Annualizing Wage Increases
“Annualizing” a wage increase is a process of computing an increase which applied to only a
portion of a year (e.g. 3, 4, 6 months…) and projects that increase over the entire year. For
instance - a wage increase of 3% across the board that took effect on the first day of a collective
bargaining agreement and continued at the same rate for the entire year (12 months) – is an
annual rate of increase of 3%. But if the wage increase is not the same throughout the year
because an additional increase kicks in at a later date, it is important to understand what the
actual annualized rate of the increase would be for the full year.
For instance - a 3% increase on day one of a contract followed by another 2% increase that
becomes effective six months later results in an annualized rate of 4% and not 5%. (Such
increases are usually referred to as “splits”). This means that the actual money in pocket for the
year would amount to a 4% increase. There is a slight compounding effect, but usually not
significant enough to bump up the percentage increase over the year. However, in this
example, the wage rate at the end of the year would be 5% higher than the prior rate.
The way to calculate annualizing rates is as follows:
1. Determine how many months (assuming it is less than a full year) the increase is in effect.
2. Divide the increase percentage by 12.
3. Multiply that amount by the number of months the increase is in effect.
4. Add that amount to any initial increase that was given (if any) at the start of the contract
year.
EXAMPLE #1:
A bargaining unit negotiates a 3% wage increase on January 1 of the contract year plus a 2%
increase on July 1 of the contract year.
2% divided by 12 = 0.16666
0.16666 multiplied by the 6 months the increase is in effect = 0.9999 or 1%
1% is then added to the 3% of January 1 for an annualized increase of 4%
EXAMPLE #2:
A bargaining unit negotiates a 4% wage increase on January 1 of the contract year plus a 3%
increase on November 1 of the contract year.
3% divided by 12 = 0.25
0.25 multiplied by the 2 months the increase is in effect = 0.25 or .5%
.5% is then added to the 4% of January 1 for an annualized increase of 4.5%
Why is this important and does it matter?
It is very important to differentiate between an annualized wage rate increase in terms of
actual dollar increases and the effect such splits have on the individual wage rates and the
resulting total pay for the year.
In Example #1, the dollar amount looks like this.
Using $12.00 as the base and assuming a full-time (2080 hours) worker.
3% increase on $12.00 =
$.36 per hour increase
$.36 X 2080 hours =
$748.80 increase for the year
2% X $12.36 =
$.25 per hour increase
$.25 X 1040 hours (6 mos) = $260.00
Total Increase for the Year = $748.80 + $260.00 = $1,008.80
12.00 X 2080 =
Plus Increase =
New Annual Wage =
$24,960.00
1,008.80
$25,968,80
$1,008.80 divided by $24,960.00 = 4% (the annualized increase)
The new hourly rate is $12.61 which reflects a 5.08% (or 5.1%) increase in the base rate
But the increase for the year in actual dollars amounts to a 4% annual increase.
A 5% wage increase on $12.00 would equal $.60
$.60 X 2080 = $1,248
The wage rate would be $12.60
But the annual wage rate for that year would be $26,208
So the 3% wage increase on January 1 of the contract year plus a 2% increase on July 1 of the
contract year yields an increase of 4% in dollars for the year, while at the same time an increase
in the wage rate of 5.1%. Therefore, the contractual increase for the year is NOT a 5% wage
increase in terms of dollars, but only on the rate – which is not insignificant. However, it is
critical to be clear on what is actually being negotiated for purposes of costing the contract and
of course impact on the bargaining unit.
The result in Example #2 is even more dramatic since the second increase comes late in the
year (4% wage increase on January 1 of the contract year plus a 3% increase on November 1 of
the contract year). This results in a far different increase than a 7% across the board, but rather
a 4.5% annualized increase.