Settlement and stability are the primary geotechnical considerations in the design of embankments founded on soft clay. Settlements are inevitably associated with lateral deformations. Lateral flow in turn is an indirect measure of the stability of embankments. Therefore, a detailed study of different settlement components and lateral deformations and their correlations will provide guidelines for an embankment design. This paper presents a new methodology, termed “Field Deformation Analysis (FDA),” which is based on a simple concept dealing with lateral and vertical deformation characteristics of soft foundations under embankment stage loading. This method is used to delineate and quantify different settlement components, namely, immediate settlement, consolidation settlement, and creep settlement, from the total settlement measured during field observations, for the loading and consolidation stages. Finite element method (FEM) of analysis was performed for comparison with FDA results. The FEM analysis was performed using the CRISP computer program, developed at Cambridge University, which uses many soil constitutive models including the modified Cam‐clay model. In 1988, the Malaysian Highway Authority was authorized to build 13 full‐scale test embankments at Muar Flats, of which two were constructed without any foundation ground improvements. A comparison study of the results from FDA and FEM, performed for both the untreated full‐scale test embankments, revealed very good agreement during loading and consolidation stages. In addition, a consistent relationship between the different settlement components was also observed during the different stages of embankment loading.