Wage flexibility

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  • Observatory: EurWORK
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  • Date of Publication: 19 Février 2009



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Increased competition has created pressure for flexibility or variation concerning wages. This can involve the localisation of basic pay-setting, which may or may not be governed by multi-employer bargaining arrangements, and the development of new variable payments systems (VPS) linked to measures of performance. This study reviews both sets of developments, focusing on two economic sectors – manufacturing and banking. It finds only limited use of ‘downwards’ wage flexibility but evidence of an increasing decentralisation of wage-setting through supplementary bargaining and the introduction of VPS which, especially in banking, are often at the employer’s discretion. Both developments threaten to erode the traditional regulatory function of multi-employer bargaining in particular.

The study was compiled on the basis of individual national reports submitted by the EIRO correspondents. The text of each of these national reports is available below. The reports have not been edited or approved by the European Foundation for the Improvement of Living and Working Conditions. The national reports were drawn up in response to a questionnaire and should be read in conjunction with it.


Introduction

The widening and deepening of economic integration within the European Union has potentially important implications for wage determination. This affects both the processes of wage regulation, particularly through collective bargaining, and pay outcomes. The internationalisation of competition means that a minimum base cannot so easily be placed under wage competition at national level, thereby undermining a key rationale for multi-employer bargaining. Trade unions also fear that threats to move investment or to relocate abroad will be used to drive concession bargaining over pay (TN0511101S). The intensification of competition also creates pressures for wage localisation so that employers can achieve greater flexibility – meaning variation – concerning pay, both on cost and performance grounds, within as well as between companies. The consequence is an increasing decentralisation in multi-employer collective bargaining systems to expand the scope for wage flexibility, and a concomitant growth in all countries of variable payments systems (VPS), which may be regulated at intersectoral, sectoral and/or company level.

The decentralisation, and to a lesser extent decline, of collective wage bargaining is now well established (TN0503102S). Pressure for both ‘downwards’ and ‘upwards’ wage flexibility has been important in driving the process of organised or coordinated decentralisation in the multi-employer bargaining arrangements which characterise much of western Europe. Both cost and performance considerations have been relevant. Reflecting the cost dimension of wages, employers may press for ‘downwards’ wage flexibility, seeking exemption from generally prevailing wage norms and levels for competitiveness reasons. Accordingly, cost pressures have been accommodated by the introduction of mechanisms such as ‘hardship’, ‘discount’ and ‘opt-out’ clauses in sectoral wage agreements. Linking wages more closely to company performance is reflected in employer pressure in multi-employer systems for scope to negotiate an element of wages, at least, at company level. It also requires the design and implementation of VPS which are suited to the business circumstances of the individual employer. The broad principles may be established under a sectoral-level framework agreement, but scope for subsequent negotiation at company level is an inevitable corollary of the spread of such schemes. Furthermore, under the single-employer bargaining arrangements which characterise the United Kingdom (UK) and the majority of the EU Member States of central and eastern Europe, significantly lower levels of collective bargaining coverage mean that developments in wage flexibility can be driven by unilateral management innovations in non-covered companies. This in turn increases incentives for management initiatives on variable pay in enterprises which are covered by collective bargaining.

VPS can, depending on context, represent a shift to upwards and/or downwards wage flexibility. Reflecting the productivity dimension of wages, successful as well as struggling companies are increasingly looking to tie wages more closely to performance through different forms of VPS. These may operate at individual, team, workplace or company levels (TN0104201S). Such forms of incentivisation and reward might merely displace traditional pay systems, such as seniority pay, in order to more closely align employee earnings to company performance or ability to pay. VPS may also be concerned with employee motivation and involve payments on top of what can be secured conventionally.

About the study

European-level competence for the regulation of pay is generally limited to the important area of discrimination and equal pay, although a generic concern arises for wage levels with regard to the dignity of labour – see, for example, Article 31 of the Charter of Fundamental Rights of the European Union. There is also a growing interest in financial participation, which is one form of wage flexibility, on grounds of employee involvement and performance. On this matter, see for example the so-called ‘PEPPER’ reports concerning the ‘promotion of employee participation in profits and enterprise results’, which contributed to a European Commission Communication in 2002 (COM(2002) 364 final). However, the primary focus of pay regulation and, in particular, wage flexibility is at sectoral and company level in most Member States, and this was the focus of the present study.

This research gathered information through the EIRO network of national centres in the 27 EU Member States and Norway, based on a questionnaire distributed in November 2007. It examined the principal patterns of wage flexibility, underpinning rationales and views of the social partners, and the role of and implications for collective bargaining. Wage flexibility is broadly defined to encompass the nature of pay regulation under collective bargaining, in particular tendencies to decentralisation and also to specific schemes that deliver pay variation in practice. Hence, the key dimensions are as follows.

  • Base pay and variable pay: Flexibility in base pay essentially refers to the scope for supplementary bargaining, and the possibility of derogation from sector wage norms, under multi-level arrangements. It also includes ‘cafeteria’-type systems that provide employees a degree of choice over pay and benefits. Variable pay includes schemes for additional payments such as individual or team performance-based pay, payments by results, and financial participation. Some forms of variable pay, such as appraisal-set pay, might affect the distribution of, and be incorporated into, base pay; others, such as bonuses, may not.
  • Upwards and downwards flexibility: Base pay might be ‘downwardly flexible’ in circumstances where companies gain exemptions from higher-level wage agreements; alternatively, supplementary bargaining over base pay might facilitate higher wages on top of that agreed at sectoral level. Variable pay, by definition, is likely to fluctuate up and down.

The survey focused on two sectors, manufacturing and retail banking, which are of economic and employment importance in most countries. Respondents were able to choose a major manufacturing subsector where relevant. Austria, Belgium and Luxembourg focused on metalworking; Cyprus and Romania on food and beverages; the Czech Republic on electrical engineering; and Latvia on metals, and food and beverages. The focus on manufacturing and banking enabled a broad yet systematic comparison of developments across countries in terms of industry and services. It also enables a comparison of wage flexibility where it concerns blue-collar and often mainly male employees, and regarding white-collar employment where women usually form a majority of the workforce (Table 1). Chapter 1 of this report explores the regulation of wage flexibility by collective bargaining. Chapter 2 examines specific developments in terms of VPS. The third chapter reviews the perspectives of employer organisations and trade unions towards wage flexibility. The final chapter makes concluding remarks.

Table 1: Female share of workforce (%)
% of women Manufacturing Banking
20%–29% AT, DE, EE, FR, IE, IT, LV, MT, NL, NO, SE, UK -
30%–39% DK, FI, PL, SI, SK ES
40%–49% BG, HU, LT, PT IT, MT, LU, NL, PT
50%–59% CZ, RO AT, BE, CY, DE, DK, FR, IE, NO, SE, UK
60%–69% - CZ, LT, PL, SK
70%–79% - BG, EE, HU, SI
80%–89% - FI
Mean (%) 32 59

Notes: See Annex for list of country codes. No data for BE, CY, EL, ES, LU (manufacturing); EL, LV, RO (banking). BG, DE, EE, HU, IE, LT, LU, MT, PL and SI report on financial intermediation rather than banking.

Source: EIRO national centres


1 – Wage flexibility and collective bargaining

This chapter examines the arrangements for wage regulation and the scope that these offer for wage flexibility. It begins with a focus on multi-employer bargaining systems. Particular attention is paid to how far these systems make opportunities available for supplementary negotiations at company level. Under multi-employer bargaining, scope for wage flexibility at company level can be governed by provisions relating to: a) exemption from the application of sector-wide wage norms at company level; b) additional bargaining at company level; and c) a framework to be applied to the implementation of VPS within companies. The regulation of VPS by sectoral agreements is thus also specifically considered in this section, as is the incidence of ‘downwards’ wage flexibility under multi-employer bargaining. The second part looks at single-employer bargaining arrangements, focusing on the regulation of VPS by company-level collective agreements. This chapter concludes with an examination of how far the gender dimension to wage flexibility is addressed by collective agreements, and to what extent there is provision under collective bargaining for individual employee choice within payments systems.

In general, and by way of contextualisation, coverage of collective bargaining – and therefore also its capacity to regulate forms of wage flexibility – is markedly higher under multi-employer than single-employer bargaining, as Table 2 indicates. The table shows the bargaining arrangements that the EIRO national centres reported for the two economic sectors under study. In 17 countries multi-employer arrangements characterise both sectors, while single employer arrangements characterise both sectors in four countries. In two countries – Estonia and Lithuania – single-employer bargaining is present in manufacturing, but no collective bargaining exists in banking. Five countries report multi-employer arrangements in one sector and single-employer bargaining in the other; of these, Cyprus and Luxembourg report multi-employer bargaining in banking and single-employer bargaining in manufacturing, while Romania reports single-employer bargaining in the former and multi-employer bargaining in the latter. Two countries with single-employer bargaining in banking – Bulgaria and Latvia – reported on both types of arrangement within manufacturing: these apply in different segments of the sector.

Table 2: Collective bargaining arrangements and coverage of employees in the two sectors studied
Country Manufacturing Banking
  Form Coverage (%) Form Coverage (%)
AT MEB 100% MEB 100%
BE MEB 90% MEB 90%
BG MEB (SEB in two subsectors) 35%–40% SEB n.d.
CY SEB n.d. MEB 95% or more
CZ MEB 8%–10% (electrical engineering) MEB 70%*
DE MEB c. 70% west; c. 45% east MEB 89%* west; c. 80%* east
DK MEB 80% MEB 90%
EE SEB n.d. None 0%
EL MEB n.d. MEB n.d.
ES MEB 90% MEB 100%
FI MEB 90% MEB 90%
FR MEB 99% MEB 99%*
HU MEB n.d. MEB n.d.
IE MEB 100% MEB 100%
IT SEB 30% or more None 0
LT SEB n.d. MEB 80%
LU SEB (MEB in two subsectors) 14% MEB n.d.
LV SEB n.d. SEB n.d.
MT MEB (SEB in MNCs) 80% or more MEB (SEB in large banks) 80% or more
NL MEB 67% MEB 84%
NO SEB 14% SEB 6% (all services)
PL MEB 98% MEB (SEB in large banks) 97%
PT MEB 100% SEB n.d.
RO MEB 90% or more MEB 97%
SE MEB 95% or more MEB 95% or more
SI MEB 28% MEB 100%
SK SEB 28% SEB 43%*
UK MEB 100% MEB 100%

Notes: MEB = multi-employer bargaining; SEB = single-employer bargaining. MNCs = multinational corporations. * = financial intermediation; n.d. = no data supplied.

Source: EIRO national centres

Wage flexibility under multi-employer bargaining

Among the countries and economic sectors with multi-employer bargaining, a broad distinction can be drawn according to: a) whether scope exists for additional negotiations at company level which impact on basic wages and, if so, b) the relative weight of the sectoral and company levels in determining basic wages. Overall, three main groups can be identified. The first group is where basic wages are solely or primarily the subject of sectoral-level negotiations. This group includes, for both sectors under study, Austria, Finland, Germany and the Netherlands. Four further countries – Cyprus, Luxembourg, Portugal and Spain – also come under this group in respect of banking only, although in Portugal and Spain it should be noted that significant unilateral wage determination by management applies at company level. Among the second group, wage negotiations exist at both levels but, to varying degrees, the sector weighs more strongly than the company level. This group covers both of the economic sectors studied in Greece, Ireland – by an intersectoral agreement – Italy and Slovenia; it also covers banking in Slovakia and manufacturing in Belgium, Portugal and Spain. Under the multi-tier arrangements of the third group, to varying extents the company level weighs more strongly than the sector in negotiating basic wages. This group includes both of the sectors under study in the Czech Republic, Denmark, France, Norway and Sweden, as well as banking in Belgium and manufacturing in Bulgaria, Latvia, Romania and Slovakia.

Scope for supplementary negotiations on base pay at company level

Of the countries and sectors where scope exists for supplementary wage negotiations at company level, those where a sectoral or intersectoral agreement weighs more strongly tend to specify the scope for company negotiations relatively precisely. Under Ireland’s most recent intersectoral agreement, scope was provided for productivity or flexibility-enhancing wage agreements at company level, but ‘cost increasing’ settlements were prohibited. The same condition applied under the previous Irish intersectoral agreement. Company wage negotiations in both of the sectors studied in Italy are, in line with the procedural provisions of the 1993 intersectoral agreement, focused on productivity or performance-related increases. Consistent with this, a 2007 report from the National Council for Economic Affairs and Labour (Consiglio Nazionale dell’Economia e del Lavoro, CNEL) (IT0801029I) finds that the most common parameters used in company negotiations are productivity, profitability, quality and attendance. The productivity parameters frame the majority (60%) of negotiations in manufacturing, while profitability criteria are used almost universally in negotiations in banking. During the recent negotiations to renew the metalworking agreement, trade unions deemed unacceptable employer proposals for an industry-level trade-off between productivity and wages, since this contravened the terms of the 1993 intersectoral agreement (IT0704019I). Meanwhile, Belgium’s metalworking agreement provides an opening for a proportion of the intersectoral wage increase to be subject to company negotiations. Conversely, in Spain’s metalworking sector the practice of absorption constrains the impact of company wage negotiations. Disputes over the practice arose in several companies in the Barcelona province following the conclusion of the most recent provincial agreement.

Among countries and sectors where the company agreements weigh more strongly, scope for company negotiations tends to be specified by sectoral agreements in more general or open-ended terms. The agreements in banking in the Czech Republic and France stand out in terms of open-endedness: these sectoral agreements only stipulate increases in minimum wages (since 2000 in France), with general wage levels and increases being determined in company negotiations. Belgium’s private banks agreement specifies increases in the overall wage ‘pot’, but not minimum wage rates or the distribution of increases within individual banks – both of which are determined in company negotiations. Similarly, the banking sector agreement in Norway specifies the increase, but wage rates are determined in companies through one of two mechanisms of individual pay-setting.

Agreements in Norway’s manufacturing sector are minimum wage agreements, which also specify minimum increases. The presumption is made that supplementary company wage negotiations will occur, governed by four criteria: financial situation of the enterprise, productivity, business prospects and the labour market situation. The situation in Denmark’s manufacturing sector is similar. In both sectors in Sweden, the agreements specify minimum wage levels and minimum increases; in the case of banking, actual wage rates are determined in companies through an individual pay-setting mechanism. The effect of the agreements in constraining the scope for company negotiations is greater in manufacturing, particularly for blue-collar workers, than in banking. In manufacturing sectors in Bulgaria, the Czech Republic, Latvia and Romania, agreements specify minimum wages and, in two instances – the Czech Republic and Latvia – other principles governing remuneration to be adopted in further company negotiations. In Slovakia, agreements in the engineering and electrical sectors go further, specifying average increases in the wage bill as well as minimum wages.

In terms of country and sector patterns, the southern countries are relatively more prominent in the group where the sectoral agreement weighs more strongly in determining basic wages. Conversely, three of the Nordic countries feature among the group where company agreements weigh more strongly. Also prominent in the group where sectoral agreements predominate is the banking sector in several of the 15 EU Member States (EU15) before EU enlargement in 2004. In contrast, manufacturing sectors among the eastern European new Member States (NMS), which joined the EU in 2004 and 2007, feature more strongly in this group; banking in the NMS is characterised either by single-employer bargaining or no bargaining arrangements at all.

Variation was also apparent by type and size of company. In some countries it was reported that the incidence of supplementary company negotiations was highest among large companies, including foreign-owned multinational corporations and – in the case of the eastern European NMS – former state-owned enterprises. The countries concerned included Bulgaria, Italy, Latvia and Portugal, mainly with regard to the manufacturing sector. In both Norway and Sweden, company-level negotiations are generalised, while the incidence in Italy has been rising. Company negotiations were also reported to be widespread in Slovakia’s manufacturing sector. In Ireland, the incidence of ‘above the norm’ company agreements in recent years has been sectorally skewed, reflecting both tight labour market conditions as well as productivity considerations.

It is worth noting that ‘wage drift’ can arise not only from supplementary company negotiations, but also from voluntary company-specific pay supplements determined by the employer. Wage drift refers to the difference between the average level of wages actually paid and official wage rates; bonus payments, for example, can lead to a drift away from the standard rate. Hence, the issue is relevant to those countries which have no provision for supplementary wage negotiations at company level as well as those that do. Data across all countries are, however, incomplete. Among the ‘single-tier’ group of countries – where basic wages are solely or primarily the subject of sectoral-level negotiations – wage drift in Austria was reported to be rising in metalworking but stable in banking. Increasing wage drift in metalworking reflects the replacement of piecework schemes, which had to guarantee average pay at a level of 30% above sectoral minimum rates, by fixed monthly pay arrangements which consolidate the 30% premium. In Germany, on the other hand, wage drift was reported to be declining in both sectors as voluntary company pay supplements are being offset against sectoral increases. The Netherlands reported a stable picture in this regard.

Among the group of countries and sectors where scope for company negotiations is more closely specified and the sectoral agreement weighs more heavily, wage drift tends to be relatively low to stable. In Ireland, it was reported that no significant wage drift has emerged since the first intersectoral agreement was concluded in 1987, with the exception of 2000–2001 when the economy was at the height of its boom. Wage drift was reported to be comparatively low in magnitude and stable in both sectors in Italy. In Spain’s manufacturing sector, however, wage drift is of substantial magnitude, although stable. Among the third group of countries, where sectoral agreements are more open-ended and the company level features more strongly, wage drift is more likely to have increased. It was reported to be rising in the manufacturing sectors in those eastern European NMS for which data are available – Bulgaria and the Czech Republic. It is relatively limited in Denmark’s manufacturing sector. In Norway, it is substantial in the manufacturing sector, but stable. In Portugal, it is substantial in both sectors, increasing in banking but decreasing in manufacturing.

Practice of ‘downwards’ wage flexibility

Downwards flexibility of wages, in either real or nominal terms, can occur under multi-employer bargaining arrangements in three main ways. The first, reflecting generally adverse economic conditions, is where the wage increases specified under sectoral agreements are below the rise in the cost of living, and therefore do not protect purchasing power. The second, reflecting the possibility that particular companies may face economic and/or financial difficulties, is the provision of opt-out or hardship clauses from the wage norms established by sectoral agreements. The third, likely to arise from the way in which harsh economic conditions impact on certain groups of companies, is unauthorised deviations below the norms of sectoral wage agreements.

The first possibility has not been widespread in recent years. The few reported instances of wage agreements providing for increases below the rise in the cost of living were mainly found among the first, single-tier, group of countries or sectors identified above. In Austria’s banking sector, basic wage agreements provided for increases below inflation in several recent years, offset by growth in non-consolidated – and frequently non-negotiated – bonuses and other premiums. A national wage freeze occurred in 2004 and 2005 in the Netherlands, which by blocking general pay increases also aimed to encourage negotiations over VPS. Payment of the 2007 wage increase negotiated in Germany’s metalworking sector was postponed for four months because of the economic situation (DE0706019I). Elsewhere, the widespread practice of absorption in both sectors in Spain means that company-originated improvements in pay – either negotiated or unilaterally accorded by management, and which may take the form of VPS – often have the effect of neutralising sectoral wage increases, thereby suppressing real wage growth. The 2007 reinstatement of the wage revision clause in the banking sector agreement, which had been rescinded in 1992, may mitigate this effect (ES0710039I). The clause compensates for loss of purchasing power if inflation rises above the level anticipated. Greece presents a somewhat different development. In manufacturing, provision is made for pay increases below those specified in national sectoral agreements in seven specific geographical areas which are grappling with problems of industrial decline and rising unemployment. Such provision has been concluded under Territorial Employment Pacts in the relevant areas.

Clauses which provide for derogations from the wage norms stipulated in sectoral or intersectoral agreements are found in agreements in manufacturing in nine of the 22 countries concerned, as shown in Table 3. Variously known as hardship, opt-out or dispensation clauses, they are less widespread in agreements in the banking sector, being found in such agreements in just four countries. The sectoral difference reflects the extent and intensity of international competition and the ongoing restructuring that this is prompting in manufacturing.

Table 3: Scope for derogations from wage norms established by sectoral agreements
Country Manufacturing/subsector Banking
AT No No
BE Yes – opt-out clause (metals) No
BG Yes – hardship clause N/A
CY N/A No
CZ Yes – hardship clause Yes – general clause
DE Yes – hardship clause (metals); opening clauses on safeguarding / creating jobs (chemicals, metals) No
DK No No
EL No No
ES Yes – opt-out clause No
FI Yes – hardship clause (chemicals)  
FR No No
IE Yes – ‘inability to pay’ clause (intersectoral) Yes – ‘inability to pay’ clause (intersectoral)
IT No No
LU N/A No
LV No N/A
NL Yes – dispensation clause Yes – dispensation clause
NO No No
PT No No
RO No N/A
SE No No
SI Yes – hardship clause Yes – hardship clause
SK No No

Note: N/A = not available. No sectoral agreements exist in EE, HU, LT, MT, PL or UK.

Source: EIRO national centres

Also notable is that, with the exception of Austria, agreements in manufacturing in the first, single-tier, group of countries are most likely to include clauses enabling such derogation. The absence of second-tier negotiations over wages in these countries serves to heighten the need for such clauses. Conversely, manufacturing agreements in the third group of countries, where greater emphasis is placed on the company level in wage negotiations, are least likely to contain derogation clauses.

A common feature of such clauses is that their use has to be authorised by the sectoral or intersectoral social partners. In some cases, approval from the labour ministry is also required. The opt-out clause in Belgium’s metalworking agreement is available to companies undergoing restructuring. In Bulgaria, some manufacturing sector agreements allow companies with a deteriorating economic position to negotiate basic wage levels below those specified in the sectoral agreement. The electrical engineering agreement’s hardship clause in the Czech Republic can be applied in companies undergoing fundamental structural change. In banking, however, a general clause makes the implementation of cost-of-living based wage increases within individual banks subject to a minimum profit ratio (‘ability to pay’). In Germany, opening clauses in the chemicals and metalworking agreements allow for reductions in working time, with proportional wage reductions, in order to prevent relocation or safeguard jobs (chemicals) or enable companies to overcome unfavourable economic conditions (metals). These clauses can be implemented by management and works councils without higher-level authorisation. In metalworking, the 2004 Pforzheimer agreement introduced scope for supplementary company agreements to improve competitiveness, innovation capacity and investment potential, with the aim of safeguarding existing jobs and promoting new ones (DE0403203F). These agreements have to be authorised by the sectoral social partners. Legal provisions under Spain’s Workers Statute permit multi-employer agreements to include opt-out clauses for companies in economic difficulties, and these are found in most manufacturing agreements, but not banking. In Finland, the chemicals sector recently became the first sector to introduce a hardship clause in its agreement for companies in economic difficulties.

Concerning countries where possibilities for derogation cover both sectors, Ireland’s intersectoral agreement contains an ‘inability to pay’ clause, which can be applied where a company claims to be in competitive difficulties. Cases not resolved between the company and trade unions can be referred to the Labour Relations Commission (LRC) for conciliation; subsequently – if necessary – the LRC can appoint an independent assessor to draw up a recommendation. Ultimately, cases can go to the Labour Court for decision. Scope also exists under certain conditions for companies to implement cost-offsetting measures when implementing pay increases stipulated under the national agreement. On occasion, cases involving cost-offsetting measures have become the subject of industrial disputes. In the Netherlands, virtually all sectoral agreements contain a dispensation clause, but the rare occasions on which these have been used have involved working time rather than wage derogations. Implementation has to be authorised by the Ministry of Social Affairs and Employment (Ministerie van Sociale Zaken en Werkgelegenheid, SZW) as well as by the social partners. Temporary derogation from wage clauses, in order to safeguard jobs in particular companies, is possible under agreements in both sectors in Slovenia.

Data on take-up of these clauses is patchy. Use of opening and hardship clauses in manufacturing in Germany is reported to be widespread, with 31% of cases in the west and slightly more (37%) in the east affecting wage payments. In the 12 months after the 2003 introduction of Ireland’s ‘inability to pay’ clause, 60 cases were notified to the LRC; the majority were in manufacturing, and this feature has continued over subsequent years. In the Netherlands, as noted above, dispensation clauses are seldom invoked. Likewise, data on the extent of any unauthorised deviation from the wage norms specified in sectoral agreements, which was identified as the third possibility for downwards wage flexibility, is scarce. Most of the EIRO national centres reported that no data were available, and some – such as Greece and Portugal – referred to the particular difficulties posed by the role of the informal economy. In Germany, the 2004–2005 survey of works councils carried out by the Institute for Economic and Social Research (Wirtschafts- und Sozialwissenschaftliches Institut, WSI) found that 10% of establishments with more than 20 employees did not comply with wage standards specified in the sectoral agreement. The fact that these are all establishments with works councils suggests that the councils must, at least, have tacitly accepted such unauthorised derogation.

Regulation of variable payments systems in sectoral agreements

The extent of any regulation of VPS, and the form such regulation takes, varies considerably. Three broad situations can be identified, which tend to cross-cut the country and sector groupings identified above in respect of scope for company-level negotiations on basic wages. Under the first, no provisions regulating VPS are found in sectoral agreements. This situation applies to both of the sectors under study in the Czech Republic, Greece, Italy – where, under the 1993 intersectoral agreement, negotiations over VPS fall within the competence of the company level – and the Netherlands – where works councils have co-determination rights over some types of VPS. It also applies in the banking sector in Cyprus and manufacturing in Latvia. Under the second situation, provisions in sectoral agreements are essentially enabling clauses. Such clauses enable the use of specified payments schemes at company level, but do not set out any substantive dimensions or procedural rules – including whether their use should be the subject of negotiation. This situation is only found among the eastern European NMS, and includes both sectors in Slovenia, as well as manufacturing in Bulgaria, Romania and Slovakia. Under the third situation, which applies in all of the remaining countries and sectors under study, procedural rules and, less frequently, substantive aspects of various types of VPS are specified under sectoral agreements. Among the countries concerned, distinct differences arise between the two sectors.

In manufacturing, procedural regulations in sectoral agreements most frequently apply to piecework and productivity bonus schemes, but other types of VPS can also be addressed by sectoral agreements. Substantive provisions concerning VPS are less common. Such regulations are most widespread among the first, single-tier, group of countries and sectors identified above, with the addition of three further Nordic countries. Procedural regulations can take either the form of a sector framework, or an opening for company negotiation to implement such schemes. In Austria, the metalworking agreement, for example, specifies guidelines for the performance standards to be used in piecework schemes, but also an average earnings guarantee of 30% above minimum sector rates. The agreement further stipulates a ‘distribution option’, which has been made available in various years since 1997 and which enables management and works councils to conclude a works agreement to distribute a certain proportion of the increase in the wage bill according to performance criteria.

Agreements in some manufacturing sectors in Germany, for instance food and beverages, and chemicals, make annual bonus payments contingent on company performance. The sums involved and their distribution are jointly decided between management and works councils. In Spain, the national agreement in chemicals provides that, where VPS are collective, they must be subject to company-level collective negotiations with worker representatives, and places a 10% maximum limit on the proportion of earnings accounted for by variable elements. Under metalworking’s provincial agreements, basic parameters of piecework and productivity bonus schemes are regulated, but not their substantive aspect. In Finland, procedural rules governing piecework and productivity bonuses also feature in manufacturing sector agreements.

Agreements in Denmark’s manufacturing sector have openings for company negotiations on different types of output-based and performance-based systems and, more recently, competency-based payments. Norway’s metalworking agreement has longstanding openings for company negotiations on piecework, productivity bonuses and – more recently – profit-sharing schemes. An opening also exists for wage differentiation according to individual workers’ skills and knowledge (‘competence’ pay). In addition to these procedural rules, the agreement contains substantive guarantees on minimum wage levels and minimum pay increases, which place threshold constraints on VPS arrangements. Similar arrangements apply under Sweden’s metalworking agreement. Agreements in Portugal’s manufacturing subsectors are unusual in specifying substantive aspects of piecework and productivity bonus schemes, but without any accompanying procedural rules on the parameters of such schemes.

In banking, any regulation in sectoral agreements tends to focus on individual performance-related pay. Again, substantive provision is less common than procedural; similarly, too, such regulations tend to be more prominent among the first, single-tier, group of countries and sectors and the Nordic countries. Austria’s savings bank agreement specifies that up to 15% of earnings can be variable, depending on a mix of company and individual performance. The 2007 agreement also replaces the traditional seniority system with an appraisal-based competency progression system. The commercial banks agreement in Germany states that up to 8% of salary can depend on individual or group-based performance criteria (DE0608029I). However, the employer organisation and trade union in cooperative banking have been unable to resolve their differences over the proportion of salary that might vary, and as a result failed to conclude a new agreement due in 2006. In France, the 2003 saving and mutual banks agreement introduced a maximum of 10% of salary which is dependent on individual performance – qualitative as well as quantitative. In Norway, the sectoral agreement establishes that companies shall apply one of two models for annual, individual pay adjustments, both of which involve forms of appraisal. In Sweden, the sectoral agreement also provides rules on the system of individual, appraisal-based, annual pay adjustments. Slovakia’s sectoral agreement permits the use of individual performance-related pay, but stipulates that schemes must be subject to company agreement. Portugal’s banking sector agreement, like its manufacturing counterparts, specifies substantive aspects such as the proportion of merit promotions within grades and the applicable pay amounts. However, it does not include procedural parameters relating, for example, to the appraisal schemes to be used. In contrast, the commercial banks agreement in Spain contains procedural rules and substantive formulae for profit-sharing payments.

In a few countries, including Belgium and Ireland, provisions in intersectoral agreements apply in both of the sectors under study. Table 4 outlines recent developments in these two Member States along with those in five other countries, as reported by the EIRO national centres. Where recent developments do not reach across both sectors, they seem more likely to involve banking than manufacturing. Banking sector agreements in Finland have traditionally regulated the proportion of earnings available under different VPS arrangements.

Table 4: Examples of recent developments in regulation of VPS by sectoral or intersectoral agreements
Country Collective agreement Development
AT Saving banks, 2005 Specifies that an element of pay, up to a maximum of 15%, should depend on company and individual performance, respectively; replaces seniority with a competence-based system.
Metalworking, 2005 Introduces a compulsory ‘distribution pot’ from 2010, providing for distribution of a proportion of the total wage bill according to: work performance; addressing low pay; and the equal treatment of male and female workers.
BE Intersectoral, 2007 Provides for collective bonus payments according to objectively measurable (not only financial) results. A bonus payment of €2,200 maximum a year is exempt from tax for employees and from fiscal charges for employers.
DE Commerical and cooperative banks, 2006 Stipulates that a maximum of 8% of individual salary can depend on individual and/or group-based performance criteria.
FI Private sector agreements, 2007 Establishes space for company negotiations over VPS, which are normally 4%–7% of the overall pay increase and were predicted to cover one quarter of the private sector workforce in 2008.
FR Savings and provident banks, 2003 Specifies that a maximum of 10% of individual salary can depend on individual performance – quantitative and qualitative.
IE Intersectoral, 2006 Includes voluntary guidelines encouraging the introduction of financial participation or gainsharing in companies.
NO Banking, 2000 Features a ‘pay interview’ model as an alternative to the existing individual pay assessment mechanism. Annual pay revision is determined by the employer on the basis of a pay interview with the individual employee. Trade union agreement is required to implement the model, but the union has no role in the pay interview and revision.

Source: EIRO national centres

Wage flexibility under single-employer bargaining

Among the countries and sectors characterised by single-employer bargaining arrangements, few instances emerge of ‘downwards’ wage flexibility such as pay freezes or cuts. Regulation of VPS by company collective agreements is more common. This is more likely to involve procedural rules and address substantive dimensions in Malta and the UK, as well as the manufacturing sector in Cyprus, than among the eastern European NMS and sectors with single-employer arrangements.

Although in principle the outcomes of company wage negotiations are likely to reflect the economic conditions which companies face, reported instances of recent ‘downwards’ wage flexibility were limited and confined to manufacturing. In Estonia’s and Latvia’s manufacturing sectors, wage freezes or settlements below inflation were reported to have occurred among companies facing difficult economic conditions, but the companies concerned were not covered by collective bargaining. There were no known cases among companies with collective agreements. In the UK, the Engineering Employers’ Federation (EEF), which operates in the sectors of manufacturing and engineering and which regularly monitors wage settlements, reported that 5% of those awarded in the final quarter of 2006 involved a pay freeze. No information is available to enable a breakdown according to collective bargaining coverage. Companies in Malta are required to implement statutory annual cost-of-living wage increases. However, a derogation procedure can be invoked by companies facing economic difficulties, which requires application to the labour ministry. Widespread recent ‘downwards’ wage flexibility in Hungary relates to macroeconomic conditions rather than the competitive circumstances of particular sectors or companies. Net wage growth arising from negotiated and unilaterally-imposed settlements during 2007 has generally been below the rise in the cost of living – a development induced by the 2006 austerity package (HU0708029I), which sharply raised taxation. A rather different effect of macroeconomic conditions, in the shape of labour shortages which have driven rapid wage increments since EU accession, was mentioned in reports from the Baltic countries and Poland.

In terms of regulation of VPS under company agreements, this is generally limited in incidence and nature among the eastern European NMS concerned, while being comparatively more extensive in Cyprus, Malta and the UK. In the manufacturing sector, piecework and productivity bonuses are more likely to be regulated by collective agreements, while in banking the focus of any regulation is on individual, appraisal-based pay. Table 5 provides some examples.

Table 5: Examples of recent developments in regulation of VPS by company agreements
Country Sector/subsector Development
CY Food and beverages manufacture The current three-year agreement at Cyprus Wine Company (Κυπριακή Εταιρία Οίνων, KEO) commits management and trade unions to the introduction of a commission-based remuneration system for sales and distribution staff.
EE Textiles Some company agreements include both procedural provisions governing the broad parameters of collective bonus and individual, appraisal-based schemes, and also substantive aspects, such as the scale of payments according to different levels of performance.
HU Manufacturing A 2006–2007 study of company agreements identified a few cases where agreements specify in some detail the procedural rules and/or substantive dimensions of collective bonus schemes.
RO Banking The agreement at Raiffeisen Bank specifies that the fund for the annual collective bonus and commission payments shall not exceed 12% of the wage bill.
UK Banking A 2005–2006 study of major retail banks found that under the individual, appraisal-based performance schemes which prevail, trade unions are effective in securing pay increases which at least match inflation for the great majority of staff. Management-determined company performance bonuses have, however, escalated in recent years.
Machinery and equipment manufacture The same study also examined developments in several machinery and equipment companies. Piecework schemes, which were subject to collective regulation, have largely disappeared in recent years. Company performance bonus and profit-sharing schemes have been recently introduced, usually unilaterally determined by management.

Source: EIRO national centres

In Bulgaria, Hungary, Latvia and in the manufacturing sector in Lithuania, any regulation of VPS is largely confined to enabling clauses which essentially specify the possible VPS which may be used. In Lithuania, such enabling provisions for bonus and incentive payments are found in some manufacturing company agreements. Regulation of VPS under company agreements in either of the two sectors under study was reported not to be widespread in Latvia; where it does occur, enabling clauses are the most likely form. The use of various VPS is enabled by company agreements in Bulgaria’s banks. In Hungary, company wage agreements usually specify the increase in the pay bill and/or minimum wages. Trade unions accept management’s right to determine individual wages within this frame, including bonuses and merit awards. Company agreements also specify wage systems, but not which ones should apply to which workforce groups. The types of VPS which can be given are enumerated, but beyond that their implementation and substantive determination is the prerogative of management. The exception is performance norms for piecework and other payments-by-results schemes, which are regulated by company agreements and also addressed by the Hungarian Labour Code. Similarly, in Poland, procedural aspects of bonus and individual, appraisal-based, performance schemes are regulated in some company agreements, but not their substantive dimensions. In Estonia’s textiles sector, several company agreements contain procedural provisions on piecework and other bonus schemes, and in a few instances appraisal-based arrangements. These provisions specify basic parameters such as the criteria to be applied. The magnitude of the payments involved is also addressed in some agreements.

Among larger companies in Cyprus’s manufacturing sector, the implementation of VPS tends to be negotiated. In Malta too, company agreements address both the procedural and substantive dimensions of the different types of VPS used. In the UK, the procedural provisions of individual, appraisal-based performance schemes in the major retail banks are extensively regulated by collective agreements. The size of the overall wage ‘pot’ available for annual increases is also negotiated, and normally the parameters of its distribution among staff. However local bonuses, which account for a significant proportion of earnings (see Chapter 2), are more often subject to consultation than substantive negotiation. In manufacturing, both procedural and substantive aspects of piecework schemes – which are in decline – and other productivity bonuses tend to be regulated by company agreements, where collective bargaining occurs. In contrast, aggregate company performance bonuses and profit-sharing arrangements are far less likely to be the focus of negotiation in either sector.

Industrial disputes featuring VPS were reported by two EIRO national centres. In one of Poland’s automotive companies, bonus payments were recently increased as part of the settlement of a wage dispute; while, in other companies in the industry, trade unions are demanding enhanced bonus payments to reflect improving business conditions and performance. In the UK, two major retail banks faced industrial action in 2005, which took effect in one case and was threatened through a ballot in the other. The protests were due to zero annual pay awards for substantial numbers of staff deemed to be above the ‘market rate’ under the banks’ respective individualised payments schemes (UK0505106F).

Collective bargaining and the gender dimension to wage flexibility

The growth of VPS in particular can have implications for gender pay equity, for example concerning access to schemes by different occupational groups and part-time workers, and in terms of the criteria used to assess performance contribution. However, the gender implications and outcomes of wage flexibility seem to be rarely explicitly addressed in collective agreements, whether under multi-employer or single-employer bargaining, or in either of the economic sectors under study, despite differences in the gender composition of the workforce (see Table 1). Wider initiatives to address the gender pay gap were reported by the EIRO national centres, such as France’s 2004 intersectoral agreement on gender equality and consequent sectoral and company agreements (FR0404104F), which could have a bearing on negotiations over forms of wage flexibility. Despite the increasing number of sectoral and company agreements on gender equality, the French national centre identified a growing recognition that women are still relatively disadvantaged in terms of VPS, in part because of the performance criteria used. A second example is Denmark’s 2007 legislation requiring the compilation of gender wage statistics. The Confederation of Danish Employers (Dansk Arbejdsgiverforening, DA) and the Danish Confederation of Trade Unions (Landsorganisationen i Danmark, LO) have cooperated with the government in the preparation of a guide for companies, although the implications of VPS and other forms of wage flexibility are not specifically addressed. Trade unions are pressing for revisions to the legislation, to enhance its application within companies.

In Austria, gender pay equity is specified as one of the parameters governing the mandatory ‘distribution pot’ to be introduced in 2010 under the metalworking agreement. In the Netherlands, debate has focused on the extent to which women are concentrated in organisations with fixed pay scales, and on the differential access to some forms of VPS – such as individual performance pay – between men and women within particular sectors. The bipartite Labour Foundation (Stichting van de Arbeid, STAR) and the Council for Labour Policy in the Public Sector (Raad voor het Overheidspersoneelsbeleid, ROP) have both issued a recommendation on gender neutrality in VPS. Dutch trade unions are also active in other ways, participating in the development of a gender wage monitoring initiative, which extends to some other countries, and which includes VPS. Debate among trade unions in Norway’s banking sector has focused on the gender implications of the two alternative models of individual pay-setting which are available. Trade union awareness of the gender dimension was reported elsewhere too. In the Czech Republic, the Czech-Moravian Confederation of Trade Unions (Českomoravská konfederace odborových svazů, ČMKOS) provides guidance for negotiators on gender issues, including variable elements of pay. In Denmark, the Financial Services’ Union (Finansforbundet) has, after several years, recently convinced employers to give the trade union access to gender-related wage data as part of the pay bargaining round. The trade union confederations in Finland are monitoring the possible gender effect of a growing variable element in pay systems. In UK banking, trade unions have been concerned to ensure that procedures governing individualised pay determination restrict the potential for gender, age and other bias in appraisals. The main banking union, Amicus, has carried out joint equal pay audits with several leading banks, to investigate the effects of individualised payments schemes.

Collective bargaining and employee choice over pay

In a recent development in a number of European countries, collective agreements in some sectors and/or companies have introduced scope for individual employees to exercise choice over the composition of their remuneration package. For example, workers might trade an element of wages against either deferred income, in the form of pension contributions, or working time, in the form of regular working hours or holidays. Reported instances were provided by the EIRO national centres in Denmark, Finland, France, Germany, the Netherlands, Spain, Sweden and the UK.

Scope for choice over elements of the pay package was introduced in Denmark’s banking agreement in 2001. The provisions involved are determined in local negotiations, and vary from company to company. In manufacturing, the 2007 agreement introduces a ‘free-choice’ account under which 1% of salary can be traded between salary, time-off or pension contributions. In Germany, over 400 collective agreements provide for schemes where, most commonly, an element of the collectively agreed wage can be converted into pension contributions. The possibility for conversion tends to be limited to annual bonus payments and other remuneration items, and therefore excludes the basic salary. Such schemes under the agreements in chemicals and metalworking permit the conversion of a maximum of 4% of earnings. In the Netherlands, a 1999 national Labour Foundation agreement promoted ‘tailored employment conditions’. Consequently, a number of sectors have concluded agreements providing scope for trade-offs between an element of wages and pension contributions and/or working time. Individual companies concluding such agreements include Philips and ABN-AMRO, which is currently being merged into the three-bank consortium which acquired the company in 2007. In both Finland and Sweden, sectoral agreements authorise the negotiation of trade-offs involving an element of wages at company level.

Scope for such trade-offs in France exists under legal regulations linking statutory provisions which respectively govern time savings accounts (compte épargne temps, CET) and employee savings schemes in respect of profit sharing and employee share ownership. These schemes include the Company Savings Scheme (Plan d’épargne entreprise, PEE) and Collective Pension Savings Plan (Plan d’épargne pour la retraite collectif, PERCO). In addition, some company agreements on time savings accounts enable employees to be paid instead of taking rest days (Réduction du temps de travail, RTT) introduced to accommodate the transition to the 35-hour working week. An agreement at the bank Société Générale is an example. In Spain, the multinational financial services group BBVA introduced a flexible remuneration package in 2007 in consultation with trade unions. This package opens up a maximum of 15% of salary for choice between pay, pension contributions and a range of products and services including shares in the bank, childcare vouchers and medical insurance. In the UK, ‘total reward’ packages involving flexible trade-offs for employees between pay, pension contributions and other benefits are being adopted by some larger employers. In a Chartered Institute of Personnel and Development (CIPD) survey of companies with 5,000 or more employees, 7% of those in manufacturing and 11% of those in services reported that they had implemented flexible remuneration packages. It is unclear how far the introduction of such packages has been negotiated with trade unions but, where the unions are recognised, they are likely to have at least been consulted.


2 – Variable payments systems

Variable pay is usually regulated by collective bargaining rather than by law. Only a minority of the EIRO national centres were able to provide anything approximating to robust data concerning the extent and significance of VPS. This reflects a combination of limitations in official surveys and the localised nature of wage setting in many countries which also complicates the process of gathering data from other sources. However, where representative data were difficult to obtain, the national correspondents drew on other research findings and used input directly from the social partners to provide an impression of key developments in their country. Overall, it appears that various forms of VPS are a feature of both of the economic sectors under study in most countries. However, VPS tend to be more widespread in banking than manufacturing, where their use tends to be related to company size. Banks are also more likely to operate a number of different forms of VPS, and with a higher impact on employee earnings. Trend data suggest that VPS are increasing in significance in the sectors concerned. In the public sector, however, initiatives tend to be more limited in scope, with notable exceptions.

Statutory regulation of variable payments systems

Most countries do not have forms of legal regulation specifically governing VPS. Where a labour code exists, this usually refers to remuneration in the general terms of fairness under the law of contract, and VPS will also be subject to laws concerning equal pay. Employment law might stipulate certain rights to co-determination in the setting of pay arrangements through institutions such as works councils. The state is more likely to lay down general provisions concerning, for example, legal minimum wage rates, but this will grant the bargaining parties considerable autonomy to arrive at their own formulae for wage rates and levels. Ministers might seek to influence wage-setting to meet certain macroeconomic objectives, for instance exhorting the parties to moderate basic wage awards and link wages to performance and ability to pay; however, this rarely translates into regulation. Nevertheless, a significant number of countries have incentives in place through the tax system for VPS, most specifically profit-sharing arrangements. Financial participation is widely seen as a useful tool to encourage employees to identify with the goals of the company and as a retention device for senior managers and core employees, as well as supplementing employees’ income.

The Czech labour code seems somewhat unusual in specifically addressing and encouraging VPS, without stipulating or discriminating between different forms. It provides that ‘wages and pay shall be provided according to the complexity, responsibility and strenuousness of work; according to the difficulty of working conditions; according to work performance and achieved work results’. Besides these general principles, the labour code also lays down binding rules regarding a number of wage forms, including extra pay and personal bonuses whereby consistently high levels of performance may be rewarded with an individual bonus of up to 50% of the pay tariff of the highest wage level in the particular pay class. The only other instances where VPS might be specifically dealt with in the Labour Code are Hungary and Portugal. In Hungary, amendments made in 2003 and 2006 further stipulated requirements for setting performance norms. It is now required that 100% performance should be achievable in regular hours, all technological and organisational conditions should be taken into consideration and a guaranteed wage has to be applied if the actual performance largely depends on factors other than the employee’s efforts. The Portuguese Labour Code of 2003 states that wages can be fixed, variable or mixed (Article 251), with any fixed element based on working time (Article 252) and the variable component linked to productivity (Article 253). This was intended to encourage the growth of VPS related to productivity.

Otherwise, generic labour regulations appear to have little impact on VPS. In Slovenia, for example, the regulation of pay is in general terms governed by the Employment Relations Act 2002, which provides for the protection of rights on the basis of an employment contract concluded between a worker and an employer. Pay regulation is also governed by the Social Agreement reached between the social partners, currently for the period 2007–2009. However, VPS are addressed only indirectly; for example, the Social Agreement refers to the need for motivational forms of reward in the public sector, and to the need to relate wages to productivity.

Respondents from Austria and the Netherlands stated that laws governing co-determination are also relevant to the regulation of VPS. Under Austrian labour law, pay agreements have to be concluded collectively – that is, at multi-employer level – whereas works agreements are prohibited from setting pay increases. However, collective agreements may contain delegation clauses relating to pay, encouraging the parties to the works agreement at company level to negotiate on VPS, within a certain framework laid down by the collective agreement and under a favourability principle. In the Netherlands, works councils have a right of consent with regard to the introduction, modification or abolition of remuneration schemes. This applies only to the system or framework as such, and not to the levels of remuneration – which are considered the prerogative of the trade unions. However, in practice, it is hard to draw a clear line between these two processes and, in several recent court cases, works councils have successfully asserted a right of consent.

Financial participation is the one area of VPS that is commonly addressed by state initiatives, usually in the form of tax incentives. In France, laws relating to profit sharing go back to 1959 (‘intéressement’). This optional scheme became mandatory in 1967 (‘participation’) for companies with 50 employees or more, with payments calculated according to a statutory formula. Both schemes involve tax-deductible arrangements for employers, along with other social exemptions, and provide for tax-free payments to employees if the stakes are held for five years. Since 2001, about a dozen legislative and regulatory texts have been issued concerning employee savings schemes and pensions. The most recent law in this regard, of 30 December 2006, pertains to the development of employee participation and shareholding. In order to promote employee savings schemes in companies with fewer than 50 employees, it created an obligation for occupational sectors to negotiate an agreement on participation within the following three years. Furthermore, it stipulated that employees of companies working together on the same project, regardless of whether the companies are legally independent, should benefit from a profit-sharing arrangement.

Other countries have generally eschewed compulsion in favour of fiscal encouragement. From 1987, UK employers were able to register profit-related schemes with the Inland Revenue so that employees were eligible for tax relief on payments received. Following mounting concern that the schemes were open to abuse – for example, encouraging the substitution of profit sharing for basic pay awards, for the purposes of tax avoidance – the Finance Act 1997 provided for all tax relief to be phased out by 1 January 2000. This led to a significant reduction in the number of schemes. In the sectoral grouping of manufacturing and energy, 4,385 schemes existed in 1997, covering almost 1.2 million employees; this number had reduced to 1,104 schemes by March 2000, covering 308,000 employees. The respective figures for banking, finance and other business services were 1,816 schemes, covering 737,000 employees, in 1997 compared with 466 schemes, covering 136,000 employees, in 2000. However, tax incentives continue to apply to share incentive plans (SIPs), which represented a 2001 relaunch of the all-employee share ownership plan (AESOP). Employee contributions are made from pre-tax salary and no income tax or national insurance is payable on shares held in a plan for five years. According to the Institute of Development Studies (IDS, 2007), the popularity of SIPs has increased in recent years and 653 such plans are now in operation. Employers usually offer free or matched shares with the intention of encouraging employees to develop a closer understanding of the business and to share in its success.

Tax relief is available on profit sharing as well as employee share ownership in Ireland. In addition, earnings under profit-sharing schemes can now be included in pensionable remuneration, effectively allowing higher annual pension contributions. Irish trade unions have been lobbying for tax relief on approved gainsharing schemes, along the lines of the exemptions already in place for profit-sharing schemes, but so far without success. In Hungary, financial policy supports share ownership rather than profit sharing, through the Approved Employee’s Benefit Programme (HU0701019Q). Tax is paid on any financial gain by way of disposal, although shares may be acquired in a preferential way. The most recent amendment of the Law on Personal Income Tax (Act LXI of 2006) removed the time requirement for holding the shares prior to sale, which it is thought will help them to become more popular.

Incentive schemes for financial participation have recently or are currently being revised in a number of countries. In Finland, the 1989 Personnel Funds Act establishes and regulates employee investment funds whose capital is accumulated mainly from profit-related payments paid by the employer. The ‘personnel fund’ is owned and administered by the enterprise’s workforce, and is effectively a delayed payment of profit-sharing bonuses. A tripartite working group is currently reviewing the operation of the legislation over a two-year period beginning in January 2007. In Belgium, the law was changed with effect from 1 January 2008 to provide extra fiscal advantages for VPS. This is unusual in that it applies to bonuses that go beyond conventional profit sharing, as defined in the collective agreement signed on 20 December 2007. The bonus must depend on objectively measurable business results, although these need not be only financial. Payments of up to €2,200 a year attract no tax for workers and are tax-deductible for employers, a move designed to encourage smaller companies to participate.

In Austria, a level of financial participation of up to €1,453 a year is tax-exempt. Apart from this, some fiscal incentives are available for that part of pay which is transferred into an occupational pension scheme. The Federal Minister for Financial Affairs and Vice-Chancellor, Wilhelm Molterer, suggested in August 2007 that the number of employees currently covered by any form of financial participation should be doubled by 2010. At present, about 6% of Austria’s employees hold some kind of shares in their employer company, and 5% of workers receive productivity-based bonuses or profit-related pay. Mr Molterer has called on the social partners to reach agreement within six months on innovative wage flexibility schemes which should at least partially replace productivity as a key pay-setting criterion. The proposal has met with trade union opposition. This was also a factor in the withdrawal of plans in Portugal to increase VPS in response to mounting employer demands for deregulation and flexibility. A White Paper on Labour Relations put forward in May 2007 provided for individual temporary wage reductions to accommodate ‘companies’ urgent needs’, which would have to be agreed between the employer and worker and monitored by labour inspection. Furthermore, the White Paper proposed that wage increments based on seniority should be considered obsolete and therefore eliminated. However, the final version did not implement these proposals (PT0802029I).

Finally, in Slovenia, an Act on Financial Participation of Workers, designed to increase the involvement of employees in profit sharing, is still in the phase of negotiation between the social partners. In Italy, the former Minister of Labour and Social Policy, Cesare Damiano, proposed tax concessions for that part of wage increases deriving from second-level bargaining. This was made in the context of a continued low wage growth, which is of increasing economic concern, and a desire to incentivise decentralised wage bargaining and VPS. This proposal is not yet, however, a legal measure and the only form of pay currently subject to a facilitated tax regime is stock options. The difference between the market value of the shares on allocation and the price on realisation of the option is subject to capital gains tax (a fixed 12.5% rate) rather than the strongly progressive personal income tax regime.

Extent of variable payments systems

Table 6 provides key findings from the nine EIRO national centres able to supply quantitative data from the sectors under study. The results show that VPS are extensive in each country and for both sectors, although they tend to be more widespread in banking in each case. Furthermore, VPS usually take multiple forms, combining individual or team productivity bonuses with profit sharing and, particularly in banking, merit pay. Appraisal-based schemes were also reported to be significant for manufacturing companies in Ireland, Norway and the UK, although it is not clear how far this extends to blue-collar employees rather than professional, technical and administrative workers.

Table 6: Extent and form of VPS (quantitative data)
Country Manufacturing Financial services/banking
BG 2006: 29% of companies used profit sharing and 20% used employee share schemes; 48% offered individual performance-pay schemes and 41% used company-wide performance-pay schemes; 22% offered team-based pay. 2006: 10% of companies used profit sharing and a similar proportion used share schemes; 80% had individual performance pay, including bonuses and appraisal-pay; 60% offered collective schemes based on team and/or organisational performance.
DE 2007: 40% of companies used some VPS, 27% of which used profit sharing (covering 50% of workers); 26% offered individual performance pay and 16% offered team-based performance pay. Each form is more common in eastern Germany. 2000: 64% of companies gave annual bonuses to workers covered by a collective agreement, 42% gave an individual bonus. 2005: 26% used profit sharing, covering 75% of workers; appraisal-based pay was used by 19% of companies for covered employees and by 43% of enterprises for workers not governed by a collective agreement.
DK A ‘Plus-pay’ (plusløn) system was agreed at sectoral level in 2002: 20% of pay is linked to qualifications, bonuses or performance-related pay. The system is voluntary and no reliable data exist on its use. The sectoral agreement sets a maximum of 20% of salary for individual supplements.
FI A range of bonuses are widely used, including piecework / productivity-based, results-based and profit-based. 2006: Results-based and profit-based bonuses were paid to 31.5% of blue-collar workers and 63.9% of clerical workers. 2006: In retail banking, 48.6% of workers received results-based or productivity-based bonuses.
FR 2005: The motor industry applied VPS to 53% of non-managerial workers; employee savings schemes were available to 92% of employees. 2005: Commission, bonuses and individualised pay were reported to be widespread and higher than average; savings schemes were available to 83% of employees.
IE 1998: 49% of companies used output-related bonuses; this proportion stood at 20% in chemicals / pharmaceuticals and 12% in electronics. About 20% offered profit sharing. 2005: 36% of employees reported that their pay was linked to appraisal; 29% were offered profit sharing. 1998: 92% of companies used merit pay; 40% offered company-related performance pay; 40% used commission; 32% offered profit sharing; 4% offered team or competency pay. 2005: Half of employees stated that their pay was linked to appraisal; 36% were offered profit sharing.
NL 2007: Performance-related pay features in 33% of all collective agreements, and about 25% of employees receive such pay; 21% of companies use non profit-related bonuses. More specifically, 18% of enterprises without a collective agreement offer such bonuses and 27% of companies with an agreement do so. Meanwhile, 6% of companies offer profit-related bonuses: 8% without a collective agreement and 6% with one. For financial services, the figures are 32% for companies offering non-profit related bonuses and 12% for those offering profit-related bonuses. For industry, these proportions are 23% and 12% respectively. The incidence of both types of bonus increases with company size.
NO 2003: 36% of companies used appraisal or competency pay; 18% offered profit sharing; 18% provided group bonuses; 8% offered individual bonus; 7% used piecework. 2006: 61% of employees were paid some form of bonus, including profit sharing. Appraisal-based pay is stipulated by the sectoral agreement, although it may apply to a minority of employees each year.
UK 2004: Merit pay was used in 13% of workplaces; commission was offered in 27% of companies; profit-based pay was used in 38% of enterprises; share schemes were provided in 10% of workplaces. 2004: Merit pay was offered in 37% of workplaces; commission was offered in 77% of companies; profit-based pay was used in 67% of enterprises; share schemes were provided in 82% of workplaces.

Source: EIRO national centres

Elsewhere, provision of data was restricted by the fact that, in some countries, pay systems remain rather standardised with little scope for VPS. In other countries, VPS may or may not be extensive but information is limited due to inadequacies of official surveys and highly decentralised pay-setting arrangements that make systematic monitoring difficult. In these circumstances, many national centres made recourse to data from the social partners, often involving a direct approach, or used data from other sources such as consultancy firms, while acknowledging limitations of sample size and bias. In Hungary, for example, no representative statistics on VPS exist as the Labour Force Survey refers only to share ownership schemes which, in 2004, covered just 1.3% of employees. However, a report from Hewitt Associates found that 70% of relatively large companies used performance-related bonuses in 2006, 10% of which involved profit sharing. An earlier survey from Hay Group found that 84% of the mostly foreign-owned companies which responded had applied certain forms of contingent wages in 2003, with manual workers eligible in 59% of cases, although payments tend to be low. Company-performance criteria were more relevant to senior employees, where payments were much higher. Similarly, in the Czech Republic, data were available from a PricewaterhouseCoopers (PwC) survey in 2005. Overall, 73% of companies surveyed used VPS and these accounted for between 15% and 20% of pay. One of the main functions of VPS in manufacturing was to limit employee absenteeism, according to 49% of companies. An appraisal system was universal in banking, with 43% of companies extending this to a ‘360-degree’ assessment of their managerial staff.

Countries where the use of VPS seemed relatively low included Cyprus, Greece, Latvia and Slovenia. In Cyprus, information was provided on the food and beverages sector for manufacturing, where VPS were said to be in their infancy. Equally, in the 24 banks covered by the sectoral collective agreement, only the four largest make any use of VPS and these have been introduced within the last five years. In Greece, pay is generally standardised in both sectors. Incremental wage scales remain the norm, set by sectoral collective agreements. These are supplemented by additional family, service and skills allowances set by the company as well as by sectoral agreement. Data are limited, but a national survey on wage flexibility conducted in 2002 found that about two thirds of all enterprises had no form of wage flexibility. One in five companies linked pay in some way to employee performance, 5.5% used profit-based or employee share schemes, and 7% used both. In banking, individual bonuses are mainly paid to executives although some provision is made for merit-based pay increases and collective bonuses such as profit sharing, which – together with share schemes – represent the most common form of variable reward. Employees in new companies, including those created by mergers and privatisations, tend to have a higher level of VPS under the so-called ‘wage packages’ system (see below).

In Latvia, the main type of additional pay is the ‘thirteenth wage’ paid at the end of the year by some better-performing companies, although larger companies tend to also use VPS. The thirteenth wage represents a bonus of an additional month of pay beyond the 12 months of the calendar year, thus amounting to 8.33% of salary. Sales, productivity and profit-related bonuses usually only apply to managers and specialists, except in banking, which offers individual commission and bonuses linked to team productivity. Appraisal-based pay is used in a minority of the 23 commercial banks in Latvia and, as in manufacturing, profit sharing and financial participation are not used for non-managerial employees. Variable pay is also relatively low in Slovenia, partly because high rates of inflation have placed a focus on the basic wage. A Christmas bonus and the ‘thirteenth wage’ are commonly used as additional payments in successful companies, although banks also offer performance-based schemes. The sectoral agreement provides for 7% of the company pay bill to be allocated to VPS based on individual and/or group efficiency.

In some countries, lower-level bargaining on wages might be permitted but not necessarily closely monitored by the parties at national or sectoral levels. The decentralisation of wage-setting was reported as a problem for data gathering in Italy, Poland, Portugal and Spain. As indicated above, the wage system in Italy is formalised by the 1993 intersectoral agreement, which stipulated that national-level bargaining is concerned with cost-of-living increases to the fixed wage, to be supplemented by secondary-level bargaining on additional or variable increments. The form of VPS, which may be regulated at company, group or territorial level, varies according to which combination of criteria are used. No additional data were available to the 2007 CNEL report referred to in Chapter 1, which found that the most common parameters used in company negotiations are productivity, profitability, quality and attendance. As noted earlier, the productivity parameters frame the majority (60%) of negotiations in manufacturing, while profitability criteria are used almost universally in negotiations in banking.

Data in Poland were also said to be difficult to obtain, given a high degree of decentralisation and individualisation due to a tendency of collective agreements to leave much discretion to employers. In the manufacturing sector, the main form of VPS in Poland is probably bonuses, which may be task-based and implemented selectively on a lump-sum basis. The banking sector tends to specify bonus schemes more precisely and to have arrangements for profit sharing or, more specifically, an annual bonus linked to company results. One survey suggests that about a third of companies have some form of profit-sharing arrangement in place, although these may be restricted to certain groups of employees, and that other forms of collective VPS are marginal.

No data were provided by Portugal either, on the basis that VPS operate at local level. However, it was reported that, in manufacturing, the main type of VPS is likely to be piecework or productivity and attendance bonuses. Profit sharing is found only in the largest companies and even then generally for senior employees. Appraisal-based schemes are the main type of VPS in banking, and in some cases competency-based schemes may be used. In Spain, much is left to unilateral management discretion, and the situation is further complicated by the consolidation of some forms of discretionary pay. The most common form of VPS in the metalworking sector is the traditional productivity bonus. Individual pay is common in banking, in the form of ‘voluntary personal supplements’ based on job functions and market rates of pay. Some 70% of the workforce receive these payments. In addition, annual bonuses are often awarded based on the achievement of targets by individuals, teams and/or business units.

Profit sharing appeared to be common in some of the remaining countries where no comprehensive data were available. It has traditionally been the most widely used form of VPS in Swedish manufacturing, especially in the larger companies, along with bonuses based on local performance criteria. In banking, appraisal-related pay is widely used in addition to profit sharing and bonuses. A similar picture emerged in Belgium. Here, consolidation within the banking sector has also permitted changes to pay systems that usually combine profit sharing with appraisal-based pay and bonuses linked to business-unit performance. In Slovakia, manufacturing companies generally combine personal bonuses – based on an individual assessment in relation to the job requirements – with team-based pay, although multinational corporations are more likely to also use bonuses linked to company results. Banks use commission schemes and various forms of other bonuses, including those linked to company results. In Estonia, profit sharing is mainly used in banking and for managerial employees in manufacturing. In textiles manufacturing, which accounts for 15% of manufacturing employment in Estonia, VPS vary according to occupational level. They are rarely used for unskilled workers, but team and organisational schemes are used for skilled workers while appraisal-based pay is used for white-collar workers. In banking, Hansabank, which employs 42% of the sector’s workforce, is used as a case study, and the company offers all forms of VPS.

In some other countries, the principal schemes appear to be more target-driven. In order to represent manufacturing in Romania, the EIRO national correspondent focused on the food and beverages sector, which accounts for 12% of manufacturing employment in that country. National-level collective agreements stipulate the minimum requirements for a range of wage supplements, including piecework, profit sharing and benefits in kind. The food and beverages industry also sets down minimum criteria, including 3% of the pay bill for piecework supplements and 0.1% of the pay bill from net profit sharing. In banking, the company level is more important and here VPS concern performance bonuses and commission. In Malta, the main forms of VPS in manufacturing are production bonuses linked to targets. Target-based schemes are also common in banking, linked to product sales and revenue generation, and these tend to integrate individual criteria and branch performance measures. Appraisal schemes are also widely used, which may refer to more subjective criteria regarding quality of work. No data are available for Lithuania, but it was reported on the basis of social partner interviews that individual and team-based VPS are expanding in both of the sectors under study. These are framed by production targets in manufacturing. In banking, payment by results is used for employees involved in sales and some banks use appraisal-based pay schemes in support of performance-management objectives. Most banks also have collective annual bonuses linked to business results.

Finally, in Austria, collective bargaining is important to the provision of VPS, both at sectoral level and through agreements with works councils. The metalworking ‘distribution option’, referred to in Chapter 1, was originally stipulated by the 1997 collective agreement. This entitles the social partners to agree at company level on a redistribution of a certain amount of the total wage bill according to performance and certain equity criteria. In 2007, this was agreed to amount to 0.3% of the actual pay increase, to be distributed according to a local works agreement. Profit-related schemes are also widespread in manufacturing, often on a voluntary basis at company level, although a binding scheme was introduced for metalworking in 2006. This currently pays workers an extra one-off payment of €200 or €150, providing that certain profitability criteria are met. In banking, bonus payments are less prominent than is the case in manufacturing, although some forms of sales-based bonuses exist as well as one-off bonuses or extra payments. In the savings bank sector, an appraisal-based payment links employee pay progression to ‘competence criteria’. Profit-related pay is also common across the five banking subsectors, and collective agreements require that these be applied to all of a company’s employees.

Main trends

Most of the EIRO national correspondents commented that VPS were expanding in the sectors under consideration, and across the wider economy. This reflected changes in product market competition, work organisation requirements and, in some cases, tight labour market conditions. In manufacturing, traditional bonus schemes such as piecework or payment by results are in widespread decline as job requirements increasingly emphasise quality, flexibility and teamwork. Bonuses tend to be made collectively, and profit sharing is also common. In banking, many companies have replaced traditional service-related pay systems, at least partly, with appraisal-based schemes and have increased the proportion of earnings accounted for by performance bonuses. Table 7 summarises some key sectoral trends based on comments made by 15 national correspondents reporting on VPS developments. The table shows that most correspondents observed a trend towards an increased extent and/or financial significance of bonuses, denoted as an upward arrow. Profit sharing, which is essentially a collective form of bonus based on organisational criteria, was also noted in a number of cases.

Table 7: Notable trends in VPS in selected countries
  Manufacturing Financial services/banking
  Piecework Bonuses Profit sharing Seniority Bonuses Profit sharing Merit
AT      
BE          
BG          
DE   =     =  
DK      
ES        
FR          
HU      
LU            
MT      
NL   =        
NO          
PT            
SK        
UK       =

Source: EIRO national centres

Taking each of the above countries in turn, the main trend in Austrian manufacturing is a decline in piecework, which covered 10% of employees in 1995 but only half that in 2004, and its substitution by bonuses. In banking, the traditional ‘seniority principle’ has continued to be undermined by performance-related and appraisal-related pay. In Belgium, the use of bonus schemes was recently endorsed and encouraged by a new intersectoral agreement of 20 December 2007; such schemes have traditionally taken the form of profit sharing. The new arrangements are also to be based on employee performance. Payments may be made amounting to €2,200 a year and these are tax-free for employees and tax-deductible for employers. In contrast, in Bulgaria, the decentralisation of wage setting has facilitated the growth of VPS, although this also makes it difficult to definitively measure any trends. Perhaps the most marked development has been an increase in share ownership and profit-sharing schemes since the shift to a market economy.

In Germany, a reliable database is only available for profit sharing, which seems fairly constant. However, piecework schemes appear to be in decline as companies replace traditional Taylorist forms of work organisation with flatter hierarchies and efforts to involve employees. These efforts have also supported the introduction and maintenance of profit sharing. In Denmark, piecework has declined in manufacturing, replaced by bonuses. Both bonuses and merit pay are on the rise in banking. Spain’s manufacturing sector has seen a decline in both piecework and bonus schemes; however, profit sharing has become more common in the banking sector. Collective forms of bonus are common in France and these have shown the most pronounced growth. The expansion of VPS in France dates mainly from 1998 and is associated with changes in the law concerning working time. Overall, in 2005 individual bonuses for non-managerial or professional workers in the non-agricultural market sector were found in 55.2% of establishments with 20 or more employees, which is only a slight increase from the 52.4% reported in 1998/1999. Collective bonuses are found in 50.2% of enterprises, up from 34.9% in 1998/1999. In total, almost three quarters (72%) of such establishments combined individual and collective systems in their pay for these workers in 2005, up from 63% in 1998/1999.

Data are limited in Hungary, particularly relating to the services sectors and banking. In manufacturing, the most notable shift has been from the piecework regimes and discretionary personal ‘rewards’ associated with the state-socialist era, and the growth of profit-sharing schemes. In part, the dispersion of new pay practices was driven by incoming multinational companies, which also tended to use more modern and flexible forms of work organisation, and their promotion by consultancy services such as Hay. Rapid innovation in domestic companies is also apparent, not least as trade unions and works councils have only weak regulatory powers. Seniority schemes have become less relevant and wages are more closely linked to skills, performance and the labour market. However, data from consultancy firms suggest that the incidence and forms of VPS have currently generally stabilised. In Luxembourg, data are unavailable from the metalworking sector although social partner sources indicated that the most common forms of VPS were profit-related schemes and absence bonuses. In banking, the new collective agreement for 2008–2009 provides for a new merit-pay scheme to replace automatic service-related increases. According to research conducted by the Luxembourg Bankers’ Association (Association des banques et banquiers, Luxembourg, ABBL), most employees favoured the change.

In Maltese manufacturing, collective agreements have adjusted to include various forms of VPS linked to individual and group performance, and profit-related pay has become more prominent. In banking, fixed scales are still used to regulate pay but there is more discretion for increments linked to employee appraisal. The practice of offering bonuses has also grown, especially those linked to profits and, unlike VPS linked to salary increases, these tend to lie outside collective agreements. In the Netherlands, the growth of VPS has been fairly rapid in recent years, particularly for companies not covered by collective agreements; manufacturing and banking have been at the forefront of this expansion. In 2002, 21% of all companies used performance-related pay. This proportion increased to 26% in 2004 and almost 30% in 2007. The growth was largest in companies not covered by a collective agreement, which stood at 40% in 2007, although VPS are increasingly addressed by collective agreements: they were included in 67% of sectoral agreements and 80% of company agreements in 2006, rising to 75% and 90% respectively in 2007. In manufacturing, the proportion of employees receiving performance-related pay rose from 31% in 2002 to 35% in 2004 and 43% in 2007; for financial services, the respective figures were 53% in 2002, 54% in 2004 and 65% in 2007. The total number of companies using bonuses – both profit-related or not – is rather stable for industry, at 30% of enterprises, but increased in financial services from 34% to 42% over the same period.

In Norwegian manufacturing, piecework is now rare and the main trend is an increase in the proportion of workers receiving bonuses, although actual payment levels remain stable. In banking, bonuses are of growing significance both in terms of average payments as well as workers covered. This reflects the good economic performance of the banks in the past few years. In terms of bonus coverage, in 1997 one in five (19%) blue-collar manufacturing employees received a bonus, compared with 12% of non-managerial staff in banking. The relevant figures in 2002 were 24% and 34%; by 2006, these proportions had risen to 34% and 61%.

The main trends in Portugal are an expansion of profit-sharing schemes in banking, with some increase in the use of merit pay in manufacturing. However, the core focus of VPS remains productivity and attendance bonuses in manufacturing, and appraisal-related pay in banking. In Slovakia, the main trend in both sectors is the growth of collective bonuses linked to team and/or company performance. In addition, payment by results has long been in decline in manufacturing and ‘special wages’ – the so-called thirteenth or even fourteenth wages – are now rarely used. The decline of piecework is also a long-term trend in the UK. In engineering, payment by results has been replaced mainly by site-level and company-level bonus schemes. In some low-paying subsectors like clothing, the introduction of a statutory minimum wage in 1999 – and subsequent above-inflation increases – finally made piecework too complex to administer, and other forms of bonus have been introduced for good performers. The situation in banking is a continued use of individual appraisal to allocate base pay increases, although in practice these are more or less standardised within companies for the majority of staff rated as effective performers. The growth and multiplicity of bonuses is more important in terms of earnings. These have been used to underpin performance-management objectives and, in organisational schemes, to promote a culture of shared success, without adding to fixed costs.

Of the other countries, three (Cyprus, Ireland and Poland) stated that insufficient data existed to support any commentary about developments in VPS. Others noted more general trends towards increased use of VPS. In Italy, low inflation has contributed to an increase in the proportion of pay bargained for at company level across the economy as a whole, much of which concerns performance-related pay. In Finland, pay systems have traditionally been centralised and rigid, although recent sectoral-level collective agreements have made possible ‘local pay’ arrangements to be agreed at company level. In 2009, the locally negotiated pay increase pool will be augmented more substantially in the different sectors. In the financial services sector and technology industry, the company-specific pay increase could even amount to half of the total pay rise. In the collective agreements negotiated by the Finnish Metalworkers’ Union (Metallityöväenliitto), the company-specific proportion reached 23% in the autumn of 2007 and was set to reach 39% in 2008 and approximately 40% in 2009. Among employees belonging to trade unions affiliated to the Confederation of Unions for Academic Professionals (Akateemisten Toimihenkilöiden Keskusjärjestö, AKAVA) in the metalworking sector, the share of company-specific pay raises could be half of the overall increase in both 2008 and 2009. These generally take the form of productivity-based bonuses. The use of VPS based on individual and company-level performance has grown in recent years, including profit-sharing bonuses – which were once the preserve of senior staff. No official data are available for the Czech Republic, although the 2005 PwC survey referred to earlier suggests that VPS are increasingly widespread. This research reports a trend to use team-based rather than individual schemes, particularly in manufacturing, although the latter continue to be used where individual contributions to performance outcomes are measurable and significant. In managerial and administrative occupations, company performance is more often used as the basis for VPS.

A few correspondents observed that the growth of VPS was linked to labour market considerations in their country. In Lithuania, the expansion of VPS is reported to be a product of, at least in part, strong economic growth and labour shortages, which have been compounded by emigration. In Latvia, the increasing use of VPS is also linked to tight labour markets. This is reflected in strong real wage growth amounting to 9.7% in 2005, 15.6% in 2006 and more than 20% in 2007. Greater pay flexibility in banking is encouraged by the fact that banks are relatively high payers and because they face an increasingly competitive product market situation. In addition to new schemes based on individual VPS, some employers have begun to introduce greater differentiation in the payment of previously standardised and collective ‘thirteenth wage’ schemes. Similarly, in Romania, a recent growth of VPS is linked to labour force shortages in various economic sectors and occupations, as well as foreign inwards investment. Some of the most significant initiatives have concerned the introduction of commissions and bonuses in banking.

Most of the remaining countries report a generally stable situation for VPS, although banking remains at the forefront of any significant developments. In Sweden, choices over VPS are made at company level and trade union sources reported that no distinct trend had emerged towards higher or lower usage of any form of VPS. No data were available from Estonia, although the social partners there also indicated that the current situation is stable. If anything, the main recent trend seems to be an extension of appraisal-based pay to white-collar workers in manufacturing, and some increase in the use of payment-by-results-type schemes in banking. In Slovenia, increased recourse is made to Christmas bonuses and thirteenth wage payments, perhaps as retention as well as motivation tools. VPS have grown most quickly in banking, at a rate of 25.6% more than fixed pay over the period 2001–2007, according to the Slovenian Banking Union (Sindikat bancništva Slovenije, SBS). The picture in Greece is also generally stable, with the exception of the growth of ‘wage packages’ in the banking sector. Under these arrangements, companies observe the minimum rates established by the sectoral collective agreement but link actual rates to an assessment of the value of the job, and link pay progression to an assessment of performance. These have mainly been introduced in new banks or after a merger or privatisation. In Spain, banking companies are developing new pay systems as a means to retain and motivate staff, and to compensate for the moderate wage settlements agreed at sectoral level. In 2007, several banks announced incentive plans for 2008–2010 involving at least 8% of profits. Profit sharing itself is relatively rare in Spain as it is not supported by the taxation system, although company profits are used to support the system of additional months of salary. In manufacturing, a tendency currently exists to consolidate productivity bonuses because they are less variable as a result of the introduction of new performance-enhancing production processes. Companies are thus experimenting with alternative pay schemes, including payment by results, to reintroduce incentive effects.

Significance for earnings

Most countries were able to provide some indicators of the significance of VPS for employee earnings. Table 8 summarises key quantitative data. Together with other information discussed below, these reinforce the impression that VPS are common in both of the economic sectors under study but particularly important in banking. This might reflect a number of factors, including: the nature of the work, as customer-facing sales and administrative jobs are more open to pay based on commission and managerial appraisal; the nature of the organisations, as banks are generally relatively large and profitable employers; and/or management strategy, for example, replacing seniority with performance pay in response to product market change or introducing VPS to contain fixed pay costs and motivate and retain high performers.

Although only limited evidence exists according to type of VPS, it appears that bonuses are much more significant for employee earnings than merit pay awards are. Bonuses generally do not affect base pay, and may be more ‘objectively’ defined in terms of targets rather than managerial appraisal. In Norway, for example, merit pay is uncommon for blue-collar workers. Although it is applied to a significant proportion of banking employees – about a third in any given year in the larger banks – it accounts for a much lower proportion of earnings, at around 3%–4% (albeit with considerable variation) compared with over 10% for profit sharing. In the UK, merit pay is used almost universally in banking, but in practice individual pay dispersion is low. This reflects a tendency to similar ratings of employee performance, plus low funding of overall wage ‘pots’, which remain linked to inflation. Trade union campaigns to limit real pay cuts for staff have also had an impact (see Chapter 3).

Overall, variation between countries in terms of the significance of VPS for employee earnings does not seem as pronounced as in the case of the overall incidence of VPS itself. Even where VPS appear relatively low on the whole, as in Greek or Romanian banking, this does not capture variation within sectors, with many – particularly the larger – companies appearing more typical in terms of VPS. More flexible ‘wage packages’ are on the increase in Greek banks, while large banks in Romania have bonus funds that account for, in the case of Raiffeisen for instance, 12% of the pay bill.

Data from some countries, such as Estonia and the Czech Republic, suggest that the earnings impact of VPS might be higher across their economy than may be the case elsewhere. In the former example, employer estimates are that VPS account for 23% of all employee earnings, with about 18% comprising payment-by-results-type schemes and the remaining 5% consisting of additional guaranteed bonuses (Rõõm, T. and Uusküla, L., Palgakujunduse põhimõtted Eesti ettevõtetes, Eesti Panga Toimetised, Vol. 5, 2006). In the Czech Republic, the official Information System on Average Earnings (Informační systém o průměrných výdělcích, ISPV) reports that, in 2007, VPS accounted for 21% of employee earnings in the private sector, of which 17% represented variable bonuses and rewards and 4% additional extra pay. In the non-profit sphere, bonuses and variable rewards accounted for only 3.5%, with other extra pay amounting to 15.2% of earnings.

Table 8: Significance of VPS for earnings (quantitative data)
Country Manufacturing Financial services/banking
AT No data provided. All forms of VPS amount to about 10% of the wage bill.
CZ 2006: VPS accounted for 14% of earnings for administrative workers and 20% for manual workers. 2006: VPS accounted for 20% of earnings for white-collar workers in banking, increasing to 40% for middle management and 52% for senior managerial staff.
DE 2005: In all sectors, unskilled workers received €548 in profit-sharing and bonus payments; skilled blue-collar workers received €1,131, while skilled white-collar workers received €1,843. VPS account for about 10% of earnings in retail banking, or just under one month’s wage (Böhmer, N., Leistungs- und erfolgsorientierte Vergütung – Variabilisierungstendenzen im Tarifbereich deutscher Kreditinstitute, Düsseldorf, 2006).
EE VPS account for 15%–20% of average earnings in textiles and clothing manufacture, rising to 40% for skilled workers. In Hansabank, VPS account for 20%–30% of wages; data are not available according to particular types of VPS.
EL No data provided. All forms of VPS do not exceed 5%–6% of annual earnings for most employees; but 20%–25% of those on ‘wage packages’ receive up to 10%–15% of their pay in this manner.
ES Productivity bonuses account for 15%–20% of monthly pay. Performance pay is about 10% of wages.
FI 2006: Results-based or profit-based bonuses accounted for 3.1% of annual earnings for blue-collar workers and 8% for clerical workers. 2006: Results-based or profit-based bonuses accounted for 7.8% of annual earnings in retail banking.
FR 2004: Bonuses and supplements constituted 12.9% of employee earnings, consisting of: 1.7% for seniority bonuses (compared with 2.2% in 1998); 1.8% for monthly fixed bonuses, for example, related to job or family conditions (2.5% in 1998); 4.7% for non-monthly fixed bonuses, such as thirteenth month or holiday bonuses (5% in 1998); 3.3% for performance bonuses (2.5% in 1998); and 1.4% for other bonuses and payments (1.2% in 1998). 2005: 38% of employees in food manufacturing or consumer goods had access to profit sharing, compared with 47% in machinery manufacture, 83% in motor manufacturing and 75% in financial services.
IT VPS account for 17% of wages in metalworking. VPS account for 13% in the services sector as a whole.
NO Bonuses account for about 5% of earnings in manufacturing, but 12% in banking. No data are available on appraisal-related pay. Bonuses account for about 12% of earnings in banking. No data are available on appraisal-related pay.
PT 2003: An 18% differential arose between earnings and base pay (16% in 1998, 14% in 1994). 2003: A 54% differential arose between earnings and base pay in banking (41% in 1998, 33% in 1994).
RO 2005: Profit sharing represented 0.3% of employee earnings; other VPS accounted for 3.7%. Profit sharing accounts for 2.8% of earnings; other VPS represent 2%.
UK 2006: Incentive payments represented 4% of gross annual pay (Annual Survey of Hours and Earnings, ASHE). 2006: Incentive payments represented 9% of gross annual pay (ASHE) in finance. Bonuses accounted for 10% of earnings in banking (IDS).

Source: EIRO national centres

Many other countries, such as Belgium, Bulgaria, Cyprus, Lithuania and the Netherlands were unable to offer any official or representative data. In Poland, data were also reported to be limited and unreliable, although bonuses are generally estimated to constitute between 10% and 20% of employee pay. Similarly, only limited data are available for Ireland. A 2001 survey of 422 companies found that base pay accounted for about 80% of earnings in both manufacturing and the financial services sector. However, the variable element measured also included shift-pay and overtime as well as bonuses. In Sweden, a lack of aggregate statistics concerning the earnings impact of VPS was explained by the fact that this is decided at company level. The most recent manufacturing collective agreements stipulate that 4%–5% of earnings should derive from bonus schemes, unless the local actors agree otherwise. Statistics on this topic are not available in Slovakia, and individual companies often consider their own arrangements and agreements to be confidential. However, employer representatives estimate that fixed pay constitutes about 60% of employee earnings in multinational manufacturing companies and 50% in others, with bonuses representing 20% of earnings. In banking, arrangements differ between companies but VPS make up at least 20% of earnings and may be much higher for certain categories of employees.

No official statistics are available on the level of VPS payments in Slovenia, as these focus only on overtime and Christmas/thirteenth bonuses. One estimate from 2001 indicated that 85% of wages were fixed, 10% were additional payments and 5% were VPS. Neither do representative data exist in this regard for Malta. Production bonuses in manufacturing are typically set at a maximum of 15% of earnings. Bonuses in banking are much more variable and generally account for a much higher proportion of earnings than in other sectors. In any case, VPS are more pronounced in larger organisations. This was also reported in Latvia, subject to the same caution of insufficient data. Workers in large manufacturing companies and the banks generally receive one or even two months of extra wages, or about 10%–20% of annual income. On the other hand, in smaller companies, basic wages tend to be set at the minimum wage and any additional payments take the form of variable pay. Hence, in these circumstances, VPS can account for a high proportion of total earnings.

Variable payments systems in public sector

Public sector wage structures have traditionally been more highly regulated than those in the private sector (TN0611028S). They are often very centralised, and slow to change. However, several countries report significant developments in VPS in the public sector in recent years. The exceptions are Austria, Belgium, Cyprus, the Czech Republic, Hungary, Lithuania, Luxembourg, Spain and Sweden. In Greece, appraisal-based evaluation has been introduced for public sector employees, but is not linked to pay. In Estonia, pay remains highly regulated, with few recent developments; pay differentiation occurs more on the basis of qualifications and job requirements. In Latvia, some public sector workers are entitled to receive bonuses in addition to guaranteed premiums and supplements; however, this varies according to particular sectors, institutions and budgets, and is difficult to monitor.

Regarding the countries that report notable developments, some initiatives are localised to particular parts of the public sector, often introduced as pilot schemes, whereas others apply more generally and may build on longer-established precedents. Schemes also differ in forms and rationale, although cost-cutting appears less of an objective than a desire to simplify pay arrangements and introduce local flexibility according to different and changing goals. In some countries, VPS form part of ambitious modernisation programmes of public sector reform, with varying degrees of trade union involvement. However, the introduction and extension of VPS also face common constraints set by budgets and the positions of relatively strong trade unions. Table 9 includes some examples of localised or departmental initiatives.

Table 9: Public-sector VPS initiatives
Country Initiative
BG Appraisal-based pay arrangements are in the education sector since 2008.
DK A ‘New Wage’ system was introduced in 1997, which allocates funds for local bargaining to decide performance-based pay.
IT A pilot performance-pay scheme was introduced in 2007 for staff employed in government ministries (IT0709019I). This followed much debate by the social partners and popular opinion over labour productivity in the public sector.
MT VPS usually affected only senior managers but a new scheme has introduced VPS for public officials deployed on public-private partnership government projects. This initiative was established by the most recent collective agreement for public service employees, for 2005–2010, which allows for cash bonuses ‘related to performance, responsibility and multitasking’, as well as a bonus of 10%–25% on basic salary for flexibility in duties, working arrangements or working time.
NL The public sector at provincial level has VPS for all employees, with a fixed component related to competency growth and a variable component linked to performance. For the next bargaining round, the Water Boards have made proposals for a more flexible pay structure, and similar developments are also emerging in education.
RO Financial regulatory bodies such as the Court of Accounts (Curtea de Conturi), Financial Guard (Garda Financiară) and National Environmental Guard (Garda Naţională de Mediu) have introduced a specific VPS scheme which relates employee bonuses to the financial penalties applied to offending companies.

Source: EIRO national centres

Elsewhere, developments have applied more generally across the public sector, although often by different means and with varying outcomes. In Norway, for example, a decentralisation of public sector pay-setting has taken place over the last 10–15 years, opening increasing scope for VPS across the board. Such schemes are now common, using a range of criteria such as individual or team performance as well as job content and skills. However, the distributional effects are usually moderate. Trade unions play a major role in the pay-setting process, and employers often have to operate within tight budgets. Pay priorities include the need to recruit and retain mainstream staff, as well as to motivate and reward high performers. In other countries, pay reform – and therefore scope for VPS – has occurred only recently and usually after involved negotiations between the social partners at national level. In Finland, the collective agreement of 14 December 2004 established several joint project groups to develop new pay systems, including provision for decentralisation of bargaining and results-based remuneration systems; the project groups concluded their work in 2007. In Germany, recent collective agreements stipulated that performance-based VPS schemes must be in place across the public sector by the beginning of 2007, and that such payments should amount to 8% of the wage bill. In Portugal, the government replaced seniority pay with an appraisal-based merit scheme as part of a thorough rationalisation of pay structures in 2007 (PT0705019I, PT0706059I).

As in the Portuguese case, an important concern in several countries seems to be to simplify pay scales and permit greater differentiation across the public sector, although VPS are usually facilitated by, and form part of, this process. In Slovenia, a new salary system was introduced by the Public Sector Act in 2005 in order to readjust relativities between different occupations and to promote new forms of wage determination that include variable pay. According to the Act, 5% of the annual wage bill should be dedicated to payment for job performance. In Slovakia, wage differentiation across the public sector has followed legal changes in recent years, including Act No. 312/2001 Coll. on Civil Service, as amended, and Act No. 553/2003 Coll. on Remuneration of Employees Performing Services of General Interest, as amended (SK0612059I, SK0405102F). It has also been facilitated by multi-employer collective agreements. Further initiatives have focused on specific parts of the public service, such as the introduction of individual and unit performance pay in healthcare in 2005. In Poland, ‘multiplier’ and ‘valuation’ systems have emerged to determine pay for different groups of employees. Diversification of these indicators means that pay is now increasingly differentiated across the public sector.

An even more direct push for variable pay is apparent as part of modernisation reforms by governments in three countries. In the UK, VPS are longstanding and widespread across the public sector, including in education and health services as well as the civil service. They originated with the decentralisation introduced in the 1980s, alongside a greater emphasis on market values and managerial roles. In particular, merit-pay systems were set up to help to reinforce reforms designed to increase productivity. However, incremental pay and across the board settlements are also important. According to a 2006 survey of merit pay by the human resources research group Industrial Relations Services (IRS), only 12% of public sector pay awards were based solely on performance in 2006, compared with 34% of pay awards in the private services sectors and 20% of wage settlements in manufacturing (Welfare, S., ‘Stability reigns at 3%’, IRS Employment Review, Vol. 858, 2006, pp. 32–36). Non-consolidated and team-based bonuses have also been recommended to the government in an influential report entitled Incentives for change: Rewarding performance in national government networks (Makinson, J., London, HM Treasury, 2000); in a context of resource constraints, this recommendation is likely to have most impact on senior staff. In Ireland, sectoral Performance Verification Groups (PVGs) were established across the public sector in 2003 under the ‘Sustaining progress’ national agreement. Paragraph 26.1 of this agreement stated that public sector pay increases must be:

dependent, in the case of each sector, organisation and grade, on verification of satisfactory achievement of the provisions on cooperation with flexibility and ongoing change; satisfactory implementation of the agenda for modernisation…and the maintenance of stable industrial relations and the absence of industrial action…

In other words, public service employees are expected to meet various modernisation, flexibility and productivity criteria before pay increases are endorsed. In France, recent efforts to promote VPS have been directed at state-owned companies, but the Framework Law on Budgets introduced merit awards to the civil service in 2004. Ministries receive a variable payment of up to 20% to allocate according to preset goals. Several ministries have implemented components of the merit increase, but elsewhere the process has encountered intrinsic difficulties and the strong opposition of trade unions. The ministries which have introduced elements of the merit increase include: the Ministry of Justice (Ministère de la Justice); the Ministry of Equipment, Transport and Housing (Ministère de l’équipement des Transports et du Logement), now merged with the Ministry of Ecology, Energy, Sustainable Development, and Territorial Development (Ministère de l’Écologie, de l’Energie, du Développement durable et de l’Aménagement du territoire); and the Ministry of Economy, Industry and Employment (Ministère l’Économie, de l’industrie et de l’emploi). In September 2007, President Nicolas Sarkozy stated that the individualisation of payments would be an important part of the government’s project to overhaul the civil service.


3 – Employer and trade union perspectives on wage flexibility

On the whole, under multi-employer bargaining, employer organisations tend to emphasise the need for greater scope for negotiation at company level so that wages can better reflect the considerations of profitability and productivity. Trade union perspectives on enhancing the scope for company negotiations under multi-employer bargaining differ across countries. Enhancing scope for downwards wage flexibility under multi-employer bargaining arrangements at sectoral or intersectoral level has featured on the current or recent agenda of employer organisations in only a few countries. Where it has, trade unions tend to resist employer proposals. Under both multi-employer and single-employer bargaining, employers also favour increasing the proportion of earnings accounted for by various VPS. Trade unions, under both forms of bargaining, are not necessarily opposed to VPS – as long as resulting payments are additional to basic wages, and mechanisms are transparent and fair.

Multi-employer bargaining as a minimum level

According to the reports from the EIRO national centres, a general objective of employer organisations in several countries, and/or sectoral associations conducting multi-employer bargaining, is to maximise the scope for company-level wage negotiations by restricting sectoral agreements to specifying minimum wage levels. The countries and economic sectors concerned include the banking sector in Belgium and Denmark, the manufacturing sector in Bulgaria, and both of the sectors under study in the Czech Republic, France, Slovenia and Spain. In two of these Member States – Bulgaria and Spain – trade unions would prefer to see a strengthening, rather than weakening, of the wage provisions in sectoral agreements, given the scale of company-determined voluntary pay supplements. Elsewhere, the trade unions prefer the status quo.

In a further five countries, including three where collective wage setting is largely confined to the sectoral level with little or no scope for second-tier negotiations (see Chapter 1), employer organisations are advancing more specific proposals to enhance scope for company-level negotiations. The Austrian Federal Economic Chamber (Wirtschaftskammer Österreich, WKO) has proposed transforming sectoral agreements to focus on cost-of-living related settlements only, as distinct from the current practice of also bargaining over productivity. Additional negotiations over pay, contingent on company profitability and productivity, at company level would then give rise to works agreements with works councils (AT0710039I). This proposal originated from the metalworking employers. Trade unions are resistant to the prospect of increasing the scope and role of works agreements, and therefore works councils, that such a proposal would entail. Employer organisations in Germany have called for sectoral agreements to focus on specifying minimum standards, leaving greater scope for company negotiations. More specifically, the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and sectoral organisations such as Gesamtmetall, which represents employers’ associations in the metal and electrical industry, have proposed that sectoral agreements should make a greater proportion of wage settlements available for company-negotiated VPS. Such proposals have been rejected by trade unions, which are opposed to regular wages being substituted by variable payments.

Finland’s employer organisations prioritised securing scope for negotiations at company level based on productivity and profitability in the recent bargaining round (see Chapter 2). Trade unions continue to emphasise improvements in sector-wide wages. In Italy, the Confederation of Italian Industry (Confederazione Generale dell’Industria Italiana, Confindustria) proposes strengthening second-tier bargaining – that is, company or local territorial – at the expense of sector wage negotiations, thereby enabling wages to be more effectively linked to productivity and profitability. At the same time, however, Confindustria does not want second-tier negotiations to become mandatory. Trade unions are concerned that any such shift towards the company level would penalise the majority of the private sector workforce not covered by second-tier bargaining. Two of the trade union confederations, the Italian Confederation of Workers’ Trade Unions (Confederazione Italiana Sindacati Lavoratori, Cisl) and the Union of Italian Workers (Unione Italiana del Lavoro, Uil), propose mandatory territorial bargaining where no second-tier exists at company level. Conversely, the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil) favours maintaining the current role of sectoral agreements. Sweden’s banking employers wish to see a further shift in the balance between sector-determined pay increases and individualised wage negotiations at company level, in favour of the latter. Trade unions, however, favour maintaining current arrangements.

Employers in Ireland present an exception to the general trend; due to economic circumstances, they preferred to restrict possibilities for company negotiations in the most recent intersectoral agreement. In contrast, trade unions unsuccessfully pressed for the inclusion of a local bargaining – or ‘ability to pay’ – clause. In Portugal too, trade unions want to increase the scope for company negotiations in manufacturing so that members can secure productivity-based and profitability-based earnings increases in economically successful companies.

Perspectives on downwards wage flexibility

Pressure to enhance scope for downwards wage flexibility under multi-employer bargaining is relatively rare, although not insignificant. In Germany, for example, employer organisations generally consider that hardship and opening clauses which allow for derogation by companies from working time or wage norms are effective in safeguarding jobs. BDA and sectoral organisations in chemicals, metalworking and banking also consider that company-level pacts for employment which arise from the use of such clauses should be put on a sound legal footing. This could be done by clarifying the favourability principle under collective bargaining law to embrace improvements in job security (DE0511101N). Such a change in the law is opposed by trade unions, in part because of concerns about the institutional capacity of works councils under Germany’s dual channel representation system to adequately protect workers’ interests in such negotiations, given that they are prohibited from taking industrial action. Also relevant is the periodic proposal of the Spanish Confederation of Employers’ Organisations (Confederación Española de Organizaciones Empresariales, CEOE) to eliminate the legal provision for automatic renewal of collective agreements when the parties fail to agree, in order to enhance wage flexibility. Furthermore, CEOE highlights the continued need for ‘drop-out’ or opt-out clauses in cases where collectively agreed pay rises would undermine a company’s financial stability. For their part, trade unions are critical of the widespread practice of ‘absorption’, that is, the practice whereby companies can choose whether and how to pay sector awards if their wage rates are already above those of the sector. The unions have mobilised around this issue in both banking and metalworking.

In Ireland, the Irish Business and Employers’ Confederation (IBEC) had been keen to secure the independent pay assessor mechanism introduced under the intersectoral agreement’s ‘inability to pay’ clause in 2003 (see Chapter 1). The Irish Congress of Trade Unions (ICTU) had been reluctant to negotiate the clause, and had difficulty in securing approval from its affiliates, but little subsequent criticism has arisen. In part, this is because the clause is seen to discourage spurious ‘inability to pay’ claims by some employers (IE0312204F). More recently, in 2006, social partner debate in Sweden focused on increasing scope for downwards wage flexibility, including through the introduction of opening clauses in sectoral agreements for companies facing economic difficulties to derogate from wage and working time norms. This was favoured, for example, by the Association of Engineering Industries (Teknikföretagen). The main trade union confederations – the Swedish Confederation of Trade Unions (Landsorganisationen i Sverige, LO) and the Swedish Union of Clerical and Technical Employees in Industry (Svenska Industritjänstemannaförbundet, SIF) – were critical of the idea, fearing that such a proposal was part of a wider employer initiative to move wage negotiation further towards the company level.

Perspectives on variable payments systems

Table 10 summarises information provided by the EIRO national centres on the perspectives of employer organisations towards VPS. In most countries, employer organisations promote VPS in general terms, and in some cases specific schemes are favoured. A few Member States reported that employer organisations have no policy on VPS, viewing it as a matter for individual companies. More widely, the use of VPS and choice of type of scheme are seen as being largely an issue for individual member companies. Where employer organisations promote specific schemes, variation arises across countries in the types of scheme favoured. In Finland, emphasis is given to collective schemes based on productivity and/or profitability. In France, a wide range of VPS are promoted, including schemes linked to individual as well as collective performance, and deferred payments schemes providing for financial participation and profit sharing. Profit-sharing schemes have been favoured in Ireland and Malta, whereas in the Netherlands the emphasis is on individual performance-related schemes.

Table 10: Employer positions on VPS
Country Perspectives on VPS
AT WKO seeks to make a greater proportion of wage settlements contingent on company profitability. Company-level negotiations would determine the type of VPS to be used.
BE Employer organisations promote collective VPS such as a company performance bonus and profit sharing.
BG VPS are promoted as a general policy objective.
CZ VPS are promoted as a general policy objective, along with an increase in the proportion of earnings which are variable.
DE Sectoral collective agreements should make a proportion of wage settlements available for company-negotiated VPS.
DK VPS are a prominent objective, promoted through greater scope for company-level bargaining. The type of VPS is a company-level decision.
ES VPS are promoted as a general policy objective, along with an increase in the proportion of earnings which are variable.
FI Employer organisations promote schemes related to collective performance, such as productivity and/or profitability.
FR A wide range of VPS are promoted, including schemes related to collective and individual performance and forms of financial participation.
HU Employer groups have no policy on VPS.
IE The promotion of VPS is a prominent objective, including profit sharing and individual performance schemes. IBEC established an independent association to facilitate best-practice exchange on profit sharing among member companies.
IT Employer organisations favour linking wages more closely to productivity and profits, enhancing scope for company negotiations at the expense of sectoral-level base wage settlements.
LT Although promoting VPS is a general objective, the current priority is to improve basic wage levels in response to labour market shortages.
LU VPS are promoted as a general policy objective.
LV VPS are promoted as a general policy objective.
MT Employer organisations strongly promote profit-related schemes.
NL Employer organisations strongly promote individual performance pay schemes.
NO Employer organisations promote VPS in principle. In practice, decisions are for member companies under the openings for VPS contained in sectoral agreements.
PL The promotion of wage flexibility, including VPS, is a general policy objective.
PT VPS are a matter for member companies, and are left to their discretion.
RO VPS are not actively promoted.
SE In the manufacturing sector, employer groups express a preference for collective and individual performance schemes, rather than profit sharing. In banking, VPS are viewed as a matter for member companies.
SI Employer organisations seek to increase the share of VPS in earnings, reflecting company productivity and profitability. The choice of VPS is a decision for member companies.
SK VPS are a matter for member companies, and are left to their discretion.
UK VPS are a matter for member companies, although the manufacturing federation EEF supports practices which link wages to ability to pay.

Source: EIRO national centres

Trade unions retain a strong emphasis on securing acceptable increases in basic pay (Table 11). They are, in general, not opposed to VPS as long as the resulting earnings are additional to – and do not displace – basic pay. Nevertheless, differences in emphasis emerge across countries. Among the eastern European NMS, basic wages tend to account for a relatively low proportion of earnings, and trade unions in several countries – including the Czech Republic, Lithuania and Slovakia – aim to increase the proportion which is fixed. Among the EU15, however, trade unions in several countries seem willing to accommodate an increase in the proportion of earnings accounted for by VPS, as a means of securing earnings increases which would not otherwise be available. The perspective of trade unions in Norway and Sweden is notable; these are the only countries where unions have been prepared to support the development of individual, appraisal-based performance pay schemes. Elsewhere, trade unions have tended to reluctantly accommodate such schemes, while maintaining opposition in principle. More generally, trade union concerns with VPS focus on procedural issues such as transparency, fairness and use of objective criteria. In the case of individualised schemes, concern extends to distributional outcomes.

Table 11: Trade union positions on VPS
Country Perspectives on VPS
AT Trade unions are supportive of VPS if they are paid on top of collectively agreed wage rates, but are opposed to any offset of sector-determined wages against company-level VPS.
BG The unions are supportive of VPS if they are paid on top of collectively agreed wage rates.
CY Trade unions are supportive of VPS if they are paid on top of collectively agreed wage rates, and provided procedures are transparent and fair.
CZ ČMKOS policy since 2006 is to increase base wages as a proportion of earnings, and therefore to reduce the variable proportion.
DE Trade unions favour VPS which complement regular, collectively agreed wages; hence they are cautious over individual performance pay. The unions oppose proposals to create scope in sector wage settlements for company-negotiated VPS.
DK The unions are prepared to negotiate over VPS, including schemes based on competencies and individual performance.
EE Trade unions are supportive of VPS if paid on top of collectively agreed wage rates. They emphasise the need for schemes that are transparent and fair.
EL Trade unions are prepared to accommodate VPS as long as they do not undermine base pay. The unions emphasise that schemes need to be transparent and are sceptical of individual performance pay.
ES The unions are concerned to ensure that schemes are transparent and use objective measures.
FI Trade unions prioritise sector-wide base wages. They argue that profit-related bonuses should be negotiated.
FR The unions are prepared to accommodate VPS as long as they are not detrimental to base pay.
HU Trade unions focus on performance norms of payments-by-results schemes.
IE Trade unions tend to oppose individual performance pay. They are disposed towards gainsharing schemes to help workers share in recent economic success and strengthen employee stakeholding.
IT VPS must be additional to sector base wage levels, and should focus on distributing productivity and profitability gains to workers.
LT Trade unions are not opposed to VPS, but their priority is to increase the proportion of base pay in overall earnings.
LV The unions are supportive of VPS if paid on top of collectively agreed wage rates.
MT The unions have traditionally favoured collective VPS, as long as they are not detrimental to base pay. They express concerns over the transparency and fairness of individual performance pay schemes.
NL Trade union attitudes towards VPS have become more open. A major objective of the Dutch Trade Union Federation (Federatie Nederlandse Vakbeweging, FNV) is to expand the coverage of profit-related bonus schemes. The unions are concerned about the transparency and validity of procedures under individual performance pay schemes.
NO Trade unions are seeking to secure regulation by collective agreement of bonus and profit-sharing schemes, and a maximum level on the amounts involved. In manufacturing, they are traditionally sceptical of individual performance pay schemes; this is less the case in banking, where transparent procedures and trade union monitoring of distributional outcomes are prioritised.
PL The unions prioritise increases to base pay and, regarding VPS, focus on procedures for bonus systems.
PT In the manufacturing sector, bonus schemes should be regulated by collective agreements and based on objective criteria. In banking, the trade unions are prepared to accommodate different types of VPS, providing that schemes are transparent and the criteria are objective.
SE The trade unions support an element of pay-setting which reflects individual competence and performance, based on transparent appraisal. Collective bonus and profit sharing are accepted if they are on top of base pay.
SI The unions are prepared to negotiate on VPS if economic conditions are supportive.
SK Trade unions aim to increase the proportion of base pay in overall earnings.
UK Trade unions prioritise base-pay increases. They accommodate company performance bonuses if paid on top of base pay. The banking unions focus on procedural transparency and the standardisation of awards under individual merit pay; in manufacturing, the trade unions resist merit pay due to its ‘subjectivity’.

Source: EIRO national centres


4 – Conclusions

Internationalisation and intensification of competition within the EU’s increasingly integrated market are reflected in both growing pressure and scope for wage flexibility under the differing wage-determination systems of Member States. In particular, two developments are prominent in enhancing possibilities for wage flexibility. First, further decentralisation has occurred within multi-employer bargaining systems, involving greater scope for the negotiation or determination of an element of wages at company level. Second, increasing use of VPS is reported across most, although not all, of the countries under consideration.

Concerning the first development, where multi-employer bargaining arrangements prevail, the traditional function of sectoral and intersectoral agreements in providing a minimum level which reduces wage competition within national product markets has tended to be eroded. In some Member States, the minimum level provided by multi-employer agreements is tantamount to a norm for base wages rather than a minimum. In these countries, the possibility under specified circumstances for derogation by individual companies facing economic difficulties and/or undergoing restructuring from sector wage norms is now widespread in the manufacturing sector at least. Nevertheless, downwards wage flexibility would not seem to have become a generalised issue, either under such derogation arrangements or under two-tier forms of multi-employer bargaining where sectoral negotiations tend to establish a minimum base level. Equally, downwards wage flexibility in the form of pay cuts, freezes or increases below sector norms seems to be hardly any more prevalent among countries and sectors with single-employer bargaining arrangements.

More generally, and to varying extent, increased scope exists under multi-employer bargaining for second-tier negotiations over at least an element of wages at company level, associated with greater upwards flexibility of wages. Such upwards flexibility arises in two main ways. First, in a significant number of countries and sectors, upwards flexibility can emerge through the scope for negotiations at company level, which has tended to be enhanced in recent years. In several countries and sectors, scope for any company-level wage negotiations is contingent on considerations of company performance, productivity or profitability. Secondly, implementation of VPS can lead to upwards flexibility if these are paid on top of collectively agreed wages, which is more frequently the case under both multi-employer and single-employer bargaining.

Multi-employer agreements in some countries and sectors set out either frameworks for VPS or openings for negotiation of specified schemes at company level. However, more usually – beyond general enabling clauses in sectoral agreements – VPS are left to company-level negotiation or determination. The result has been space for unilateral implementation of schemes by companies, more marked in some countries than others, as well as their introduction through negotiations with local trade unions or works councils. VPS are a feature in both the banking and manufacturing sectors in most countries, although they tend to be more widespread in the former than the latter. Banks are also more likely to operate a number of different forms of VPS, and to have introduced individual, appraisal-based performance pay, than are companies in manufacturing. The significance of VPS for earnings is also greater in banking than manufacturing. There is a noticeable trend away from piecework schemes and towards productivity bonuses and profit sharing in manufacturing, while in banking all forms of VPS have become more widespread as seniority systems are displaced.

In overall terms, the growth of VPS has been accompanied by some retreat in the influence of collective bargaining on earnings, a feature which is more salient under single-employer bargaining – and particularly among the relevant eastern European NMS – than under multi-employer bargaining. This broad conclusion also varies according to sector and type of VPS. VPS are more likely to be regulated by collective agreements in manufacturing than in banking. Collective agreements are more likely to regulate productivity and other output-related or sales-related bonuses, as well as individual, appraisal-based performance pay, than company-performance bonuses and profit-sharing schemes.

A principal objective of employer organisations in many countries where multi-employer bargaining arrangements prevail is to enhance further the scope for negotiation over an element, at least, of wages at company level. More specifically, employer organisations see this strategy as better enabling wages to reflect the business situation of companies, including strengthening the link between pay and productivity, performance and profitability. In this context, VPS are seen as having a central role to play and, in a number of countries and sectors governed by multi-employer bargaining, a priority for employers is to focus company-level wage negotiations on the implementation of such schemes. Similarly, employer organisations in most of the EU Member States and sectors with single-employer bargaining are keen to promote VPS.

In general, trade unions accord priority to protecting, and securing adequate increases, in base wages. Under multi-employer bargaining systems, this tends to be expressed as a defence of existing arrangements which establish sector wage norms. In almost all of the countries, however, the trade unions are not opposed to VPS, as long as the payments involved are additional and do not threaten base wages. Trade unions also place considerable emphasis on the need for schemes to be transparent and fair. The gender implications of the growing diffusion of VPS seem to have surfaced as an issue in a minority of countries. Where they have, awareness and activity are more evident among trade unions than employer organisations.

Overall, it is difficult to envisage an easing of the current economic and competitive pressures for wage flexibility within Europe’s single market. VPS look set to become even more widespread, albeit with continuing differences between countries and sectors. Under multi-employer bargaining, wage-setting arrangements are likely to continue to become more responsive to the ability to compete and ability to pay of individual companies. Under both multi-employer and single-employer arrangements, the extent to which VPS are brought within the remit of collective bargaining will be significant in determining the extent to which wage-setting in Europe continues to be jointly governed, or gradually shifts in emphasis towards unilateral employer regulation. The joint cooperation of the social partners is widely seen as a central characteristic of the European social model.


Annex: Country codes

Countrycode Country name
AT Austria
BE Belgium
BG Bulgaria
CY Cyprus
CZ Czech Republic
DE Germany
DK Denmark
EE Estonia
EL Greece
ES Spain
FI Finland
FR France
HU Hungary
IE Ireland
IT Italy
LT Lithuania
LU Luxembourg
LV Latvia
MT Malta
NL Netherlands
NO Norway
PL Poland
PT Portugal
RO Romania
SE Sweden
SI Slovenia
SK Slovakia
UK United Kingdom

Jim Arrowsmith and Paul Marginson, IRRU, University of Warwick

EF/08/73/EN

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