Variable pay in Europe
Traditionally, variable pay systems - whereby employees' pay is linked in some way to individual or collective performance - have been seen as an "employers' issue", and they are generally fiercely opposed by trade unions. However, in recent years, variable pay seems to have become somewhat less controversial in Europe, and has even been given a high priority on some unions' bargaining agendas. This does not mean, however, that differences of opinion no longer exist over the real or perceived advantages or disadvantages of variable pay and its effects on productivity and competitiveness, social cohesion, industrial relations, and especially the structure of collective bargaining. Introducing or changing variable pay systems can still give rise to industrial action, or even public controversies. This EIRO comparative study examines the issue of variable pay in the 15 EU Member States, plus Norway. It looks at the incidence and development of different systems, the extent to which variable pay is covered by collective bargaining and the attitudes of the social partners, the government and the public, concluding with an analysis of the impact of variable pay on industrial relations.
The concept of "variable" pay is a very broad one, and it is not always clear what is meant, but for the purposes of this study, variable pay is taken to differ from "normal" ("fixed") pay in that it implies an element of uncertainty, both for the employer and the employee(s). With variable pay there is a relationship between the pay (that is, the amount of money) that an employee receives and individual or collective performance. This may be the performance of individual employees, of teams or departments, or of establishments, companies or group of companies.
This performance can be measured in terms of both qualitative and quantitative criteria. When quantitative criteria are used, part of the pay is linked to production (or service) performance, or to the organisation's financial results. When qualitative criteria are used, pay is related to aspects of "performance" that cannot be gauged in terms of productivity, such as qualifications or "attitude".
Variable pay systems are commonly divided into three main categories, notably:
- payment by results (PBR) schemes, whereby there is a direct relationship between employees' pay and output;
- schemes whereby employees are encouraged to work to certain standards without this necessarily entailing a direct relationship with production, such as performance-related pay (PRP) schemes; and
- financial participation schemes, whereby workers are entitled to a share of the company's performance or profitability.
Within these broad categories, variable pay comes in a multitude of different forms. The "classic" examples are piecework wages, wages based on commission and productivity bonuses of all kinds. An example of a collective form of variable pay is profit-sharing, whereby all or some employees receive a proportion of the company's profits. Recently, much attention has focused in many countries on remuneration in the form of the award to employees of share options or shares, mostly in listed companies. Schemes linking variable pay to employability (ie rewarding employees for achieving training and education goals) have become more popular in the information and communications technology (ICT) and financial sectors. Where the labour market is very tight, "labour market bonuses" to attract or retain employees are flourishing.
In most of the countries covered by this study, the different types of variable pay described above are regarded as variable pay and exist in practice. In some countries, however, specific types can be found. France, for example, has its own systems of mandatory and voluntary profit-sharing. Mandatory profit-sharing (participation) is a statutory requirement in companies with a workforce of over 50 (lowered from 100 in 1990). Under this mechanism, which was introduced in 1967, companies set aside a statutorily defined percentage of their profits, or a higher proportion where special mandatory profit-sharing agreements exist, for distribution to employees. Voluntary profit-sharing (intéressement), which was introduced in 1959, ties a percentage of workers' pay to company performance; in the form of profits or productivity, for example. This type of bonus system is not a statutory requirement.
Austria also has its own system, known as the "distribution option" (Verteilungsoption). This system splits pay increases into two components: a general percentage increase in actual pay to be applied to all employees; and a percentage increase which can be distributed flexibly among a company's employees on the basis of a works agreement between the management and the works council. The distribution option was first introduced in the metalworking industry, for both blue-collar and white-collar workers (AT9902132N). A few other sectors of manufacturing industry then imitated this arrangement. The decision as to whether to apply a standard option of a flat-rate percentage pay increase, or to use the distribution option, is left to the individual company. Under the distribution option, the flexible component may be used to reward specific groups of staff; while it may be applied to low-income groups, it may also be applied to high-performance groups, thus meeting our definition of variable pay.
In Germany, there is a specific form of downward pay flexibility related to company performance. Many sector-wide agreements contain "opening clauses" that allow downward variation of collectively agreed pay rates, mainly in the event of economic difficulties (DE9709229F). However, the use of these clauses has been rather limited.
The European Union institutions have taken an interest in variable pay over the past decade or so, and especially in promoting employee financial participation in company profits, results and equity. The European Commission issued a report on the "Promotion of Participation by Employed Persons in Profits and Enterprise Results" (PEPPER) in 1991, and the Council of Ministers subsequently adopted a Recommendation on the subject in July 1992 (92/443/EEC). The Recommendation invited Member States to acknowledge the benefits of a wider use of schemes to increase the participation of employees in profits and enterprise results by means of profit-sharing, employee share-ownership and a combination of both. In 1997, the Commission followed up with a PEPPER II report, making various recommendations for further consideration by the Member States (such as considering the development of national framework legislation) and the social partners (such as promoting such schemes during negotiations) (EU9702106N). In its current five-year social policy agenda, issued in 2000 (EU0007266F), the Commission makes a commitment to launch a communication and action plan on the financial participation of workers during 2001.
Comparative study
This comparative study - based on the contributions of the EIRO national centres in the 15 EU Member States, plus Norway- examines:
- the incidence of the various types of variable pay;
- the details of the main forms of variable pay used (the level at which schemes are applied, the criteria used, the extent of the variation and the possibility of downward variation);
- trends in the use of variable pay;
- the extent and nature of collective bargaining over variable pay;
- the views of trade unions. employers' organisations and governments; and
- public and academic debates on variable pay issues.
The incidence of variable pay
In 1995-6, the European Foundation for the Improvement of Living and Working Conditions (EFILWC) published an overview of the incidence of different variable pay systems in the EU. To clarify the background to today's trends, these figures are reproduced below in table 1.
| Country | Performance-related payments | Employee financial participation | Both performance-related payments and employee financial participation |
|---|---|---|---|
| France | 51% | 1% | 6% |
| UK | 28% | 11% | 12% |
| Sweden | 19% | 1% | 1% |
| Netherlands | 13% | 3% | 0% |
| Germany | 12% | 3% | 1% |
| Denmark | 9% | 5% | 1% |
| Ireland | 7% | 3% | 1% |
| Portugal | 6% | 3% | 0% |
| Spain | 6% | 8% | 2% |
| Italy | 3% | 2% | 1% |
Source: EFILWC, quoted in IWD No. 47, 23 November 2000.
The current situation, based on the most recent figures reported by the EIRO national centres, differs significantly from the data in table 1 in many respects. However, many countries lack reliable statistics on certain aspects of variable pay and, where figures are given, it is important to be very careful in interpreting and, in particular, comparing these figures across countries. Definitions vary, as do the year(s) covered (see the national reports on which this study is based for more details on these points).
To enable this information to be presented clearly, we distinguish between two main types of variable pay: performance-related pay linked to individuals or teams; and systems of variable pay linked to company results (profit-sharing, shares, share options, etc). Table 2 below provides the available data on performance-related pay (no figures are available for Belgium and Luxembourg).
There are some striking differences between the figures in tables 1 and 2, but without further research (which is beyond the scope of this study) it is impossible to draw any firm conclusions about the trends that they reveal. However, the data on sectoral differences, differences due to company size and the developments over time, presented below will enable us to gain a somewhat clearer view of the incidence of variable pay.
| Country | Companies affected | Employees affected |
|---|---|---|
| Austria (2000) (1) | - | 25% of white-collar staff, 10%-15% of blue-collar staff |
| Denmark (2000) (2) | 15,000?20,000 companies in the private sector bargaining area covered by DA and LO | One-third of employees (600,000) in DA/LO area |
| Finland (1998) (3) | - | 36% in industry, 9% in state sector and 2.4% in municipal sector |
| France (1992) | - | 20.8% have pay linked to company performance, 5.4% to team performance; 15.4% to individual performance, 28.8% to other factors |
| Germany (1999/2000) | 53.8% of private firms | 35.4% of white-collar staff, 30.3% of blue-collar staff and 30.2% of executive staff (46.2% not covered by PBR) |
| Greece (1995) | 40% have production bonuses, 10% have productivity bonuses | - |
| Ireland (1998) | 57% have performance/merit-related pay (individual), 37% performance/merit-related pay (company), 30% output/production-related bonuses, 25% commission payments, 6% teamwork pay, 6% skill-based pay, 3% competency pay and 2% "broad-banding" | - |
| Italy (1995-6) | - | Variable pay affects 64.2% of those workers covered by company-level bargaining in manufacturing and 52.8% of workers covered by company-level bargaining in services, 22.7% of all employees are affected by PBR, 12.5% by production bonuses, 5.1% by attendance bonuses and 3.9% by piecework |
| Netherlands (1999) | - | 49% covered by PRP, 23% by pay related to qualifications |
| Norway (1997) (4) | 40%-50% of larger manufacturing firms | - |
| Portugal | 94% have annual bonuses, 26% have commission payments | - |
| Spain (1999) | 40% of company agreements contain individual incentives, 30% contain objectives by groups or areas | 25% covered by incentives linked to productivity |
| Sweden (2000) | - | 100,000 construction workers, 27,000 electricians |
| UK (1998) | - | 35% of middle/senior managers, 62% of skilled manual workers |
Source: EIRO. (1) distribution option; (2) all forms of variable pay; (3) variable pay based on company performance (4) includes schemes based on company economic performance.
Table 3 below presents the limited data available (for seven countries) for profit-related pay and share (option) schemes. As with performance-based pay, there are large variations in the incidence of profit-sharing, or share and share option schemes. In countries with a highly developed stock market, like the UK, the latter schemes are far more common than in a country such as Germany. In France, the high incidence of profit-sharing can be explained by legislative developments (see above).
| Country | Companies | Employees |
|---|---|---|
| Finland (1998) | - | 5% of industry employees receive payments (13% covered by schemes) |
| France (1997) | 19,000 companies have mandatory profit-sharing, 14,600 companies have voluntary profit-sharing and 6,000 companies have both | 4.9 million in private sector (33%) covered by mandatory profit-sharing, 3 million covered by voluntary profit-sharing and 2.4 million covered by both |
| Germany (1997/2000) | 46% have profit/company performance-related schemes covering all employees, 54% have such schemes covering only certain categories, and around 400 companies have employee share schemes | 13% of west German employees and 8% of east German employees receive annual company performance-related bonus, 1.7 million workers covered by employee share schemes. |
| Ireland (1996-7) | 11% have profit sharing and 11% have employee share ownership | - |
| Netherlands (2000) | 4% have share/share option schemes | 13% covered by profit-sharing |
| Portugal (2000) | 9% have profit-sharing | - |
| UK (1998) | - | 23% covered by profit-sharing, 24%?32% covered by share ownership |
Source: EIRO.
It should be noted that when variable pay schemes are applied to employees at a certain level in a company, this does not automatically mean that everyone below that level is covered by such a scheme. This is illustrated by the figures from Portugal: 38% of top executives, but no production workers are covered by a variable pay scheme linked to global company results. In Portugal, the higher the level of an organisation's hierarchy, the higher the proportion of employees who are covered by variable pay schemes based on performance.
In many countries, share and share option schemes have traditionally been reserved for executives and higher and middle management, but pressure by the trade unions has sometimes resulted in some extension of these schemes, as in the Netherlands.
Sectoral and other variations
The incidence of variable pay schemes varies according to a number of characteristics of the employing organisations concerned. Size seems to be an important characteristic: the larger the organisation, the more frequent the incidence of variable pay (this is the case in, for example, France, Germany, Netherlands, Norway, Portugal and the UK).
There is considerable variation between the extent and nature of variable pay in the different sectors of the economy, as indicated by table 4 below
| Country | Sectors |
|---|---|
| Austria | General - "new economy"; distribution option (see above) - manufacturing sector. |
| Denmark | Piecework - construction; bonuses, options and shares - commerce, private business services, "new economy" and finance; sales commission - mainly in the service sector. |
| Finland | General - export sector, and more widespread in the private than in the government sector. |
| France | Voluntary and/or mandatory profit-sharing - auto industry (60% of the workforce) and the energy and financial sectors (70%) (under 30% in agriculture and services). |
| Germany | PBR - construction and other service (low in transport and communication, banking and insurance, raw materials and investment goods); profit-related payments - banking and insurance, commerce (low in construction, consumer goods industry and other services). |
| Ireland | Employee share ownership - mainly in semi-state companies; profit-sharing - information technology and software; output/production-related bonuses - other manufacturing; commission payments - banking/insurance/finance; individual performance/merit-related payments - banking/insurance/finance, chemicals/pharmaceuticals/healthcare and electronics. |
| Italy | PBR - more common in manufacturing (especially vehicles) than in services. |
| Netherlands | PBR - more common in agriculture, construction, trade, hotels and catering (none in education and healthcare) |
| Norway | General - manufacturing. |
| Portugal | General - above average in financial services (below average in textiles, machinery and equipment, and construction). |
| Spain | General - communications, energy, consumer goods, distribution and services; employee share ownership - construction, real estate, consumer goods, distribution and services. |
| Sweden | General - building industry; shares and share options - information technology, banking, insurance and finance. |
| UK | General - more common in private (mostly in manufacturing) than in public organisations; financial participation - finance, public utilities (very low in education and health); performance-related pay - distribution, banking and finance, manufacturing and other services. |
Source: EIRO.
It is hard to draw firm conclusions about the sectoral distribution of variable pay from the data available. A few sectors stand out, however. The incidence and relative importance of variable pay is far higher than average in the "new economy" and among professionals. This is also true of the banking and insurance sectors. There is a high incidence of payment by results in the building and construction industry in several countries, as in Scandinavia. As might be expected, variable pay schemes are almost unknown in health and education. Much depends on the type of variable pay scheme in question.
In Italy and Germany there are significant regional differences in the incidence of variable pay. In Germany, variable pay is more common in the west than in the east, while in Italy it is far more common in the north than in the south.
In the UK, the incidence of financial participation differs to some extent between UK-owned companies (below average) and foreign-owned companies (above average).
Levels and criteria
Variable pay can be located at different levels of an organisation, ranging from the individual employee to the internationally operating company, with the team, the plant and the national company levels between these extremes. The level to which variable pay systems are linked depends to a great extent on the system that is used: piecework applies to individual employees, profit-sharing occurs at company level, etc. In most of the countries covered by this study, all the levels mentioned above play a role in variable pay systems. Against this background, a number of trends can be identified. The importance of the individual employee level is decreasing in the traditional sectors of the economies of Spain and Finland, and this even applies to sales commission in Spain. At the same time, however, the importance of the individual employee level is increasing in the fast-growing "new economy".
As with the level, the criteria used in defining the level of variable pay also depend to a large extent on the type of scheme in question. Quantity of output has long been the dominant criterion for variable pay. This criterion is still a very important measurement tool for the purposes of payment by results, but it is definitely, and probably to an increasing extent, not the only criterion. Quality of output seems to be gaining ground as a measurement tool. In Finland, for example, factors such as the number of defective items produced, customer feedback, and the rate of injuries at work may also be taken into account. The shift from the more traditional forms of variable pay such as piecework towards other systems also implies a shift in the criteria used, from quantity of output towards quality or meeting deadlines (as, for example, in Spain). Quality of output is also reported as a criterion in Italy, the Netherlands and Germany, for instance, while some German organisations also take savings on materials or waste and equipment use into account. Qualifications play an important role in the Netherlands and the UK. Target-setting for individuals or teams is reported from Germany and Italy, and is also used for management in Spain.
The only two countries for which statistics on the incidence of different criteria are available are Italy and the UK. In Italy, criteria based on economic performance are used in 20% of relevant firms. A combination of economic performance and quantitative indicators is used in another 20%. Productivity in all its different forms is used in 25% of cases, while quality indicators are used in a further 20% of cases. In the UK, the incidence of criteria for performance-related pay is as follows: piece rates 7%; other measures of output 45%; assessment by supervisors 57%; and acquisition of skills/core competencies 17%. Figures on the criteria for profit-sharing are also available for the UK: 33% at the management's discretion; 33% as a fixed percentage of profits; and 33% as an annual bonus.
Unsurprisingly, profit-sharing is linked to company performance, but even here differences exist. Sometimes the performance of a multinational company's national operations may be decisive, but profit-sharing may also be linked to its European or worldwide performance.
Importance of variable pay in total remuneration
The amount of variation which may occur in a variable pay scheme can be restricted or unrestricted, but usually the potential variations are restricted to a certain "bandwidth". Furthermore, the direction of the variation can be positive or negative, with or without a floor. Examples might include: a bonus of 5% when production rises by 10% or more, but no bonus if this does not occur; or extra pay if an employee does not take sick leave, but no end-of-year bonus if an employee has called in sick more than four times. In most cases, "negative variation" means the loss of a bonus or no entitlement to a pay rise, but there are examples of real decreases in salary if certain criteria are not met.
There are large differences between countries in the relative importance of variable pay in employees' total salary. Where general figures are available, these are presented in table 5 below:
| Country | Percentage (range) |
|---|---|
| Austria | 5%?15% in industry; 30% in "new economy" |
| Belgium | nd (but government bill provides that financial participation may not exceed 10% of total payroll costs or 20% of profits) |
| Denmark | nd (but not insignificant) |
| Finland | Average of 5%, but up to 20% |
| France | 8.2% (1997 figure for companies that combine mandatory and voluntary profit-sharing schemes) |
| Germany | 5%?27% |
| Italy | 3 %? 5% (excluding management) |
| Netherlands | 10%?15% |
| Norway | Usually under 10% (50% of employees covered report less than 5%) |
| Portugal | nd (but increasing) |
| Spain | 10%?20% |
| Sweden | 25% |
| UK | 2.9%-5% for merit pay; 5%?9% for profit-related pay |
Source: EIRO.
Not only are there huge differences in the range of variation, but perceptions of this range also differ greatly. The figure for Sweden is quite high in absolute terms, but is considered to be "relatively low". The amount of (potential) variation itself varies within countries according to the sector and level in the hierarchy of the organisation. In general, by far the highest variation occurs for managers and executives, while the lower the level in the hierarchy, the lower the proportion of remuneration that is variable. There are some exceptions to this general picture, however, such as the building sector. In several countries, the "new economy" is cited as a sector where the proportion of variable pay in the salary is much higher than average. In Germany, there is a regional difference: the average variation in the west is higher than in the east.
Downward variation
Variable pay is usually associated with increases in the level of remuneration, but of course variation is possible in two directions. Most trade unions accept only upward variations, while one of the key reasons for many employers to advocate variable pay is the possibility of downward variations, especially in adverse circumstances (see below).
Downward variations are exceptional, and sometimes they are explicitly ruled out. In Spain, the current national collective agreement for the chemicals sector, concluded in 1999, explicitly states that in no case may introducing or modifying a variable pay system lead to a loss of remuneration for a worker performing the same activity. In the UK, most incentive schemes are designed to ensure that an individual is unlikely to receive an overall decrease in pay. The "worst-case scenario" is usually one in which no increase or bonus is awarded. In Austria, collective agreements allow for upward variations only. In France, the value of the bonuses paid under the voluntary profit-sharing scheme has continually increased up until now.
Downward variation does exist, however, especially where variable pay schemes take the form of shares or share options, or in the case of sales commission (as, for example, in Belgium). Upward variation only is normally possible in Italy. In 1996, however, company managers asked about the issue in a survey estimated that significant downward variations were possible in about 20% of cases where variable pay was linked to company performance, covering a third of the employees involved. In Germany, many sectoral collective agreements contain opening clauses stipulating that companies are allowed to pay less than the collectively agreed standard rate under certain conditions. According to a recent survey, one fifth of the companies concerned had recently made use of such an opening clause.
Trends in the use of variable pay
Overall, the incidence of variable pay is increasing throughout the EU. Between 25% and 75% of current schemes providing for teamwork pay, gainsharing, skill-based pay and "broad-banding" in Ireland were introduced between 1995 and 1998, for example. Statistics from Norway suggest that the coverage of variable pay systems doubled from 11% of employees to 22% in the period 1989-98, not including piecework schemes. Finland recorded a significant increase during the 1990s.
The overall increase does not imply that all types of variable pay systems are on the increase in all countries covered by this study. In fact, the more traditional forms of piecework in particular are decreasing in countries such as Austria, Spain and Sweden. The incidence of performance-related pay has been fairly stable over a longer period in countries like Portugal, the UK, the western part of Germany, the Netherlands and Spain (between 1995 and 1998).
There are various different explanations for the increasing use of variable pay. In Italy and Spain, the decentralisation of the collective bargaining structure (with an increase in company-level bargaining) has lent a strong impetus to the introduction and spread of variable pay schemes (see below). In France, this increase is largely due to the introduction by law of the mandatory and voluntary profit-sharing schemes.
Most countries are experiencing an increase in the use of share and share option schemes. A notable exception is the UK, which witnessed such an increase during the 1980s under consecutive Conservative governments, but saw a decrease in the 1990s.
Variable pay and collective bargaining
To what extent is variable pay covered by collective bargaining? In other words, who makes the decision to introduce, modify or abolish variable pay systems and who decides how these systems are to be applied? There is a range of possibilities here, varying from no influence at all for employees and/or their representatives to joint decision-making powers, and from a strictly individualised process to various forms of collective bargaining. The following parties ? either alone or in combination ? may be involved in the decision-making process: management; individual employees; works councils; trade unions; and, in the case of shares and share options, the general meeting of shareholders.
There is thus no automatic link between variable pay and collective bargaining. In many cases, variable pay systems are introduced and implemented at the employer's sole discretion, or their introduction is negotiated between management and individual employees without any involvement or control by the unions. The discretionary powers of employers seem to be greatest in Greece, the UK, Finland and Portugal. In Greece, for instance, 70% of employers in the private sector say (when asked in a survey) that there is no union involvement in variable pay matters.
Care should be taken to distinguish between collective bargaining and collective agreements. In the UK, for instance, it is usually management that introduces variable pay schemes, with trade unions then trying to influence the decision in negotiations. Most variable pay systems in the UK are not covered by collective agreements. At the other extreme, in Luxembourg, all variable pay systems are regulated through collective agreements.
It should also be noted that the fact that collective agreements contain provisions concerning variable pay does not mean that these provisions are always implemented, or result in a payment every year. A final noteworthy point is that it is not only trade unions that conduct bargaining on the employees' side, but also works councils in some countries. Works councils play an important part in Austria, the Netherlands and especially Germany. In Belgium, they have to be consulted about the criteria used for variable pay schemes.
Bargaining over variable pay takes place to some extent in all the countries covered by this study - see table 6 below for brief details. It is clear that the more traditional forms of variable pay are regulated by collective agreements more often than newer forms, which does not come as a surprise. However, few figures are available on either the number of relevant agreements or the number of employees who are covered by these agreements.
| Austria | Bargaining over variable pay may occur at both sectoral and company level. The distribution option (see above) is dealt with by sectoral collective agreements in metalworking and some other industrial sectors (eg pulp/paper, chemicals and glass), while the details are negotiated between management and works council at company level. Piecework and incentive payment systems are also regulated by sectoral agreements (eg in metalworking). |
| Denmark | Provisions on "productivity-enhancing wage systems" (ie variable pay) are very common in collective agreements in the area of the private sector covered by the Danish Confederation of Trade Unions (Landsorganisationen i Danmark, LO) and the Danish Employers' Confederation (Dansk Arbejdsgiverforening, DA). Such provisions can be found in all major collective agreements in manufacturing industry, building and construction, and service-related industries. Negotiations on this issue occur at both sector and company level. Sectoral agreements generally recommend the introduction of productivity-enhancing wage systems, where such systems are possible, or state that the parties regard favourably the use of such systems, adapted locally according to the specific conditions of the individual enterprise. |
| Finland | Variable pay schemes are regulated by some sectoral agreements, as in metalworking and paper. However, decisions as to the procedures for implementing such schemes are made at local level by individual employers. Pressure to regulate these schemes has increased in recent times, a they have become more common. Employers' organisations and unions have tried to agree on the subject at central level, without concrete results. |
| France | Collective bargaining on variable pay relates mainly to company bargaining (most often in larger firms) on mandatory and voluntary profit-sharing schemes (see above). In 1997, some 19,000 companies had mandatory profit-sharing agreements, covering 4.9 million workers (a third of those in the for-profit sector), while 14,600 companies with over 3 million workers had a voluntary profit-sharing agreement. Around 6,000 companies had agreements implementing both types of profit-sharing arrangements, accounting for 2.4 million workers. |
| Germany | In companies with variable pay schemes (according to a recent survey by WSI), these are more often - in around three-quarters of cases - governed by works agreements (between management and works councils) than by collective agreements (signed by trade unions), while in a substantial number of companies variable pay is determined neither by collective nor works agreement, but by other forms of accord such as individual or group agreements or unilateral management declarations. With regard to payments by results, nearly 40% of relevant companies apply the provisions of collective agreements, mainly because conditions and criteria for pay premia and piecework have traditionally been determined by such agreements. By contrast, there are few collectively agreed provisions on newer forms of payment by results, such as target-setting agreements. Regarding company performance- and profit-related payments, only 13% of companies concerned apply provisions determined by collective agreements, with seven out of 10 having works agreements on the issue. Many sectoral agreements have opening clauses, allowing downward pay variations in certain circumstances. |
| Greece | Profit-sharing and other ways of linking pay with productivity or company performance have not as a rule been the subject of collective agreements (in other words, they are among the benefits conferred unilaterally by employers). |
| Ireland | The current national pay agreement, the Programme for Prosperity and Fairness (PPF), contains a number of provisions relating to the diffusion of financial participation at enterprise level (IE0003149F). A "partnership clause" provides for the voluntary establishment and deepening of financial participation (employee share-option trusts, gainsharing, profit-sharing and other financial employee incentives). Furthermore, a tripartite consultative committee was established to prepare proposals on financial participation, and particularly its tax treatment, for consideration in the national budget. An increasing number of local-level agreements covering one or more financial participation systems have been negotiated under the partnership clause of the PPF and the previous national agreement, P2000, though the overall number remains fairly low. Recent examples of profit-sharing arrangements include those at Boots (chemists' shops), the Irish Times newspaper, and Tanco (engineering), while gainsharing arrangements have recently been signed at the state broadcaster, RTE, and Metal Powders. |
| Italy | Bargaining over variable pay takes place essentially at company-level, though some "framework" rules may be set also at sectoral level, as in chemicals (IT9806325F) and banking (IT9907121N). A 1997 Istat survey of company-level collective bargaining found that such bargaining covered 9.9% of businesses with at least 10 workers and 3.2 million workers (38.8% of all employees). Variable pay agreements covered 64.2% of the workers involved in manufacturing and 52.8% in services, and dealt with payment by results (introduced after a 1993 tripartite agreement,) plus more traditional kinds of variable pay (attendance bonuses, production bonuses, piecework etc). A Bank of Italy survey found that in 1996, 60% of manufacturing firms with at least 50 workers had a company-level agreement on variable pay. A recent example of a company agreement is one at Electrolux-Zanussi, which has widened the scope for the involvement of plant-level union representative bodies in the definition of productivity targets for variable pay. |
| Luxembourg | Collectively agreements have increasingly (if slowly) begun to deal with variable pay over the past decade. In nearly all the main sectors, agreements provide for a 13th-month bonus or a fixed or variable end-of-year bonus, though variable payments during the year are extremely unusual. Collective agreements do not usually deal with the details of piecework. Recent sectoral agreements on variable pay include those in banking and iron and steel, while recent company agreements have been signed at Villeroy et Boch, Paul Wurth, Goodyear, Dupont de Nemours and Circuit Foil. |
| Netherlands | Research indicates that variable pay was dealt with in one-third of collective agreements in 1998, especially at sector level. The most common forms are performance-related pay, result-related pay and qualifications-related pay. In six sectors - agriculture, construction, the civil service, trade and catering, and to a lesser degree education, health and welfare - collective agreements deal with variable pay in a significant way, covering more than 90% of employees concerned. |
| Norway | A significant number of collective agreements in manufacturing industries allow for local piecework and various bonus arrangements. Such agreements may be negotiated at company level, though the exact number is not known. In the building sector, piecework agreements are negotiated at industry level. |
| Portugal | Provisions on some forms of variable pay are included in some collective agreements, but this is not widespread. For example, according to the General Directorate for Working Conditions (DGCT), in the first three quarters of 2000, of 1,430 pay-related amendments to collective agreements, 12 covered productivity bonuses and 11 attendance bonuses. |
| Spain | In general, collective bargaining on variable pay has increased greatly since a 1994 legislative change prompting the rationalisation of wage supplements and the modification or establishment of variable supplements. Variable pay is usually regulated at company level by collective or company agreements, though sectoral agreements may regulate the procedure for introducing or modifying variable pay (eg in chemicals). Only in exceptional cases does the sectoral agreement regulate variable pay itself, or any of its components. The contents of company bargaining varies - though traditional bonuses are still predominant, more complex schemes are increasing. According to the Ministry of Labour, in 1999 some 26% of collective agreements (33% of company agreements and 14% of sector agreements). According to the Economic and Social Council (Consejo Económico y Social, CES), in 1998, variable pay supplements depending on company results and objectives were found in 15% of company agreements and 5% of sector agreements. Finally, a 1999 survey by the Spanish Confederation of Employers' Organisations (Confederación Española de Organizaciones Empresariales, CEOE) found that: 15% of company agreements establish variable supplements linked to achieving the general objectives of the company (profit-sharing and similar); 30% establish objectives by groups or areas; and 40% establish individual incentives. The percentages are far lower for sectoral agreements. |
| Sweden | Most sectoral collective agreements concluded by member organisations of the Swedish Trade Union Confederation (Landsorganisationen, LO) provide for systems based typically on a 90% fixed pay component and a 10% variable bonus depending on production quality and other economic factors. Only three unions have sectoral agreements of other kinds - those representing electricians (whereby pay is partly based on the price of work) painters (piece rates) and building workers (a mixture of various sorts of piecework and monthly pay. Agreements on piecework have by and large been superseded since the 1980s, though they remain in some small companies. |
| UK | There is little or no information concerning the extent of collective agreements over variable pay. However, in 1998 only 29% of workplaces had their pay determined by collective bargaining at all (in the UK, bargaining usually occurs at the level of the organisation, or in some cases the workplace). The greatest coverage of bargaining is in the public sector, which is not affected by profit-related pay and share ownership schemes. The extent of bargaining over such schemes is therefore probably low. Indeed, the increased importance of variable pay has coincided with the decentralisation and decline of collective bargaining. PRP schemes are usually introduced unilaterally by management, but unions will often attempt to influence them in order to: regulate the process of performance appraisal to ensure that management decision-making involves rules and procedures; reduce the financial risk to employees covered; and secure procedural rights to pursue appeals, have access to information concerning the running of the schemes and jointly review the schemes with management. In general, their current emphasis on "partnership" in the workplace means that unions will look to play a role in variable pay wherever possible. |
Source: EIRO.
Level of bargaining on variable pay
Unsurprisingly, most collective bargaining over variable pay takes place at company level (see table 6 above). This highlights the relationship between the ? real or perceived - process of decentralisation of collective bargaining in many countries and the subject of variable pay. There is a two-way relationship here: on the one hand, decentralising bargaining furthers the introduction or spread of variable pay (as in Italy and Spain), while at the same time variable pay systems support this decentralisation process (as in France and Germany). In this sense, the increasing use of variable pay may be seen as a direct threat to the existence or relevance of sector-wide collective agreements, while within companies it helps to achieve greater individualisation of employment relations.
The fact that variable pay is closely connected to company-level bargaining does not, however, imply that the national or sectoral levels are unimportant. In Austria, the unions negotiate at sectoral level (for example, on the distribution option - see above) and details of the agreements they reach are then negotiated by works councils at company level. Higher-level negotiations and agreements often result in recommendations on variable pay (as in Denmark), or in a set of procedures to be followed at the lower level (as in Spain or Italy). In Finland, the desire to develop a framework to deal with the perceived increase in the prevalence of variable pay schemes led to higher-level negotiations, though these were unsuccessful. In Germany, many sectoral agreements contain opening clauses that allow downward variation of collectively agreed pay, mainly in the event of economic difficulties. However, only limited use is made of these clauses. In Ireland the national level has played quite an important role in stimulating financial participation. The national agreement concluded in spring 2000 ? the Programme for Prosperity and Fairness (PPF) - contains a number of provisions relating to the diffusion of financial participation at enterprise level - see table 6.
More substantive sectoral agreements on variable pay are found in some countries in the building and construction industry (as in Sweden and Norway). In Luxembourg, the collective agreements for the banking sector and the iron and steel industry contain provisions on variable pay.
We noted above that the overall incidence of variable pay is rising. It is also true that, even though not all variable pay systems are based on collective agreements, the rise of the variable pay phenomenon has been accompanied by an increase in collective agreements on the subject. In fact, in some countries much of the increase in the incidence of variable pay systems can probably be attributed to the decentralisation of collective bargaining. This is certainly the case in Spain and Italy, where national agreements reached in 1993-4 opened the way for company-level bargaining on this issue.
Industrial conflict
Variable pay is not, it appears, a major source of conflict in industrial relations in the EU and Norway, although at least one example of a conflict is reported from the majority of countries covered by this study. In Italy, the issue of variable pay represents the core of company-level bargaining and has therefore sparked off conflicts. A recent example was a strike at the Fiat motor manufacturing group over the renewal of the collective agreement in November 2000 (IT0007157N). Several conflicts have also occurred in Belgium, for example at IBM (BE9902166N) and the GIB retail group (BE0006314N). In these disputes, the unions have taken a stand against variable pay on principle. In Spain, the introduction or modification of a variable pay system is usually a source of conflict when it involves greater risk for the employees, more discretionary powers for the employer or increased individualisation. A major conflict was sparked off in 2000 at the Telefónica telecommunications group by a programme of share options for executives, which dominated the political and social debate for several months (ES0004185F). One of the conflicts reported from the UK concerned the introduction of a PRP scheme at Barclays Bank in 1997, without consulting the unions (UK9711179N). This resulted in several one-day strikes, a work-to-rule and an overtime ban.
In Finland, one dispute is reported in the paper industry, when a profit-sharing scheme for all employees was replaced by a performance-related pay scheme. In France, the issue of voluntary profit-sharing bonuses led to industrial action at Renault's Flins plant in 1999, in protest over the motor manufacturing company's plan to abolish the voluntary profit-sharing system. In the Netherlands, there was conflict in the 2000 bargaining round when unions resisted the introduction of variable pay at Philips (electronics) Akzo (chemicals) and ING (finance) (NL0003184F). In the same country, the courts have ruled that workers' participation in a profit-sharing system cannot be linked to their non-participation in a strike.
Few or no conflicts on this issue are reported from Austria, Denmark, Germany, Ireland, Luxembourg, Norway, Portugal or Sweden. In Norway, most variable pay schemes are negotiated at company level and therefore, by their nature, they are not subject to the right to industrial action. In Ireland, an imminent strike was averted at Irish Distillers in 1999 after agreement was reached to set up a monitoring committee and include the employees of a subsidiary company in a profit-sharing scheme.
Social partner and government views
On the whole, variable pay is an item that tends to be placed on the agenda by employers. Whether prompted by the time-honoured argument that linking pay to results will increase employee motivation, or by the newer factor of the wage implications of EU Economic and Monetary Union (EMU) (TN0007402S), employers' organisations are in favour of variable pay. In countries where governments are facilitating a policy of more variable pay by, for example, offering tax exemptions and special arrangements for small and medium-sized enterprises (SME s), employers' representatives are basically content. Where there are objections to variable pay, most of these come from the trade unions. However, the unions differ in the extent to which they accept variable pay, and a pragmatic attitude is dominant. For instance, the Irish unions are clearly in favour of variable pay, while the unions in Belgium and France are fiercely resistant. The unions that oppose variable pay accept it only when doing so is absolutely unavoidable, and seek to lay down strict conditions and procedures for its acceptance. Governments also take a variety of positions on this issue. Some offer extensive tax exemptions, others leave the whole question up to the social partners, and yet others have begun introducing measurement systems with a view to promoting "responsible" pay trends.
Unions: partial shift to pragmatism
The greatest contrast in attitudes towards variable pay can be found between the Irish and Italian trade unions on the one hand, and the Belgian and French unions on the other. The former view variable pay as a way for employees to share in favourable company results, with the Irish unions seeing variable pay as a way of broadening employee "stakeholding" in modern enterprises. By contrast, the latter believe that workers should not have to shoulder the burden of corporate risk through variable pay.
The Italian unions have had experience with negotiations over variable pay since 1993, when a tripartite agreement was reached between social partners and government which provided that future pay bargaining would be conducted at two levels (IT9803223F). In this two-tier structure, the aim is that the first level (national sectoral) should agree minimum wage increases which ensure that real pay is maintained in the face of inflation. At the second level, be it company or local ("territorial"), "the redistribution of productivity gains" should be negotiated. The Italian Confederation of Workers' Unions (Confederazione Italiana Sindacati Lavoratori, Cisl) in particular stresses the importance of decentralised, second-level agreements, and is of the opinion that the percentage of workers who are currently covered by such agreements ? over 40% - should increase. Cisl believes that decentralised bargaining over performance-related pay is in keeping with the increased importance of issues related to competitiveness. However, sceptics within the union movement claim that, in practice, a combination of insufficient protection of real wages and the limited percentage of workers covered by second-level bargaining has resulted in an erosion of wage levels.
To the Italian unions, "controlled decentralisation" of bargaining in this area should mean that pay variability is linked to objectives shared by the company and its employees and that the criteria are subject to bargaining, relating to issues over which employees have real influence, and jointly supervised. Most European unions would endorse these conditions.
Danish, Swedish and Norwegian unions have essentially accepted variable pay, on the condition that the whole process is transparent and regulated and that the majority of remuneration is fixed (for example, that only one 10th of the salary is variable at maximum). The Danish unions have stipulated that any employee-share ownership schemes must be available to all employees and must therefore be regulated in collective bargaining (DK0009197F). The Finnish unions, however, are divided, with positions ranging from slight resistance to strong support. Supporters believe that variable pay offers companies greater flexibility in the context of the demands imposed by the introduction of EMU. However, here too the supporters of variable pay believe that it should be linked to strict (predefined) conditions and should apply only to a limited proportion of remuneration; a fixed basic rate of pay should guarantee the standard of living. Variable pay, in the opinion of Finnish unions, is best paid out in the form of "personnel funds" (general profit-sharing schemes).
The Irish unions are strongly in favour of variable pay, provided that the abovementioned conditions are met. The Irish Congress of Trade Unions (ICTU) has acknowledged that union bargaining priorities have, to a significant extent, shifted away from "the traditional annual pay claim". In present conditions, financial participation in companies is seen as a way of securing a fairer share of the gains arising from the country's recent substantial increases in productivity and profits. It is therefore perceived by ICTU to be one of the most effective ways of making the concept of "workers as stakeholders" a reality. It is seen as a vital tool for developing "the broader employment relationship by underpinning and deepening workplace partnerships and facilitating the broadening of worker stakeholding in the modern enterprise". According to ICTU, feedback from organisations operating variable pay schemes indicates that both workers and companies are benefiting. Variable pay is even a major issue for unions in the public sector. As part of a programme of public service pay reform, the Civil and Public Service Union (CPSU) has put forward "innovative proposals" for a new gainsharing fund: it proposes that a certain percentage of wages should be assigned to this fund and that "shares" should then be allocated to employees.
This contrasts sharply with the attitude of unions in the Netherlands, where unions in the public sector are strongly opposed to variable pay, despite the fact that in 1997 the union confederations reached agreement on the principle of variable pay with employers in the bipartite central Labour Foundation (Stichting van de Arbeid). In the longer term, this new pay system is supposed to replace the old system with its automatic salary increases based on seniority or position (NL0101123F).
"Stakeholder" considerations play no role in Spain or Greece. In the view of the Greek unions, variable pay may reflect a demand for fair treatment and recognition of the workers' positive contribution to improved company performance. For pragmatic reasons, the Spanish unions are in favour of variable pay, although only under certain conditions. Furthermore, they believe that variable pay should be regulated collectively, and the Trade Union Confederation of Workers' Commissions (Comisiones Obreras, CC.OO) and General Workers' Confederation (Unión General de Trabajadores, UGT) declare that the amount of variable pay should not substantially alter the total wage packet. The Spanish unions have a long tradition of negotiating bonuses and similar productivity incentives. Although they may have reservations about new forms of variable pay, such arrangements are often introduced outside the framework of collective bargaining, through agreements concluded individually. Ignoring this reality would encourage even greater individualisation of industrial relations and a reduction of the trade unions' influence. The same is true of the Greek unions, which also face the issue of variable pay outside the framework of collective agreements.
On the other hand, Belgium's largest unions - the Confederation of Christian Trade Unions (Confédération des Syndicats Chrétiens/Algemeen Christelijk Vakverbond, CSC/ACV) Confederation of Christian Trade Unions (CSC/ACV) and the Belgian General Federation of Labour (Fédération Générale du Travail de Belgique/Algemeen Belgisch Vakverbond, FGTB/ABVV) - have rejected "stakeholder" ideas or pragmatic attitudes completely. They have done so explicitly in a joint response to a recent government bill on employees' financial participation in companies, for a number of reasons:
- they "do not believe in the benefits attributed to financial participation";
- they state that "the alleged link between participation and motivation is non-existent for many workers";
- they think that financial participation has been "wrongly presented as moving a step closer to social and economic democracy";
- profit-sharing may "encourage workers in an enterprise to adopt an attitude that is detrimental to other workers ... so that the profits to be distributed are as high as possible for the smallest possible number of people"; and
- the unions reject the decentralisation of collective bargaining to enterprise level on the grounds that it undermines "cohesion" at sector or group level.
Although they oppose the bill, if it is to be adopted the Belgian unions want it to meet certain minimum requirements - eg, compulsory consultation with employee representatives, collective agreements on financial participation, maintaining employment levels and making benefits available to all workers.
While the German unions display the divisions that variable pay tends to evoke nowadays, in the past they were unanimously opposed to piecework (asserting that "piecework means murder"). Some unions believe that financial participation means little more than shifting the entrepreneurial risk onto the employees; others recognise that the importance of company performance-related pay will grow in any case. The question then is whether the unions will be able to influence the conditions for performance- or profit-related payments. A fundamental condition on which the unions insist is that variable pay should be paid out over and above collectively agreed pay and should not become a substitute for part of the existing basic payment. A further condition is that performance- or profit-related payments should preferably be regulated through sector-wide collective agreements, in an attempt to oppose the "creeping trend towards decentralisation of pay determination". With regard to the latter issue, many unions have had to accept "opening clauses" in sectoral collective agreements, under which downward deviations from collectively agreed pay are permitted (in order to safeguard jobs in the event of poor company results).
The individualisation of some aspects of employment relations and decentralisation in general are trends that are widespread throughout Europe. The Italian and Spanish unions have highlighted these trends explicitly. Although generally not in favour, unions nonetheless recognise that they cannot ignore these developments. They have in many cases developed a pragmatic attitude in an attempt to keep a grip on the process (as in the Netherlands, the UK and France). Unions in the UK, for example, often oppose variable pay, but their main response has been to attempt to secure collective agreements regulating its operation.
Employers' organisations: generally in favour
Employers' organisations in Europe are in favour of variable pay. For some it is a key issue. In Ireland, for example, the Irish Business and Employers Confederation (IBEC) has set up its own organisation to promote employee financial participation. In favour of variable pay, employers' associations often cite the traditional arguments of: increasing employees' motivation and performance; increasing companies' flexibility and competitiveness; and decreasing corporate risks and fixed pay costs.
However, a number of new arguments have now come into play alongside these traditional ones. In Ireland it is the shortage of labour, particularly in the information technology sector, that is forcing employers to argue that more scope should be allowed for variable pay. Employers in the Netherlands and Germany hope that variable pay will lead to moderate wage trends. In Finland, the introduction of EMU has helped to increase the popularity of result-based schemes among employers, including those in the public sector, though the argument quoted is the traditional one of increasing companies' flexibility and competitiveness.
In some countries, employers' representatives are now more or less explicitly rejecting existing collective agreement systems, because they are considered incompatible with variable pay. In Austria, for example, the employers maintain that variable pay cannot be achieved under the existing sector-based bargaining structure. The Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) has repeatedly proposed that pay bargaining should be shifted to company level. Ideally, it believes that pay should consist of three components: a general component; a component that depends on the company's financial position; and a component that reflects the employee's performance.
In Germany, employer representatives seem to have accepted that sectoral collective agreements are inevitable, as evinced by a joint statement made in July 1999 by the Confederation of German Employers' Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA) and the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB): "on the basis of sectoral collective agreements, at company level there should be better participation in company performance by employees in order to consider the different situations in companies' performance and competitiveness" (DE9907219F). However, employers, in contrast to the unions, prefer the details of variable pay to be regulated at company level in order to safeguard the flexibility of the company's pay options. They also reject the idea of variable payments over and above existing collectively agreed pay. On the contrary, they argue that some of the collectively agreed fixed pay should be converted into performance-related variable pay. Both the collectively agreed Christmas bonus which is normal in Germany and other bonuses should be made dependent on company performance, and collectively agreed basic pay should be divided into fixed and variable components. So, although employer representatives may pay lip service to the concept of sectoral agreements, they want to delegate part of pay bargaining to company level.
Larger companies are generally more in favour of variable pay than SMEs. In Ireland, however, some SME employers have adopted a positive stance towards variable pay. A recent survey carried out among SMEs revealed that a small majority were in favour of variable pay. The SME lobby group, Irish Small and Medium-Sized Enterprises Association (ISME) advocates a scheme under which smaller companies would be allowed to distribute 15%-20% of their profits tax-free to all staff as cash lump-sums rather than shares.
In general, across Europe employers are in favour of variable pay, but they also propose limits. Employers in Luxembourg, for example, are increasingly demanding that employee participation should not become global or "across-the-board" for all workers. Thus, even employers believe that financial participation by employees has its "boundaries".
Governments: a society of stakeholders
European governments have taken stances towards variable pay ranging from "no commitment "(as in Denmark, Norway and Sweden) to strong commitment (as in Germany, Ireland and the UK), and there seems to be little opposition.
Apart from the French government, which first introduced policy measures to stimulate employee profit-sharing in the 1950s and 1960s, it is perhaps the Irish government that has the longest tradition of regulating variable pay, although its attitude has shifted over the years. In 1992, the Minister of Finance cited "large-scale abuse" through "contrived arrangements" as the reason for abolishing all tax breaks for share options and profit shares issued to employees and directors. In recent years, however, the government has been concerned with introducing measures to encourage variable pay schemes. The 1999 Finance Bill contained a number of amendments to the legislation in respect of both employee share-ownership and profit-sharing schemes, covering matters such as the limit on shares obtained tax free, exemption from capital gains tax and the employees involved. In 2000, the government signed up to the PPF national tripartite agreement, which advocates a role for financial participation at the level of the enterprise (see above).
The situation is rather different in Spain. While the present centre-right government sympathises with the employers' positive stance on variable pay, the only steps it has taken in this area have tended to be restrictive. In late 1999, as a consequence of the controversy over share options for senior management at Telefónica (see above), the government introduced higher taxation on variable pay if it exceeds a certain limit and obliged companies to increase the transparency of variable pay based on shares. The 1994 labour reform carried out by the Socialist government of the time remains Spain's main legislative tool for achieving more widespread application of variable pay.
The tripartite agreement on a two-tier wage system that the Italian government signed in 1993 (see above) was an important gesture towards variable pay, envisaging the introduction of incentives to promote variable pay schemes. One such incentive entailed reducing the social security contributions levied on variable pay awarded on the basis of collective agreements. The Italian government's positive attitude towards variable pay schemes has been motivated by its attempts to curb inflation and implement a sound incomes policy; to prevent "wage-push" inflation, it has seen a need to eliminate automatic wage increases and link pay rises to productivity gains.
Some governments have extended or replaced a policy of promoting wage moderation with a broader vision of "a society of stakeholders", as the German Chancellor, Gerhard Schröder, puts it. Such a stance is endorsed by the UK's ruling Labour Party. For Chancellor Schröder, this society of stakeholders forms a core element of a comprehensive social democratic strategy for modernisation. Germany's coalition government of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/The Greens (Bündnis 90/Die Grünen) views the "improved participation of employees in productive capital" as one of its principal political aims. According to Chancellor Schröder, the extension of employee shareholding had various advantages: a fairer distribution of assets; an additional form of employee co-determination; increased employee involvement and participation in the work process; and a new pillar of financial security in old age. In March 2000, he invited the social partners, in the context of the current tripartite Alliance for Jobs (DE9812286N), to develop new provisions to achieve greater employee participation in their employers' success, on the basis of sectoral collective agreements. The government will take the social partners' possible recommendations into account when deciding on possible legislative measures to promote variable pay (at present, these measures are still rather limited).
The current Labour government in the UK has published a white paper, Modernising government, in which it proposes changes to public sector pay that reflect its agenda of linking pay to individual performance in both the private and public sectors. The introduction of performance-related pay for teachers has recently been particularly controversial (UK0011100F). In general, the Labour government encourages profit and share schemes by providing tax incentives.
Although the Greek government has introduced legislation to regulate some aspects of the issue, it is the Belgian government that has proposed the most comprehensive specific statutory framework to regulate variable pay. In a bill published in 2000, aimed at ending current uncertainties, it proposed that employers should be allowed to introduce a financial participation plan for all workers in the form of either profit-sharing or equity participation, either under the terms of a collective agreement or by an official announcement. Employees' earnings under profit-sharing schemes would be subject to 25% taxation, plus social security contributions, while equity participation schemes would be subject only to 15% taxation. Such schemes would be subject to a number of conditions: financial participation must not replace pay rises; there must be no reduction in employment; and the total benefits must not exceed 10% of total payroll costs or 20% of profits. Although the Belgian government expected this bill to meet long-standing expectations, trade unions have reacted very negatively to it. Employer representatives, on the other hand, have welcomed the proposed statutory framework, particularly because it incorporates a special complementary scheme for SMEs.
Public and academic debates
It is, of course, not uncommon for "scandals and controversies" to spark off public debate. Such developments have provoked both public discussion and legislation relating to variable pay in Ireland and Spain (see above). Government representatives in Norway (NO9711137N) and the Netherlands (NL0009106F) have expressed their dissatisfaction with lucrative share-option schemes for management in larger companies; they claim that preaching moderate pay rises for the workforce in general loses credibility when some particular staff are enriching themselves to an unlimited degree. In countries such as Denmark, there has been much public and media attention on workers in the ICT sector supposedly making large amounts of money from share options in their booming companies (DK0009197F). Overall, the conclusion appears to be that uncontrolled remuneration poses a threat to: governments' pay policies; pay coordination; cooperation between the social partners; the frameworks that have been developed for wage negotiations; and the established mechanism of collective agreements.
Aspects of the public debate highlight a key question in the current academic debate in this area: is variable pay inevitably involved in the decentralisation of collective bargaining, the general trend towards more individualised employment relations and the growth of a neo-liberal cultural climate with an emphasis on competitiveness? That is, is variable pay another threat to social cohesion (as the question has been put in Germany)?
Some academic work touches on these questions, but most studies concentrate on more "instrumental" issues. In particular, certain claims for variable pay - that it motivates employees to attain higher productivity and better performance - are being questioned. In the UK, for example, these claims are the subject of fierce debate, often with negative findings (UK9803107F), while a Portuguese study suggests the opposite relationship: high productivity seems to be linked to high levels of fixed wages for employees and low employee turnover. Other questions examined in research include: How can the effectiveness of variable pay be measured, given that companies' performance and success depend on such a wide variety of factors? Since team-based performance-related pay is rarely found, what means are actually being used to encourage the vital co-operation between employees? Is this cooperation not undermined by individual result-based pay? What do employees themselves think of variable pay? On this last question, for example, research in the Netherlands indicates that employees are reaching different conclusions on the subject of variable pay as time goes by. At the moment, a small majority of employees is in favour, but this majority also believes that effort is a more satisfactory criterion for determining pay than results, which also depend on other factors and on colleagues' efforts.
The variable pay debate has specific focuses in particular countries. In Italy, macroeconomic questions such as the competitiveness of the national economy and wage moderation have prompted much debate and numerous academic studies on variable pay. French research highlights another important factor: the drop in tax and social security revenues caused by the exemptions for profit-sharing schemes. It is estimated that FRF 35 billion or so paid out in voluntary and mandatory profit-sharing bonuses in 1998 led to a shortfall in public finances of around FRF 22 billion.
In conclusion, variable pay is a controversial issue in quite a few countries, while in others it is not an issue at all. Research on variable pay is relatively scarce, with most studies seeking to scrutinise the effectiveness of variable pay at different levels.
Commentary
Most of the countries covered by this study have seen an increase in the use of variable pay systems in recent years. However, this does not mean that the picture is uniform. The UK, for example, actually saw a decrease in the use of share and share option schemes in the 1990s, while in several other countries the more traditional systems of variable pay are on the decline, or seem to have more or less stabilised. Having said this, the overall picture is still one of a gradual increase in the use of variable pay systems. What are the implications for the various industrial relations systems within the EU?
First, there is the question of power. In several countries there is evidence of a strong link between the decentralisation of collective bargaining and the increasing use of variable pay. This raises the question of who decides on the introduction, continuation or abolition of a system of variable pay. Is it the employer, or the employer and the individual employee together? Or is the variable pay scheme part of a collective agreement?
As the collective bargaining process becomes decentralised, the importance of the various parties at company level increases. Where the presence of trade unions at company level is weak, the relative power of the management increases unless another power is present to counterbalance it. This counterbalancing power seems to be present only in Austria and Germany, and possibly the Netherlands, in the form of the works council. However, it is debatable whether works councils can fully replace the unions.
Where variable pay is agreed at individual level, the question of power is even more acute. This, of course, is self-evident where management makes the decision on pay unilaterally, but probably less so in situations where variable pay deals are negotiated between management and individual employees. The transparency of the power relationship here may become blurred by a tight situation in the labour market, as illustrated by the cases of Ireland and the Netherlands.
Second, given the connection between decentralisation and individualisation on the one hand and variable pay on the other, the question arises of how far the process of individualisation and decentralisation will go. The unions' fear that present developments will continue indefinitely seems unjustified. Employers appear to recognise that total individualisation of the setting of terms of employment has disadvantages. Surprisingly ? or maybe not - collective agreements are currently emerging in some countries in the sector where they might least be expected, ICT. Admittedly, these agreements contain more far-reaching clauses on variable pay than the average collective agreement, but their emergence in itself seems to prove that employers recognise that the complete individualisation of terms of employment has various disadvantages. Transaction costs are one such disadvantage: these are likely to increase prohibitively as negotiations approach the individual employee level. At the same time, this may also highlight the potential limits on the use of variable pay systems. It is worth noting that SME employers do not seem to be particularly fond of PBR and PRP systems.
Finally, this brings us to the question of the effects of variable pay. A point that deserves to be considered here is the assumption that variable pay systems increase productivity and relate positively to economic performance. This is generally taken for granted by economists, but it is far from being universally recognised. Commentators in several countries are questioning the effects of PRP systems: not only because of measurement problems, but also because of possible adverse effects and the "free-rider" problem (ie employees not pulling their weight) that can arise in the case of systems linked to team performance.
Nor is there unanimity about the more general impact of variable pay systems. Employers stress the benefits of the flexibility that these systems can provide by linking incomes to changing economic circumstances and possible "external shocks". However, many unions are afraid that employees will ultimately wind up as losers, and that the spread of variable pay systems will erode social cohesion and solidarity.
This threat to solidarity and social cohesion is highlighted when unions call attention to the sometimes lavish share and share option schemes offered to executives, and the impossibility of introducing such schemes in the public sector. In several countries, the question of management remuneration in the form of variable pay has been a core issue in industrial relations in recent years.
Looking ahead to the future, it is important to recognise that opinions on this subject still differ between employers and unions, and will probably continue to do so for a long time to come, although the picture is less clear than it was 10 years ago. Here a "procedural approach" may be more promising than attempts to reconcile fundamentally different views. Under such a procedural approach, employers and unions agree on sets of rules that companies must follow when introducing or modifying variable pay schemes. The exact procedures will vary between different industrial relations systems, but the approach eliminates unilateral decisions by employers. Where this kind of approach is taken, the opposing views will not vanish, but the outcome will probably reflect a balance between the need for employers to achieve a certain degree of flexibility and for employees to enjoy a certain degree of security. (Robbert van het Kaar and Marianne Grünell, HSI)
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