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REMUNERATION

Since 1997 the wages and conditions of employees in the APS have been negotiated and determined at the agency level. Most APS employees are covered by CAs (around 90% of ongoing employees) but an increasing proportion is being covered by individual Australian workplace agreements (AWAs) (8.5% compared with 6.7% last year). In negotiating wages and conditions agencies have significant flexibility subject to consistency with the Government’s Policy Parameters for Agreement Making in the APS. These policy parameters cover a range of matters but include the important requirements that improvements in pay and conditions be linked to organisational productivity and performance and that they be funded from within agency budgets. In December 2003 the policy parameters were expanded to include a new parameter which requires agencies to include in their agreements leave policies and employment practices that support the release of Defence reservists for peacetime training and deployment.

Last year’s report commented on the increasing salary overlaps between classifications across the APS and the higher level of salaries for those on AWAs compared to those covered by CAs for employees at the same classification level. The report found that salary overlaps within agencies were confined to a relatively small number of agencies and affected only very small numbers of employees with particular skills or particular jobs, moderating to a large extent concerns about undermining the merit principle, but the report emphasised again the importance of robust remuneration policies that make clear the links between skills, performance and pay. A degree of concern was also expressed about the quantum of average annual wage increases in some agencies compared to the average annual increase for the private sector. This section revisits some of these issues and outlines further developments in APS remuneration in 2003—04.

CERTIFIED AGREEMENTS

Data provided by DEWR indicates that at 30 June 2004 there were 99 CAs operating in the APS. Sixty-nine of these were third-round agreements and 21 were fourth-round agreements with one agency having negotiated a fifth-round agreement (the remaining eight agreements were first or second round agreements). Thirty-eight agreements were made during the year to 30 June 2004 (compared with 56 agreements made in the previous 12 months). These agreements cover around 95% of ongoing APS 1—6 employees and just under 80% of ongoing EL employees but few, if any, SES employees.

Over two-thirds of operating agreements have been made with one or more trade unions under section 170LJ of the Workplace Relations Act 1996 (Cwlth), while nearly 30% have been made directly with employees under section 170LK. These proportions have been much the same over the past two years. The number of operating CAs that are stand-alone agreements that completely displace the Australian Public Service Award 1998 has steadily increased to 98% (it was 94% at the end of 2002—03 and 60% in 1999).

The average annualised wage increase (AAWI) for all APS agreements certified in the 12 months to 30 June 2004 was 4.2% (compared with 4.9% in the previous 12 months). When calculated from the nominal expiry date (NED) of an agreement to the NED of that agreement’s replacement, the AAWI was 4.0% for the 12 months to 30 June 2004 (compared to 3.9% for the previous 12 months). The spread of NED to NED AAWI in APS CAs in the 12 months to 30 June 2004 narrowed over the year, ranging from 2.1% to 5.0% (last year the comparable data was 2.4% to 7.5%).

Measuring and comparing remuneration increases is difficult, given different timeframes for negotiating different agreements and changes in the composition of remuneration. Using the NED to NED AAWI abstracts from some of these problems.¹³ Comparisons with the private sector are more difficult as comparable NED to NED AAWI data is not available. Using AAWIs as the basis for comparison, the private sector AAWI at 30 June 2004 was 3.7% (3.6% last year). On an AAWI basis the average APS wage increase in CAs has been above the average for the private sector over the past three years. While on the face of it this may be of some concern, further comparison based on comparable skill levels in the private sector (considered later), suggests that the APS is matching private sector increases but not leading them.

AUSTRALIAN WORKPLACE AGREEMENTS

Data collected by DEWR from agencies indicates that the number of operative AWAs in the APS over the 12 months to end June 2004 increased strongly by around 30% to 10,362 (1870 covering the SES, 5506 covering EL staff and 2986 covering APS 1—6 employees). The rate of growth for AWA coverage of APS 1—6 employees continued to be very strong (over 75%) but this classification group still has the lowest coverage level (around 3% of all ongoing employees) compared with around 21% for EL staff and essentially all the SES.

The employee survey asked employees to indicate if their salary was set out in an AWA or their agency’s CA. Consistent with the above DEWR data, nearly all the SES and 22% of EL staff (the same proportions as last year) responded that their salary was set out in an AWA. However, 10% of APS 1—6 employees indicated they were covered by an AWA (up from 7% last year), around three times the coverage indicated by the DEWR data. As indicated in last year’s report, the most likely explanation for this discrepancy between the DEWR data and the employee survey data is a lack of knowledge of the distinction between AWAs and CAs by some survey respondents in this classification group.

CHANGES IN SALARY AND PERFORMANCE PAY

Data on the amount of salary and performance pay for those on AWAs and CAs are available from the results of an agency survey of SES and non-SES remuneration conducted for DEWR by Mercer Human Resource Consulting in 2003.¹⁴

Table 5.3 shows that rates of increase in base salary varied widely between those on CAs and AWAs and between classifications. The variability in actual outcomes reflects a number of different factors including that individuals move through salary ranges at different paces (as part of a performance management system) or because the proportion of employees at the top of salary ranges (and therefore generally ineligible for additional increases via movements in base salary) varies between classifications. It may also reflect deliberate remuneration policies to target higher increases at particular classification levels or to retain employees with particular skills and experience.

Table 5.3 shows in particular that, while employees on AWAs generally still enjoyed higher levels of base salary in 2003 (as in 2002 and 2001) compared with employees covered by CAs, the gap between the two groups of employees narrowed considerably in 2003 for all classifications except graduates. In fact, for the APS 4 classification, employees on CAs received a higher level of median base pay than those on AWAs. One factor that is likely to have affected this narrowing is the timing of specific CAs: in 2002—03 56 CAs were renegotiated compared to only 36 in the previous 12 months, and for some of these the initial pay adjustment may relate to a period of over 12 months. Nonetheless, the difference in base salary between those on CAs and those on AWAs appears to have at least stabilised, possibly reflecting in part the widening use of AWAs.

Table 5.3: Median base salary comparison–CAs and AWAs

Source: Mercer Human Resource Consulting, 2003 APS SES Remuneration Survey and 2003 APS Non-SES Remuneration Survey, conducted for DEWR, revised version released October 2004.

Note:‘-’data unavailable or not applicable

Results from the remuneration surveys conducted in 2003 for DEWR indicated that employees covered by AWAs were more likely to be eligible for a performance bonus than those on CAs (e.g. 21% of employees covered by a CA and 62% of non-SES employees covered by an AWA were eligible to receive a performance bonus in 2003). Some of the factors underpinning this divergence include that both AWAs and performance bonuses are more prevalent amongst more senior staff and that there may be some resistance amongst some staff to allow CAs to include performance bonuses. SES employees were most likely to be eligible to receive performance bonuses.

Of the employees eligible for a performance bonus, 24% of those employed under CAs, 83% of non-SES employees on AWAs and 91% of SES employees actually received a performance bonus in 2003 reflecting perhaps the tendency towards ‘top hat’¹⁵ schemes for CA staff (coupled with access to other forms of performance related pay in CAs such as movement through a salary range) and broader schemes for more senior staff, as well as the possibility that those less likely to gain a bonus may also be less likely to take up an AWA.

The comparative data for last year was 45%, 78% and 88% respectively, indicating that the proportion of those on CAs who received performance bonuses fell even further in 2003 and the proportion of those on AWAs who received a bonus increased a little in 2003.

The more widespread access to performance bonuses for those employees on AWAs serves to increase the remuneration gap between those on CAs and AWAs. This is reinforced by the fact that, for those employees who received a performance bonus, those on AWAs consistently receive higher bonuses at all classification levels. For example, of those who received a bonus at the EL2 level the average performance bonus received by those on AWAs was $6560 while for those on CAs the average was $3945.

The size of performance bonuses as a proportion of base salary by classification and by CA and AWA coverage are presented in detail in Chapter 9 in Table 9.5 in the context of a discussion of performance management systems. The data shows that performance bonuses vary considerably from 1% of base salary for APS 4s on CAs to 7.8% for SES Band 3s. The size of performance bonuses generally rise with classification level.

These differences should not be interpreted as firm evidence of unfairness or discrimination. Many agencies make strategic use of AWAs to attract and retain key staff, and some high performing staff are particularly attracted to the opportunity to gain performance bonuses. Moreover, higher performance bonuses at higher classification levels also represent more pay at risk. Nevertheless, the data does reinforce the importance of agencies having clear remuneration policies, and of consulting staff about them, to limit the risk of a perception (as well as the reality) of unfairness.

The following sections look in more detail at agencies’ remuneration policies and also examine the differences in characteristics and views of those employees covered by CAs and AWAs.

AGENCIES’ REMUNERATION POLICIES AND THEIR USE OF AWAs/CAs FOR NON-SES STAFF

Nearly all agencies (95%) report having some non-SES staff covered by an AWA. For most agencies (87%) it means employing non-SES staff at the same classification level on a mix of AWAs and the agency’s CA (i.e. some employees at the same level are on AWAs while others are covered by the CA). Three-quarters of agencies reported that this occurred for EL2 level staff, just over two-thirds of agencies for EL1 staff and half of all agencies for APS 1—6 staff.

The top five reasons for having staff at the same classification level on a mix of AWA coverage and CA coverage were exactly the same for EL2 and EL1 staff, namely to attract and retain people with critical skills and knowledge, to reflect differences in skill and/or knowledge, to reflect additional duties/responsibilities of employees on AWAs, to maintain employees’ pay and/or conditions upon moving from another agency (this was more important for large agencies, particularly at the EL2 level, than for small and medium agencies) and to implement a performance pay system. The first three reasons were the same for APS 1—6 staff but the fourth most common reason for this group of staff was to provide flexible work practices while the fifth most common reason was the inclusion of job-specific targets in AWAs.

Despite the widespread use of AWAs, only 37% of agencies employing staff on AWAs report having a written remuneration policy that deals with staff covered by AWAs, while another 14% of agencies reported that they were currently developing such a policy.¹⁶ Of this 37% of agencies, around two-thirds reported that this policy was available to all employees with the other third limiting access to the policy to SES staff and HR staff. Large agencies were more likely to have a written remuneration policy that deals with staff covered by AWAs (67%) compared to medium and small agencies (36% and 22% respectively).

The last two State of the Service reports have commented that the availability of flexibility for agencies in relation to remuneration has reinforced the desirability of clear remuneration policies that set out the criteria for determining remuneration for employees. Last year 26% of agencies reported having an explicit remuneration policy that was separate from their CA. While this year’s agency survey question was not exactly the same (‘does your agency have a written remuneration policy that deals with non-SES employees on AWAs?’) it appears that there has been progress made with more agencies having established this type of policy (37%). However, it is apparent that there are a significant number of agencies that should undertake the development of such a policy and make it available to all staff. This is important from an accountability perspective as well as building and maintaining employee confidence in, and support for, more flexible and individually based approaches to remuneration that are consistent with merit-based employment and a fair workplace (as required by the APS Values).

OVERLAPPING SALARY RANGES

Previous State of the Service reports have commented on the overlap between salary ranges for classifications across the APS. Figures 5.4 and 5.5 present data from the Mercer surveys on remuneration conducted for DEWR on the extent of the overlaps in 2003. Figure 5.4 indicates that for APS and EL classifications there continues to be considerable overlap between classifications, although the 50% of employees paid around the median (i.e. the second and third quartiles) do not overlap between any classifications (last year there was an overlap between the APS 2 and APS 3 classifications). Both figures also illustrate, consistent with last year’s results, that the size of the salary range (i.e. the dispersion around the median) tends to increase with classification.

Figure 5.4: Base salary distribution for non-SES employees

Source: Mercer Human Resource Consulting, 2003 APS Non-SES Remuneration Survey, conducted for DEWR, revised version released October 2004.

Figure 5.5: Base salary distribution for SES employees

Source: Mercer Human Resource Consulting, 2003 APS SES Remuneration Survey, conducted for DEWR, revised version released October 2004.

The data provided by the Mercer remuneration surveys for DEWR does not allow an accurate analysis of the extent of overlaps at the APS and EL classifications over time. Thus, it is not possible to comment on whether the extent of the overlaps have changed over 2003 for these classifications, other than to note the disappearance in 2003 of the overlap of the second and third quartiles between the APS 2 and APS 3 classifications. More detailed data, however, is provided for the SES classifications and is set out in Figure 5.6.

Figure 5.6: More detailed data on base salary distribution for SES employees

Source: Mercer Human Resource Consulting, 2003 APS SES Remuneration Survey, conducted for DEWR, revised version released October 2004.

Relevant data has been read from Figures 5.4 and 5.6 and presented in Table 5.4. It indicates that salary overlaps at the APS-wide level between these classifications appear to have narrowed in 2003.

Table 5.4: APS-wide salary overlaps

Source: Mercer Human Resource Consulting, 2003 APS SES Remuneration Survey and 2003 APS Non-SES Remuneration Survey, conducted for DEWR, revised version released October 2004.

Notes: The actual numbers in Table 5.4 are not published in Mercer’s publicly available survey results–rather the salary ranges in Table 5.4 have been ‘read’ from graphs and charts from Mercer’s publication (and are therefore only approximate). Outliers have been excluded. The 2002 survey results are from 51 agencies for the SES and 55 agencies for EL2s. The 2003 survey results are from 49 agencies for the SES and 53 agencies for EL2s.

FUNDING ARRANGEMENTS

Last year’s report touched on the conundrum of pay increases in the APS and their funding. The policy parameter that requires the ongoing funding of remuneration increases for CAs and AWAs from productivity improvements within agency budgets had not, at least at the average level, appeared to have prevented APS employees from achieving salary increases in excess of the average of the private sector.

The following attempts to analyse this issue in a little more detail, before drawing some tentative conclusions.

The comparison with the average increase for the total private sector is somewhat misleading in that the APS workforce is, on average, a more highly qualified workforce than the general Australian labour force. The results of the State of the Service employee survey indicated that 64% of APS employees had a tertiary qualification; comparative data for the broader employed Australian labour force is 47% with tertiary qualifications according to the 2001 ABS Census of Population and Housing. A comparison with industry sectors with more comparable rates of employees with tertiary qualifications reverses the gap in 2004 between average increases in the APS and other sectors. The AAWI in certified agreements current at end-June 2004 for industry sectors with more than half of their employees with tertiary qualifications was 4.2% while for industry sectors with half or less than half of their employees with tertiary qualifications the AAWI was 3.7%.¹⁷ So, on average, in June 2004, pay increases in the APS are not increasing more quickly than in the more comparable areas of the private sector, though they are not lagging behind by much. This limited evidence also tends to suggest that there is little if any ‘bidding up’ of pay amongst APS agencies beyond what the broader labour market demands, at least for staff covered by CAs.

Last year’s report advised that there is no evidence that levels of base salary have fallen behind in small agencies, and that the average salary paid in very large agencies (greater than 5000 employees) was more consistently at the lower end of the range. The latest Mercer non-SES remuneration survey indicates, however, that very small agencies (with fewer than 100 employees) consistently had the lowest level of average salary paid for all classifications from APS 2 through to the SES Band 1 classification.¹⁸ Data for very large agencies was not published this year. The evidence therefore is not clear, but perhaps the concern amongst smaller agencies that they are less able to match the market rates for the skills they need given the funding arrangements cannot be dismissed as easily as last year’s report suggested.

The overall productivity gains required to be made by APS agencies by the current funding arrangements are quite substantial. In addition to the 1% per annum efficiency dividend, the wage cost indexes applied to departmental funding incorporate an assumption of productivity gains by agencies to finance increases in departmental expenses. While the non-wage component of the wage cost indexes is adjusted by the CPI, the wage component is adjusted by the most recent safety net adjustment handed down by the Australian Industrial Relations Commission (AIRC) converted to a percentage of average weekly ordinary time earnings (AWOTE). Because AWOTE is around double the federal minimum award wage to which the AIRC’s safety net adjustment most directly applies, the indexes amount to about half the annual percentage adjustment to federal minimum award wages. Depending on the size of the AIRC’s decision, therefore, the indexes typically are around half the broader movement in wages. They are also typically around four-fifths the movement in the CPI. The indexes are designed to reflect the reasonable expectation across the economy that wage movements should reflect genuine productivity gains, at least above the safety net adjustment. For the APS, in recent years the indexes required agencies to find productivity gains of around 2% to fund pay increases of around 4%. A further 1% is required to fund the efficiency dividend.

Agencies may achieve these gains by genuine efficiency gains or by sensible reconsideration of priorities.

Overall, the available evidence suggests that pay increases in the APS are not moving more quickly on average than in the comparable labour market outside. There may be some problems, particularly amongst smaller agencies to maintain competitive pay rates, and there may be some working ‘around’ arrangements by other agencies in order to pay market rates. From an APS-wide perspective, such approaches are short-sighted. That said, it is reasonable to expect agencies to ensure productivity gains and return a proportion of these to the Government to consider priorities for reallocation, and productivity is not something that is ever totally exhausted: there are always new technologies and new skills and knowledge that allow greater efficiency, effectiveness and higher quality, some of which can be manifested as cost savings. Nevertheless, the total productivity gains required each and every year by every agency are substantial and there may be an argument at least for case-by-case exemptions or relief.

13 The NED to NED AAWI measures the average annual pay increase from the NED of the previous agreement to the NED of the current agreement. This measure of AAWI seeks to even out any adjustment of the wage increases provided for in APS agreements to compensate for any lags between the expiry of an earlier agreement and finalisation of a replacement agreement.

14 Mercer Human Resource Consulting, 2003 APS SES Remuneration Survey and 2003 APS Non-SES Remuneration Survey conducted for DEWR, revised version released October 2004. The Mercer surveys present a snapshot of data at 31 December 2003.

15 ‘Top hat’ schemes refer to schemes which are designed to focus rewards on very high performing employees rather than broad schemes which reward a larger group of above average performing employees.

16 There continues to be a discrepancy between the results of the agency survey and the Mercer survey of non-SES remuneration. The 2003 Mercer survey reported that the majority of the 49 agencies that responded (76%) stated that they has a formal non-SES remuneration strategy that is communicated to non-SES employees. It may be that the strategy largely consists of an agency’s CA in some of the responding agencies.

17 ABS data shows that there were six industry sectors with more that 50% of their employees with tertiary qualifications– Electricity, Gas and Water (65%), Construction (55%), Property and Business Services (56%), Government Administration and Defence (54%), Education (77%) and Health and Community Services (61%). There were 13 industry sectors with half or less than half of their employees with tertiary qualifications. This data is sourced from the ABS 2001 Census of Population and Housing. The data on AAWI by sector was provided by DEWR.

18 Mercer Human Resource Consulting, op.cit.