Steady wage increases reflect flexible wage policy

A recent study based on a survey of Estonian managers concludes that wage policy in Estonia is generally flexible. More than three quarters of companies review staff wages at least once a year, and 50% of companies pay an incentive wage based on performance. Wages on average are increasing along with productivity, which is the most important reason for a wage increase. According to Estonian managers, collective agreements and trade union activities have almost no impact on wages. The wider EU labour market is a new factor that employers have to take into account in their wages policies.

In 2006, the Bank of Estonia (Eesti Pank) published a report entitled Salary policy in Estonian enterprises (in Estonian, 635Kb PDF). The study was based on telephone interviews with a sample of 250 managers – namely chief executives or company directors – taken from the Estonian Central Commercial Register. A quota sample was used in order to include companies from all fields of economic activity. By comparing the sample with data from the Estonian Labour Force Survey, the researchers concluded that the sample was relatively representative of all companies in Estonia despite the small size of the survey, covering only 250 companies or 0.3% of all companies in the country.

In addition, the data are based on the subjective evaluations of the managers interviewed and thus might deviate to an extent from the actual situation. Moreover, it should be taken into account that the study was carried out in a situation of very rapid economic growth.

Wage dynamics

According to Statistics Estonia (

Increase in average monthly gross wages compared with previous year, 2001–2005 (%)

According to the study, 90% of companies increased their wages in 2004, almost one quarter of them by more than 10% (Figure 2). Only 10% of enterprises did not increase wages in 2004. When the rate of inflation is taken into account, amounting to 3.1% in 2004, then there was a real wage increase in 64% of establishments.

Figure 2: Changes in nominal wages, 2004, by company (%)

Source: Bank of Estonia, 2006

Changes in nominal wages, 2004, by company (%)

Wage policy is generally flexible in Estonia. Some 78% of enterprises increase wages at least once a year. In almost half of the cases (45.6%), wages are updated regularly after a certain interval of time, while in 22.8% of companies, the wages are reviewed on an irregular basis. Both strategies are used in a further 31.6% of establishments.

Incentive wage

Approximately half of the employees receive an incentive wage, that is pay for performance, in addition to their basic wage. In 23% of companies, the incentive wage depends on the individual efficiency of the employee, while 13% of enterprises link the incentive wage to company profit and 11% of establishments link it to the financial turnover of the enterprise.

According to the managers’ estimates, the basic wage formed about 77% of the income of employees, while the incentive wage accounted for about 18% and the remaining proportion comprised other extra payments.

An incentive wage is used less often in companies employing mainly unskilled workers and is used most frequently in companies with clerical and service workers (Figure 3).

Figure 3: Employees receiving incentive wage, according to major occupation group in company (%)

Source: Bank of Estonia, 2006

Employees receiving incentive wage, according to major occupation group in company (%)

Factors influencing wage increases

According to the survey, 85% of the managers are completely independent in their wage policies; the remaining proportion have to follow the guidelines of owners or parent enterprises.

The study concludes that the financial situation of a company and factors influencing the business environment are not significant to most of the employers when reviewing their employees’ wages. Change in work efficiency is noted as important or very important most frequently – by 35% of managers (see Table). Most of the factors included in the question have no impact on wages and about a quarter of managers find none of the factors influential. It is noteworthy that 96% of employers do not believe that they are influenced in their wage policies by collective agreements and the activities of trade unions. Moreover, not many employers claim that they take the wage levels of other companies into account in their wage policies.

Source: Bank of Estonia, 2006

Although a quarter of managers find that maintaining employees’ standard of living is a significant reason for a wage increase, only 9% of managers take inflation into account when increasing wages.

The productivity of employees has the most rapid impact on salaries. A total of 40% of enterprises react to this within a month. Enterprises are slower to change wages in the case of changes in profit or in the inflation rate. According to managers’ responses, companies react to positive changes in significant factors more than to negative changes. For example, 67% of managers report that they take an increase in turnover into account, but only 49% respond in wage terms when a decrease in turnover occurs.

In addition to the factors cited in the Table, in 2004, some 16% of companies raised wages to a higher level than usual due to the opening of the European Union labour market. Overall, 32% of employers have lost some of their workforce as a result of the migration of workers to another EU country. A total of 341 employees from the enterprises interviewed, representing 2% of their total workforce, had left their jobs to work abroad after Estonia joined the EU.

Liis Roosaar and Marre Karu, Praxis Centre for Policy Studies