.
8. General manufacturing (including manufacture of bricks, cement, ceramics, glass and timber products).
9. Electricity, gas and water.
10. Construction.
11. Retail and wholesale.
12. Hotels and catering.
13. Transport and communication.
14. Finance.
15. General services (this particularly diverse category takes in radio and television, charitable activities, community, social and personal services, and business activities such as accounting and industrial cleaning).
16. Public services.
The glossary (see box) contains an explanation of how the sectors are grouped into manufacturing and services.
Sampling organisations
Organisations providing information to IRS do so on a voluntary basis. Achieving a fair and representative balance of employers is therefore a challenge. IRS aims to achieve a reasonable spread of organisations by industrial sector and size, to both reflect the balance of the economy and the information needs of subscribers. To this end, IRS gathers information from private and public sector organisations, from across the economic spectrum and from small, medium and large employers.
In practice, some industrial sectors feature more strongly than others; in the year to December 2003, the general services sector formed the largest percentage (16.8%) of pay awards monitored by IRS. To some extent, this is a reflection of the breadth of this category. Retail deals made up more than one in ten (11%) of awards recorded on the databank, followed by finance, general manufacturing and chemicals. Over half (51.9%) of all databank entries were from the services sector, and 37.6% were from manufacturers.
Data analysis
In its regular monthly analyses of pay trends, IRS establishes a headline figure for deals by tracking the median basic pay award. This is the midpoint in the range of basic awards. Selecting the median gives a more reliable guide to overall trends than the average, or mean, as it remains unaffected by extreme figures, especially at the top end of the spectrum, that can distort an average (the sum of all recorded awards, divided by the total number of awards).
As well as indicating the median basic award, IRS also derives quartiles. These mark the cut-off points for the top 25% of deals (the upper quartile) and the bottom quarter of deals (the lower quartile). Between these figures lies the interquartile range, within which half of pay awards lie. The interquartile range indicates how tightly bunched pay increases are. Currently, the interquartile range is around half a percentage point. A year ago, it was just one percentage point.
In its monthly reviews, IRS provides figures on a rolling quarterly basis. This helps to smooth out the peaks and troughs in the pay review calendar and makes for a more reliable and consistent indication of settlement trends.
The settlement figures recorded on the databank are annualised percentage increases. For deals that do not run over a 12-month period, an annualised figure is calculated. For example, a 3.5% rise over 18 months equates to 3.5/18 x 12 = 2.3% on an annualised basis; similarly, a two-stage deal might consist of 3% for 12 months, followed by a second stage increase of 1.5% six months later. This would be 3 + (1.5 x 6/12) = 3.75% annualised.
Pay freezes for a complete bargaining year are entered on the databank as zero increases. For pay reviews consisting of a pay pause or deferral for a number of months, followed by a percentage increase in basic rates, these are entered as a single review, with the increase annualised to give one figure for the entire year. For example, a six-month pay pause followed by a 2.5% increase for the remaining six months would result in a 1.25% annualised rate (2.5 x 6/12 = 1.25).
Merit pay
The use of merit pay - individual performance-related pay - has grown substantially since the late 1970s. Initially, its growth reflected the prevailing political and economic climate of the times, when market- and individually determined pay awards began to supersede centrally regulated arrangements. Its growth was marked in the early 1990s; a decade ago, IRS reported a steep rise in reviews based wholly or in part on merit in its 1993 annual review, from 14.5% in 1992 to 20% of deals a year later. This compares with our most recent annual review, when IRS recorded merit pay reviews in 30% of organisations in the year to 31 August 2003 (Settlements rise with inflation during 2002/03 wage round). This represents a rise of two percentage points from 2002.
The prevalence of merit pay varies between sectors and bargaining groups. In some sectors, such as finance, merit pay makes up the majority of pay reviews. Performance-related pay has also become more common in the public sector. Managerial and white-collar employees are the main recipients of merit pay, but sales staff are among other bargaining groups who can expect to receive some form of performance-related pay.
For its monthly reviews, IRS only records and analyses basic pay deals that can be used to produce a single percentage rise for the purpose of establishing underlying settlement trends.
However, merit deals are also recorded on the databank, either as all-merit awards (where the entire annual increase consists of performance-related pay), or basic plus merit deals (where a percentage increase applicable to all employees in the bargaining group, is combined with a merit element). In gathering information on merit pay, researchers seek two key sets of figures: firstly, the increase in the overall merit pay budget, or pot, which will often represent the average merit payment made to individual employees; and the range of merit payments made to employees.
This article was written by Bridget Henderson, researcher and writer, IRS Employment Review.
IRS pay databank profile1
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SECTOR |
PERCENTAGE OF ALL ENTRIES |
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Agriculture and forestry |
1.2% |
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Chemicals |
8.2% |
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Construction |
3.1% |
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Electricity, gas and water |
5.8% |
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Engineering and metals |
8.0% |
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Finance |
8.6% |
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Food, drink and tobacco |
5.3% |
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General manufacturing |
8.3% |
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General services |
16.8% |
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Hotels and catering |
1.6% |
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Mining and quarrying |
0.4% |
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Paper and printing |
5.8% |
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Public services |
7.3% |
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Retail and wholesale |
11.1% |
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Textiles |
2.0% |
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Transport and communications |
6.5% |
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Manufacturing |
37.6% |
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Services |
51.9% |
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Total |
100% |
1. Based on settlements monitored by IRS in the 12 months to 31 December 2003.
