Chapter 9 - Quality change
9.1 Price indexes aim to measure pure price change over time. For the WPI this is achieved by ensuring that identical jobs are priced from one period to the next. This is referred to as pricing to constant quality. This is difficult to do and in practice changes in the nature of jobs occur frequently as the characteristics of the job occupant change over time or the range of duties performed changes. These changes are considered to be quality changes. For price index purposes, it is necessary to remove any change in price attributable purely to the change in quality from the inflationary movement in the price. The following chapter describes the quality adjustments made within the WPI.
Ordinary time earnings
9.2 Ordinary time hourly rates of pay data are collected quarterly in the WPI. Ordinary time payments are collected for each sampled job and include the following:
- Award, agreed or over-award payments
- Casual loading
- Value of any salary sacrificed
- Piecework payments
- Higher duties allowances which relate to the selected jobs
- Fixed and regular taxable allowances
- Payment for leave taken during the pay period (e.g. sick leave, annual leave).
9.3 The following are specifically excluded from ordinary time payments:
- Shift allowances and shift penalty payments
- Reimbursements and non-taxable allowances
- Taxable allowances that are not fixed and regular (e.g. variable travel allowance)
- Leave loading
- Severance, termination and redundancy payments
- Employer contributions to superannuation funds
- Value of any payments in kind that cannot be salary sacrificed.
9.4 Pure price movements are allowed to contribute to the ordinary time price. These movements will include: those due to inflation; cost of living; enterprise or agency agreements; award rises; minimum wage rises; individual contracts (both formal and informal); and salary reviews.
9.5 Elements that are excluded from changes in the ordinary time price are those that relate to changes in the quality or quantity of work performed. Quality changes within a job can occur in a number of ways including:
- changes in the level of performance of the occupant
- changes in the age, grade or level of qualification of the occupant
- changes in the duties required to perform the job.
A range of procedures have been developed to quality-adjust the data collected to ensure only pure price changes are reflected in the indexes.
9.6 Only those jobs that exist in both the current and the previous quarter (i.e. matched jobs) contribute to the index calculations. Jobs are matched by collecting detailed job specifications and ensuring job occupants do not deviate from these specifications over time. When an employee moves out of the sampled job, the WPI will continue to collect information about the job, rather than the employee.
9.7 Where a job has ceased and no other jobs with these specifications exist in the business, a new (or replacement) job is selected at random from the employer payroll. When initialising these new jobs, current and previous quarter base hourly rates are obtained to ensure a price change can be measured and the job contributes to the index in the quarter it is initialised.
9.8 A feature of the labour market which is becoming more common is the use of salary sacrificing. Salary sacrifice arrangements are voluntary agreements in which the employee foregoes part of their salary or wages in return for benefits of a similar cost to the employer. The amount sacrificed can vary at the employee's discretion within guidelines set by the employer. The arrangement is generally intended to be cost-neutral to the employer and advantageous to the employee. Salary sacrifice arrangements can change and the cash component of the salary for a job may fluctuate between adjacent quarters even when there has been no change in the cost to the employer.
9.9 In deriving the price of ordinary time hourly rates both the cash and non-cash elements of flexible salary packages are included. The price movements in wage and salary rates would be distorted if just the cash component was included as the relationship between the cash and non-cash components can change based on an individual employee's circumstances.
9.10 With the introduction of enterprise bargaining in Australia it has become common for benefits such as allowances, leave entitlements or fringe benefits to be traded off to obtain greater pay increases. These benefits are rolled into ordinary time or base pay. These trade-offs are generally price-neutral to the employer and therefore do not reflect changes in the price of the job in the labour market. Accordingly changes of this nature do not affect the ordinary time hourly rates of pay indexes. For example, an employee may choose to trade-off a non-cash component of their salary package (e.g. annual leave) for an increased cash component. In such a case, there would be no change recorded in the wage price index.
9.11 One exception to this is the shift of payments from overtime to ordinary time. The ordinary time rates of pay index shows the impact of these changes.
Performance related pay changes
9.12 Occasionally pay rate changes are partially the result of an individual's work performance, i.e. the pay change reflects more than pure price change in the labour market. For a small proportion of such jobs, it may not be possible to completely quantify the effect work performance has had on remuneration.
9.13 When the quality (i.e. performance related) and pure price components of the pay changes cannot be separately identified, the entire increase is allowed to contribute to the wage price indexes. It is expected that over time the job occupant will change, resulting in a subsequent fall in the price of the job due the lower quality (i.e. performance or experience) of the new employee. This decrease in the price of the job will also contribute to the index, counterbalancing the increase shown earlier, and in effect removing the performance component over time. While there may be some upward bias in the price rise during the tenure of a given employee, this treatment should minimise any bias in the long term. This treatment is considered preferable to the alternative of removing all pay movements where there is a quality component which would create a downward bias in the index.
9.14 Jobs where individual work performance is a factor in remuneration generally have unstructured or informal pay setting mechanisms i.e. an unregistered individual agreement. Remuneration is usually the result of negotiation between the employer and the employee with the level of pay generally being reviewed annually.
9.15 Overtime is often worked irregularly and may be infrequent. Different hours of overtime will be worked in different jobs each week. Not all job occupants will be eligible to work overtime and not all occupants who are eligible will have been paid overtime in any particular period. For those who do, there is a broad range of scenarios and arrangements under which overtime might be paid. These arrangements are usually based on peaks and troughs in the operations of a business.
9.16 To overcome the problem of irregular or fluctuating overtime hours and to enable overtime to be priced to a constant quantity and quality, standard overtime hours for a job are defined as the number of overtime hours actually paid for in the reference week of the first quarter the job is included in the survey. Therefore not all jobs where the occupant is eligible for overtime will have overtime priced in the total hourly rates of pay indexes. This reflects the fact that overtime is not worked by all job occupants who are eligible to work overtime in a given week.
9.17 Overtime rates are updated annually in the December quarter to reflect the number of overtime hours worked and average penalty rate for this period. These changes are reflected in the index, where constant quantity and quality are maintained. This updating occurs to ensure the level of overtime used in the index is up to date.
Overtime price movements
9.18 The overtime rates are derived in the first quarter a job is included in the survey. Progressively the overtime rates are updated with changing overtime hours worked, changes in the eligibility of the occupant to work overtime and where there are changes to the actual overtime provisions, i.e. the overtime rates of pay for particular patterns of hours worked.
9.19 Apart from the changes identified above, the overtime hourly price would also change with a change in the ordinary time hourly price. This is because the overtime hourly price is based on the ordinary time hourly price.
9.20 Overtime rates or eligibility may change when pay is reviewed for a job, for example when new individual contracts or collective agreements are struck. In such cases, the overtime rates and the overtime weekly standard hours are updated at the time this occurs to reflect this change, which flows into the calculation of total hourly rates of pay.
9.21 When there are substitutions in remuneration between overtime and ordinary time payments, the ordinary time rates of pay index shows the impact of these changes.
Bonuses, commissions and incentive payments
9.22 Bonuses, commissions and incentive payments fluctuate from quarter to quarter, as they generally relate to the productivity of either the individual in the job or the organisation as a whole. Bonuses, commissions and incentive payments may be paid to employees in addition to regular wage or salary payments, and may be paid on a regular basis e.g. weekly, quarterly or annually, or on an ad hoc basis (e.g. staff suggestion bonuses). For ease of reference the term 'bonuses' encompasses bonuses, commissions and incentive payments.
9.23 Data on bonuses are collected on the following basis:
- where the bonuses are paid with a weekly, fortnightly, monthly, or quarterly frequency, the most recent payment to the employee is collected
- where the bonuses are paid biannually, annually or with other frequency, the full amount paid in the quarter is collected (i.e. the total paid since the previous quarter's survey reference date).
Such data enable an hourly rate for bonuses, commissions and incentive payments to be calculated.
9.24 Bonuses exclude the cost of retainers and piece work payments which are included in the calculation of the ordinary time hourly rate.
9.25 The hourly price for bonuses is derived from the total of all bonus payments for all frequencies, without separating quality changes from pure price changes. Since no attempt is made to remove quality from the price of bonuses, the indexes which include bonuses are not pure price indexes.