Employment Cost Index vs Salary Structure Changes

Why would anyone use the ECI for salary structure changes?  The BLS Employment Cost Index has nothing to do with pay structures and seems to have accuracy issues.

The ECI is an index like CPI, derived from an arbitrary base and not a standard measure of percentage changes in comparable pay amounts; so I can't imagine why anyone would tie structure changes to it.  Unless all your jobs and their pay figures matched the standard index model in the base comparison year and your changes thereafter were equivalent to those at the employers measured, it would seem to have little relevance to your specific local competive market for pay.  About 30% of the ECI metric value comes from benefit costs, too, so it can be difficult to identify only the wages & salaries component.  The measure does not include Federal workers, either, despite the influence of federal pay on salary trends.  Plus, the published results are constantly being corrected for periods ranging from monthly, quarterly and even back six (6) years!

The enterprises surveyed tend to be well established very large employers rather than low-paying small firms or agile start-up entrepreneurs who all pay quite differently than the dinosaurs.  The technical notes clarify that it is an estimate based on a probability sample covering about 10,000 public and private employers and the results for Employer Costs for Employee Compensation (ECEC) will differ from Employment Cost Index (ECI) results.  Hard to explain all that.

This gross national metric is used in setting Federal monetary or fiscal economic policy; but it is also tied by law to some Federal pay adjustments, so that would explain why someone might decide to piggy-back on it at a private employer.  It remains to be seen whether you are using it like the Federal pay system does, however.  ECI has an impact on Medicare payments, military pay changes, state property tax rates and labor cost budgeting.  It can be used as a wage escalator in collective bargaining contract clauses, too, and is fequently a federal defense contract cost escalator metric.  But it remains an estimated index and not a measure of surveyed pay structure percentage changes from one year to the next. 

As well explained in this comprehensive article about the CPI, COLA clauses use indexes as standards against which tiny income changes are typically tied to absolute index point movements via a formula: i.e., one cent in hourly wage will be added for every positive change of 8 index points over a certain period.  A 3% change in the index does not necessarily equal a 3% change in pay but usually generates a much smaller pay increment, because such indices are typically applied simply to take certain sums off the table in labor negotiations.  Experienced negotiators already know that both sides are not going to dispute the necessity for some incremental increases up to a certain point during the terms of the contract.  Therefore, it is much easier to derive a formula that binds both parties to a method that offers a mutually acceptable way to respond to extraordinary changes than it is to waste valuable effort renegotiating the contract every few months. 

An index can be used for temporary minor adjustments or to minimize disputes over non-controversial “givens.”  Those are appropriate uses of such indexes or indices or whatever you want to call them.  Fewer employers than ever still use COLA clauses like that, however.  Using any index as the sole factor for a major plan places a whole lot of weight on a very fragile mechanism, especially if the index measure was not designed for that purpose. 

I could be wrong, but using ECI instead of surveys of salary structure changes seems like comparing apples to raisins.  They are quite different.  On the other hand, the advantage is that reliance is placed on a highly visible nationally published figure that costs nothing to collect and which no one except an expert can be expected to challenge.  It's free, and as the old saying goes, "It's good enough for government work."  In fact, that’s the only place it is usually found.

Does anyone have any other suggestions for federal bureaucratic procedures to adopt at private employers?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

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Comments

[Paul Weatherhead]

Thanks for the blog on ECI, Jim.

I can see a company using the ECI as an escalator if there is a collective bargaining agreement; management wants a longer-than-normal contract duration (over 3 years); and an escalator is the price management has to pay to get the long term contract. Then the ECI may be the lesser of two evils compared with a CPI-based COLA.

But even with ECI, management needs to recognize what ECI is measuring - average salary increases versus structure adjustments. Management can pull down several years worth of WorldatWork annual salary budget surveys to demonstrate there is a difference between structure adjustments and total increases.

Considering the low percentage of unionized workers in the US workforce, most companies don't need to have escalator provisions in their pay policies. Nonetheless, the ECI might be a measure that management wants to look at as a reference point to compare the growth in their own salaries.

Finally, you made a good point about using the right ECI measure. If you use just salaries and wages the ECI growth may be different than the ECI with benefits. No need to remind compensation professionals of the continuing high costs of health benefits.

[E. James (Jim) Brennan]

Good clarifications, Paul. Life would be easier with one simple metric to follow for pay changes, but then no one would need compensation experts.

[Chris Dobyns]

No, I would not recommend adopting the procedure specified, and particularly using the ECI index.

And as a part of that federal bureacracy, I guess this places my comment clearly in the category of unnecessarily awkward.

[E. James (Jim) Brennan]

No fear, Chris, because we are not adopting your procedures, anyway. The world is safe now.

[Paul Weatherhead]

One of the great ironies of the Feds passing the ECI escalator for government pay in 1989 is that it occurred just when the private sector was dumping their escalator clauses in their collective bargaining agreements. Businesses learned a painful lesson during the Carter era that with wages chasing prices and prices chasing wages, inflation was killing our economy. To eliminate those inflationary forces, companies and unions all over the country began eliminating COLA clauses in their labor contracts.but not the Feds. They embraced the ECI escalator.