Merit pay spreads rapidly

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According to surveys published in summer 2002 by the Confederation of Finnish Industry and Employers (TT) and the Employers' Confederation of Service Industries (PT), merit pay - defined as variable pay linked to criteria such as company profits or results - has become widespread in Finnish companies, which plan to extend it further. Trade unions would like to agree on the 'rules of the game' for merit pay in the next national incomes policy agreement, while the employers reject this idea.

According to a survey published in June 2002 by the Confederation of Finnish Industry and Employers (Teollisuuden ja Työnantajain Keskusliitto, TT), merit pay schemes - defined as variable pay linked to criteria such as company profits or results - were in use in 2001 at 66% of establishments in industry and 74% of those in the construction and service sectors in Finland. Some 67% of the total workforce in industry was covered by a merit pay scheme. The survey indicates that companies plan to extend merit pay schemes further. If these plans are realised, in a couple of years three-quarters of TT member companies will have merit pay.

In the past three years, states TT, the number of employees covered by a merit pay system has grown in industry by almost 50%. About half of this growth is because such schemes have been introduced in companies where they had not previously been used. The other half comes from extension of schemes to additional personnel groups in companies already using merit pay.

Level of merit pay

According to the TT statistics, a merit payment was received by 42% of employees in industry in 2001. For clerical employees, this payment amounted on average to 6.1% of their total income. Among other employees, the corresponding figure was 3.4%.

The granting of merit payments depends on whether set goals and criteria are met. Generally, these require that company profits or other economic result are sufficient to justify the awarding of merit pay. The economic position and profitability of industrial companies progressed positively at the end of the 1990s, generally making it possible to award merit pay. During 2001, however, the economic position of companies weakened fast, which obviously affected the granting of merit payments.

Merit pay is among the motivational and incentive measures operated by companies, and is determined by local agreements on company-specific grounds, which are assessed at least once a year. TT states that in future the use and development of well-functioning merit pay schemes must continue to be determined at local level.

Similar developments in service sector

Merit pay schemes have also become more common in the service sector. According to a survey published by the Employers' Confederation of Service Industries (Palvelutyönantajat, PT) in August 2002, merit pay is in use in a quarter of service sector companies and covers about 40% of the sector's workforce. In 2001, the average merit payment for employees was slightly under 5% of annual income. The PT survey finds that merit pay schemes are clearly more common in larger companies than in smaller ones. Of companies with under 50 employees, one fifth had introduced merit pay schemes, compared with nearly two-thirds of companies with over 250 employees. However, the average level of merit payments was greater in small and medium-sized companies than in the largest firms

According to the PT survey, merit pay will be extended further, because one in seven companies which do not currently use such schemes are planning to introduce them in the next two years. Some companies will also consider the development of other kinds of reward schemes.

The merit pay schemes operated by service companies use several payment criteria. The most crucial is the results of the company or other profit centre. In second place comes customer service, which is used as a criterion in 60% of the schemes.

The survey finds that employees were involved in the process of setting up the merit pay scheme in three-quarters of cases in the service sector. This involved sounding out employees' views, negotiating with them, or reaching agreement concerning the scheme before its introduction. The companies are found to have use established procedures for taking the personnel's viewpoint into account.

Trade union criticism

The Service Unions United (Palvelualojen Ammattiliitto, PAM) trade union has expressed critical views on merit pay. It believes that schemes work well when the companies are performing well, but that problems arise if their situation deteriorates. Furthermore, a merit pay scheme which is based only on the company's financial results can be easily manipulated by using 'accounting tricks'. PAM would like the next national incomes policy agreement, which is due to be negotiated in late 2002, to regulate the 'rules of the game' for merit pay.

Commentary

Companies have been trying to create wage systems that react rapidly to changes in their ability to pay. As a result, the use of merit pay has increased rapidly in Finnish companies, and the employers want its regulation to be kept within the sphere of local-level agreements. Basic pay, on the other hand, is regulated largely by sectoral collective agreements, and trade unions would also like to regulate merit pay in this way. PAM is not alone in wanting to establish 'rules of the game' for merit pay in the next incomes policy round. The service sector employers' organisation, PT, does not believe that this would be possible. There have been several earlier efforts to agree on merit pay at this level, but without any results, and the subject is highly likely to remain untouched by national incomes policy agreements in the foreseeable future. (Juha Hietanen, Ministry of Labour)