Payment by results examined

A recent study shows that 12% of Austrian employees are paid by results. The social partners tend to underestimate the phenomenon, and especially the continued significance of piece rates. Both works councils and management appear to be insufficiently informed of the options available, the regulations to be observed, and the dangers and gains to be expected.

In September/October 1997, the Ministry of Labour, Health and Social Affairs (Bundesministerium für Arbeit, Gesundheit und Soziales, BMAGS) published a report based on commissioned research undertaken by Birgit Buchinger, Ulrike Gschwandtner and others on the use and prevalence of performance-based wage systems in Austria. "Leistung lohnt sich nicht". Zur Dekonstruktion des Mythos Leistungslohn ("Performance doesn't pay": The deconstruction of the myth of payment by results) is available free of charge from the Ministry as Research Report in Social and Labour Market Policy No. 60. What follows is a summary of the report's contents and findings.

Legal background

By law, the introduction and specifications of payment by results (Leistungsentlohnung) must be agreed to by the works council, and any applicable collective agreements have to be observed. However, there cannot be a works council in an establishment with fewer than five "eligible" employees: close relatives of the owner, high-level staff, employees with less than six months' service in the establishment and third-country nationals are considered ineligible. In practice, establishments with fewer than 20 eligible employees rarely have works councils. Where there is no works council, individual employment contracts have to specify the particulars of the wage system. In cases where payment by results is negotiated with only a few employees instead of the entire workforce of a unit or establishment, the works council's agreement is necessary only if the individuals and management cannot agree.

The procedures of change

The Ministry report contains four detailed examples of industrial plants with systems of payment by results. While the study's purpose was to document these systems and their effects, we will focus here on the procedures and dynamics of change in wage systems. In three of the four cases management intended to change the wage system, but in only two of them could these intentions actually be carried out.

In what the study presents as the most successful case of change, a wood processing plant shifted from piece rates to a bonus scheme. The company originally brought in an external consultant and drew up a list of five elements of pay determination: flexibility; willingness to work overtime; creativity; working time spent in the plant; and diligence and dexterity. The works council did not agree and called upon the Chamber of Labour to provide an expert. The two sides agreed on a "dry run" and found the system was too arbitrary. Together they then set out to draft a new wage system. A set of goals was defined: transparency for all; individual work and group work; just wages; efficiency; adherence to the collective agreement; performance orientation; adaptability to automatic data processing; simple and efficient handling; integration with time management; flexibility; and easy-to-measure criteria.

Ultimately, a system was agreed that compiled wages from the minimum set by the collective agreement, plus: a "qualification bonus" derived more from individual on-the-job experience than formal training; a performance bonus identical for all employees; and supplements for dirty, heavy and dangerous work. In addition, a four-year changeover period was agreed. A staff meeting was held to secure the consent of the workforce, not just of the works council. It was felt that this would be useful because a number of employees would initially earn less than they used to, though all would be better off in the longer term. The results, according to the study, were higher productivity (up 11% on average), higher wages (up 13% on average) and wage equalisation.

In a second example of a shift to a bonus scheme, management did not succeed in securing the works council's approval for shifting the entire workforce. Instead, in an ongoing process begun in 1990, more than 30 works agreements were concluded - each covering the bonus scheme for one set of former piece-rate jobs. From 1995, time-rate jobs were also transformed in the same manner. The works council is afraid that a general works agreement might lower average incomes, a point denied by management.

In both cases, automated production reduced the scope for piece rates to have a significant impact on productivity and incomes. The focus of monetary incentives shifted to quality control and thus from piece rates to bonus schemes.

In the two other cases studied, piece rates were maintained. In a textiles plant producing knitted fabrics, production was organised on the basis of individual piece rates. Management foresaw no need to change the wage system, in spite of continuing automation. It was the works council that began a campaign for a quality bonus to be paid twice yearly to all production workers. Agreement was apparently reached with plant management, but not with the headquarters located in Germany. In a metalworking plant in the automotive sector, group piece rates are being maintained. The study argues that the relatively low wages of a largely female and immigrant workforce make labour-intensiveness and piece rates more cost-effective than automation coupled with a bonus scheme. In spite of piece rates and the existence of a works council, there is no works agreement on the subject.

Prevalence

An analysis of data from the Central Statistical Office's (Österreichisches Statistisches Zentralamt, ÖSTAT) June 1994 microcensus forms part of the study. It shows that 11.8% of employees are paid by results - 13.2% of the male and 9.7% of the female employees. Some 340,000 employees reported that they were paid by results, with a total of 429,900 instances of payment by results reported (ie some employees were covered by more than one form of payment by result). Of the incidences of payment by results, 64% were bonus schemes, 15% were individual piece rates, 12% were group piece rates, and 9% were tips. As might be expected, tipping is absolutely and relatively more prevalent among female employees than among males. Women are particularly underrepresented in group piece rate schemes and slightly overrepresented in individual piece rates.

Around 9% of employees paid by results are foreign nationals, which conforms with this group's overall share of the labour force. Construction, retailing, insurance, and restaurants and hotels are the main sectors operating performance-related schemes, accounting together for close to a quarter of all instances of payment by results. For piece rates alone, a comparison with an earlier microcensus shows instances to have grown from 112,200 in 1985 to 118,000 in 1994, resulting in a stable 4.1% share of total employment.

Social partner attitudes

As part of the study, 18 trade union and Chamber of Labour officials were interviewed along with two employers' officials, one representative of the Public Employment Service and three academics. The study concludes that trade unions have been focusing almost exclusively on the size of the wage, and concern themselves little with how the wages are earned. Trade union training no longer addresses payment by results. Those interviewed largely seem to feel that the issue is both diminishing in importance and well under control. The study authors, however, seem to feel that the changed composition of the workforce covered by payment by results, who are now mostly women and foreign nationals of either sex, has led to the reduced interest taken by the mostly male and exclusively Austrian trade union officials. The study does not contain material that might help to decide this conflict of interpretation.

Commentary

Prevalence data show payment by results to be an important feature of employment. It is likely that bonus schemes have been gaining in importance while piece rates - contrary to belief of the social partners and other experts - affect a stable share of employment. The notion, suggested by the cases studied in detail, that payment by results may be focused on women and immigrants, is not corroborated by the prevalence data. This is particularly true of piece-rate schemes. Women are underrepresented and aliens hold an average share. It is also true, though, that while piece rates are closely regulated by law and collective agreement, the same does not hold for bonus schemes. Generally the social partners have been paying less and less attention to the ways in which the wage is earned. This may begin to pose problems, especially with overexertion. It would seem advisable to put the issue of wage systems back on the agenda, particularly the training agenda. Works councils and managers seem insufficiently informed about the results to be expected from different schemes in terms of costs and benefits to both the enterprise and the employees. Preconceived notions seem to hold sway and to obstruct a constructive dialogue at plant level. (August Gächter, IHS)

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