APPENDIX 4 TREATMENT OF BONUSES & COMMISSIONS IN THE LPI
BONUSES AND COMMISSIONS
Data on bonuses and commissions have been collected since the commencement of the Wage Price Index (WPI) series in September quarter 1997. These data are reflected in the wage price indexes for ordinary time hourly rates of pay including bonuses, and for total hourly rates of pay including bonuses. For ease of reference the indexes are referred to as 'including bonuses', however they include both bonuses and commissions.
Bonuses and commissions may be paid to employees in addition to regular wage or salary payments. They generally relate to the performance of either the individual in the job or the business as a whole. No attempt has been made to remove this performance or quality element from the price of bonuses. However, for commissions, which are identified as those payments that are a percentage of the value of sales made, changes in the price were considered more likely to reflect variation in the performance of the individual than pure price movements. For this reason, quality adjustments were made in the past to remove any changes in the price of commissions.
A recent review of the methodology for the treatment of bonuses and commissions determined that it was not feasible to accurately quality adjust the price. However, the review also concluded that the extent of quality change associated with a change in the price of bonuses and commissions was minimal, with the bulk of the change more likely to be an actual change in the "price" underlying the bonuses and commissions paid. Therefore, the review's findings, while consistent with the current treatment of bonuses, required that the treatment of commissions be amended.
Consider a real estate agent who receives a quarterly commission based on the number of properties sold. An increase or decrease in the amount of commission received from one quarter to the next is more likely to reflect the state of the housing market rather than a change in the ability or performance of the real estate agent. Given that the WPI is a measure of the change in the price of labour inputs regardless of the outcomes achieved, it would be more accurate to treat a large part of such a change as a genuine change in the price of commission. In practice, it is impossible to identify the quality component of a commission with any degree of certainty and so it becomes necessary to treat them as either all price change or all quality change. Treating it as all price change is considered to be less inaccurate than the alternative of treating it as all quality change.
Commencing from the March quarter 2006, all changes in the price of commissions will be treated as price movements. At the same time, changes have been implemented to allow wage and salary quality adjustments to be made without affecting the price of bonuses and commissions. This was previously not possible.
It should be noted that while it is considered indexes constructed using the new methodology will provide a better estimate of the change in the price of labour, they will continue to be a combination of a pure price index and a form of unit value (i.e. total value divided by quantity), with changes in quality or quantity affecting the bonus component. As a result, only those wage price indexes that exclude bonuses and commissions can be considered pure price indexes. However, those series that include bonuses and commissions will provide extra information about the extent to which the incidence and size of these payments are changing over time.
It is expected that this change in methodology will result in a divergence between the indexes that include bonuses and commissions and those which exclude them. To assist in the analysis of this methodological change, the ABS has developed an analytical series which provides an estimate of the index numbers, since the September quarter 2001, based on the new methodology. The analytical series is not a revision to the published series. It is important to note that the analytical series has been calculated using the information currently available about earlier reference periods. It is therefore possible that the analytical series produced may be different to one calculated contemporaneously using the new pricing methodology because it is not possible to replicate the procedures that might have been applied when the information on bonuses and commissions was first received from businesses.
The graph below indicates the difference between the published series and the analytical series developed using the new methodology.
Total hourly rates of pay including bonuses, Australia
The analytical series has been produced for the indexes of ordinary time hourly rates of pay including bonuses and total hourly rates of pay including bonuses, at the Australia and sector level. These indexes are available on request by contacting David Taylor on (08) 9360 5151 or by email <firstname.lastname@example.org>.