This technical report was published in the January 2007 issue of Australian Labour Market Statistics (cat. no. 6105.0).
CHANGES TO ABS MEASURES OF EMPLOYEE REMUNERATION
The remuneration paid to employees for their work is of interest from both social and economic perspectives. The ABS produces a range of statistics on employee remuneration, and these are widely used by policy makers, researchers and others in the community.
Over recent years there have been substantial changes to remuneration arrangements for Australia's employees. In particular, an increasing number of employees are now able to participate in salary sacrifice arrangements, whereby they forgo some of their wages and salary in exchange for benefits provided by their employer (e.g. cars, laptop computers, employer superannuation contributions).
There have been differing treatments of amounts salary sacrificed in the various ABS measure of employee remuneration. Generally, amounts salary sacrificed are reflected in statistics of compensation of employees, but not in earnings and employee income statistics.
The magnitude of amounts salary sacrificed is such that their inclusion or exclusion could have a noticeable impact for some measures. For example, in May 2004, an estimated 12% of employees had a salary sacrifice arrangement, with an average value of $173 per week for those participating. This amounts to an average value of $21 per week for all employees, or 2.7% of average weekly earnings (unpublished data from the May 2004 Survey of Employee Earnings and Hours).
In view of the increase in the diversity of remuneration arrangements, particularly the increased use of salary sacrifice arrangements, the ABS has reviewed the conceptual basis of measures of employee remuneration, and will be implementing a number of changes to its statistics of employee remuneration.
These changes are discussed in Information paper: Changes to ABS Measures of Employee Remuneration (cat. no. 6313.0) which was released on 14 November 2006. The information paper describes employee remuneration arrangements, international standards for statistics of employee remuneration, the changes to conceptual treatments, and the impact of these changes on ABS statistical series.
This article provides a summary of the changes outlined in the information paper.
EMPLOYEE REMUNERATION ARRANGEMENTS
Employee remuneration may take a number of forms. Mostly, remuneration is in cash, whether as a deposit into an account, or a cheque, or bank notes. However, employers often also provide remuneration in the form of goods and services. In some cases, an employee will have the choice as to whether they receive part of their remuneration as cash or as benefits, but at other times the form of remuneration is not negotiable.
Over the last decade there has been a substantial increase in the number of employees who receive non-cash benefits. This reflects both the increase in decentralised bargaining to negotiate employment agreements, and interpretations of tax law that have established the practice of salary sacrificing.
The Australian Taxation Office (ATO) refers to a salary sacrifice arrangement as:
an arrangement under which an employee agrees contractually to forgo part of the remuneration, which the employee would otherwise receive as wages or salary, in return for the employer or someone associated with the employer providing benefits of a similar value.
Under a salary sacrifice arrangement, the amount of salary that has been forgone (plus any additional costs incurred, such as fringe benefits taxes and administration costs) is deducted from the employee's pre-tax wage or salary.
Salary sacrifice arrangements now form part of remuneration arrangements for over one in ten employees, including over a quarter of managers and administrators. Table 1 shows the extent of salary sacrificing arrangements for all occupation groups.
1. Salary sacrifice, By occupation group - May 2004
Amount salary sacrificed as a % of average weekly earnings(a)
Proportion of employees with salary sacrifice
Employees with salary sacrifice
|Managers and administrators |
|Associate professionals |
|Tradespersons and related workers |
|Advanced clerical and service workers |
|Intermediate clerical, sales and service workers |
|Intermediate production and transport workers |
|Elementary clerical, sales and service workers |
|Labourers and related workers |
|All occupations |
|(a) Salary sacrifice as a proportion of Average Weekly Earnings excluding salary sacrificed. |
|ABS Survey of Employee Earnings and Hours. |
ABS MEASURES OF EMPLOYEE REMUNERATION
The ABS produces several measures to meet the different needs of users of statistics of employee remuneration, including:
Compensation of employees
Compensation of Employees (CoE) is the total remuneration, in cash or in kind, payable by an enterprise to its employees in return for work done by the latter during the accounting period. It comprises wages and salaries in cash, wages and salaries in kind, and employers' social contributions.
- compensation of employees within the Australian System of National Accounts;
- earnings and labour prices as part of the body of statistics on the Australian labour market; and
- employee income within income distribution statistics.
Wages and salaries in cash includes the wages and salaries paid at regular intervals, together with payments by measured result and piecework payments, allowances for working overtime, for working away from home and similar taxable allowances, pay for annual and other leave for short periods, ad-hoc bonuses and commissions, and gratuities and tips received by employees.
Wages and salaries in kind refers to remuneration received as goods, services or other benefits (such as free or subsidised accommodation, travel, food, motor vehicles, etc.).
Employers' social contributions are incurred by employers in order to secure social benefits for their employees (e.g. employers' superannuation contributions, workers compensation premiums). Entitlements to social benefits are generally dependent on certain circumstances, such as sickness, accidents, redundancy or retirement.
Earnings statistics are based on the concept of earnings as income to the employee. The concept broadly aligns with the wages and salaries component of CoE. However, whereas the national accounts measures wages and salaries as an economic flow over an annual or quarterly period, earnings statistics are generally a series of 'point-in-time' measures of the average earnings of employees in a short reference period.
As a result, the definition of earnings is slightly narrower than the national accounts definition of wages and salaries. Earnings refers to remuneration paid 'as a rule at regular intervals', to differentiate between payments that can be expected to be received regularly and frequently (e.g. fortnightly, monthly, or quarterly) and one-off and infrequent (e.g. annual) payments. Earnings statistics also exclude wages and salaries in kind, largely due to practical considerations.
Employee income is a component of the broader measure of household income. The concept broadly aligns with CoE. However, employee income statistics currently exclude payments in kind, as well as severance and termination pay and employers' social contributions.
CONCEPTUAL CHANGES TO ABS REMUNERATION STATISTICS
The ABS has made a number of changes to its conceptual framework for employee remuneration statistics. The key changes relate to the treatment of salary sacrifice, FBT, employer superannuation contributions and taxes on superannuation contributions.
Benefits provided at the employee's discretion are more like wages and salaries in cash than wages and salaries in kind, as the employee has chosen to receive the benefits provided by the employer. The amount sacrificed represents the same level of utility for the employee as cash.
As a result, the value of salary forgone through a salary sacrifice arrangement is now treated as wages and salaries in cash (regardless of the goods and services received). This will help overcome distortions in time series if the relationship between the cash and non-cash components of remuneration packages changes over time.
Fringe benefits tax
The ABS has historically treated the value of FBT as a tax on production, because the employer who provides the fringe benefits incurs the FBT liability. However, FBT is similar in its intent and purpose to personal income tax. The intent of FBT legislation is to ensure that all forms of remuneration provided to employees bear a fair measure of tax (i.e. by taxing fringe benefits received in place of, or in addition to, salary or wages). It is also common practice for employers to directly seek reimbursement from the employee of FBT incurred in a salary sacrifice arrangement.
For these reasons, the ABS has made a change to the conceptual treatment of FBT. FBT is now considered (for statistical purposes) as a tax on employee remuneration. The value of FBT on benefits received as part of a salary sacrifice arrangement is now included in the value of wages and salaries in cash. The value of FBT on benefits received through an arrangement other than salary sacrifice is now included in wages and salaries in kind.
Employer superannuation contributions
Employer contributions to superannuation funds (on behalf of their employees) generally fall within one of the following three types: contributions made under Superannuation Guarantee (SG) legislation; additional contributions made by employers over and above their SG obligations and not at the employee's discretion; and contributions made at the employee's discretion (i.e. by forgoing wages or salary through a salary sacrifice arrangement).
Under SG legislation, employers are required to contribute a minimum proportion (currently 9%) of an employee's wages and salary to the employee's superannuation fund. Employer contributions made to comply with SG legislation are considered to be employers' social contributions because the payment is a form of social insurance. Employees and employers are not able to convert the payment to cash wages or salary.
While the SG legislation specifies the minimum amount an employer is required to contribute, employers can contribute more. Where these additional employer superannuation contributions cannot be converted into wages and salary at the discretion of the employee, they are also treated as employers' social contributions.
However, employer superannuation contributions that are made as part of a salary sacrifice arrangement are made at the discretion of the employee. Therefore, in line with the treatment of salary sacrifice described above, salary sacrificed into superannuation is now treated as wages and salaries in cash, rather than employers' social contributions.
Taxes on superannuation contributions
The tax paid by superannuation funds on the contributions they receive and the income they earn on those contributions has historically been treated as a tax on financial corporations. This treatment was based on the fact that the tax is remitted by the superannuation funds.
However, contributions made by employers, whether as employers' social contributions or through salary sacrifice arrangements, are part of CoE. In addition, as the investments of superannuation funds are made on behalf of the members, the flow of investment income earned by superannuation funds should be considered as income earned by individuals. As a result, taxes on superannuation contributions and taxes on the income earned by superannuation funds are now treated as payable by individuals.
Summary of the changes
In summary, the following changes have been made to the conceptual basis for ABS statistics of employee remuneration:
The following diagram shows the conceptual framework for ABS employee remuneration statistics (in the context of the broader concept of labour cost), and highlights the changes that have been made (shown in bold and 'strikethrough').
- The value of goods and services provided through a salary sacrifice arrangement is now treated as wages and salaries in cash;
- FBT is now included as a component of wages and salaries and employee income (i.e. FBT is now classified as a tax on employees);
- Employer superannuation contributions that are made at the employee's discretion are now treated as wages and salaries in cash, and not as employers' social contributions; and
- Taxes on contributions to superannuation funds, and on the income earned on those contributions, are now treated as taxes on individuals.
2. CONCEPTUAL FRAMEWORK FOR MEASURES OF EMPLOYEE REMUNERATION
IMPACTS ON ABS STATISTICS
As a result of the changes to conceptual treatments outlined above, the following changes will be made to ABS statistics of Compensation of Employees, Earnings and Labour prices, and Employee income.
Compensation of employees
A number of changes have already been made to CoE within the National Accounts. These changes were implemented in the annual national accounts release Australian System of National Accounts, 2004-05 (cat. no. 5204.0), released on 7 November 2005. Specifically:
Earnings and labour prices
The ABS conducts a number of employer and household surveys to collect information on earnings and labour prices. The changes to these surveys are described below.
- FBT is now treated as part of the value of CoE;
- a new benchmark for wages and salaries in kind has been implemented to fully cover payments of this form of remuneration; and
- taxes on superannuation contributions are now deemed as being paid by households.
Survey of Average Weekly Earnings
The Survey of Average Weekly Earnings (AWE) measures regular wages and salaries in cash associated with employee jobs. Estimates of average weekly earnings, and changes in average weekly earnings, are produced each quarter. Average weekly earnings series from the AWE survey are referred to extensively in Commonwealth, state and territory legislation. AWE series are also used extensively in private sector contracts.
The definition of earnings currently used in the AWE survey is, broadly, current and regular payments in cash to employees for work done. Earnings series from the AWE survey have always excluded amounts salary sacrificed, as these have been considered conceptually as payments in kind.
Given the significant current use of AWE statistics for legislative and contract purposes, continuity is a prime consideration. Therefore, the ABS plans to continue to compile AWE statistics on the current conceptual basis (i.e. excluding salary sacrifice), and to therefore retain the series currently used for these purposes.
However, the ABS plans to compile additional statistics from the AWE survey on a basis that is consistent with the revised conceptual framework (i.e. inclusive of salary sacrifice). The ABS plans to commence collection of this additional information from the August 2007 reference period. Data in respect of a number of quarters will be required to make an assessment of the quality of the new series. Once this assessment has been completed, data will be released retrospectively and then on a continuing basis. The new series will have different labels to the current AWE series, to clearly distinguish the new series from the current series.
Survey of Employee Earnings and Hours
The two-yearly Survey of Employee Earnings and Hours (EEH) measures regular wages and salaries in cash associated with employee jobs. The survey provides statistics on the composition and distribution of earnings of employees, the hours they are paid for, and the methods used to set their pay. Estimates from the survey are used in developing and reviewing wages and labour market policies and in wage negotiation processes.
The ABS collected information on amounts salary sacrificed in the 2002 and 2004 EEH surveys. However, in line with the prevailing conceptual and operational definitions of earnings used, the published weekly earnings series for 2002 and 2004 excluded amounts salary sacrificed, to maintain continuity with results from previous EEH surveys and with other ABS earnings series.
Beginning with the May 2006 EEH survey, earnings measures will be published on the new conceptual basis (i.e. including amounts salary sacrificed). As information on amounts salary sacrificed was collected in the 2002 and 2004 EEH surveys, it will also be possible to produce data on the new basis for 2002 and 2004. This will be done for selected series at the time of publication, and will be available upon request for other selected series.
Estimates of the average amount of salary sacrifice per employee from the 2002 and 2004 EEH surveys are shown in table 3.
3. Estimates of the impact of including salary sacrifice in the EEH survey
Average weekly earnings per employee(a)
Average weekly salary sacrifice per employee
Impact of including salary sacrifice
|Full-time adult managerial employees |
|May 2002 |
|May 2004 |
|Full-time adult non-managerial employees |
|May 2002 |
|May 2004 |
|Part-time employees |
|May 2002 |
|May 2004 |
|All employees |
|May 2002 |
|May 2004 |
|(a) Published estimate of Average Weekly Total Earnings, excluding salary sacrifice. |
|ABS Survey of Employee Earnings and Hours. |
Survey of Employee Earnings, Benefits and Trade Union Membership
The annual Survey of Employee Earnings, Benefits and Trade Union Membership (EEBTUM) collects information on the weekly earnings and employment benefits (e.g. paid leave entitlements, superannuation coverage) received by employees. A number of mean and median weekly earnings series are published. The information is used to analyse the distribution of weekly earnings across employees with different socio-economic and employment characteristics.
In recent years there has been no explicit reference to the treatment of salary sacrifice in survey questions or interviewers instructions. Thus, it is probable that some respondents are already including amounts salary sacrificed in their responses depending on how pay is reported.
Beginning with the August 2007 survey, earnings measures will be collected on the new conceptual basis (i.e. including amounts salary sacrificed). References to the treatment of amounts salary sacrificed will be explicitly included in survey questions and interviewers instructions. The ABS is not planning to collect the value of salary sacrifice separately, and will publish EEBTUM earnings series on the new basis only from the 2007 survey onwards. This will increase the level of the EEBTUM survey earnings series, causing a break in time series. As it is likely that a proportion of salary sacrifice is already included, it is expected that the impact will be considerably less than the total impact observed from the EEH survey (shown in table 3).
Labour Price Index
The Labour Price Index (LPI) is a Laspeyres-type index covering wage and salary costs and selected non-wage costs. It measures the change in the price of labour between the current period and the price of labour at a given base period, with the quantity and quality of labour services being held constant. The headline wage price index is 'Total hourly rates of pay excluding bonuses'. As the LPI already includes the value of salary sacrificed in calculating the wage price indexes, no changes to the LPI are required.
The value of salary sacrificed will be included in measures of employee income from the Survey of Income and Housing (SIH) and the Household Income and Expenditure Survey (HIES). This will include employer superannuation contributions made as part of a salary sacrifice arrangement, as well as amounts salary sacrificed for fringe benefits and the associated FBT. As most of the value of salary sacrificed is already included as part of employee income, the changes will not impact significantly on the estimates of employee income from household surveys.
Summary of changes
The following table summarises the changes to be made to the various employee remuneration statistical series.
For further information, refer to Information paper: Changes to ABS Measures of Employee Remuneration (cat. no. 6313.0), or call (02) 6252 5514.