Variable pay under debate

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Variable pay schemes were in the news in the Netherlands in February 2002. Employers' representatives contested research findings published by KPMG Consulting, questioning the value of performance-related pay. Meanwhile, at Philips, management and the central works council are in dispute over the company's share-option scheme for managers.

In February 2002, KPMG Consulting published the findings of research into variable pay in the Netherlands (TN0104201S). The study finds that, since 1997, the number of collective agreements providing for variable pay has increased fourfold; 30% of the collective agreements concluded in 2000 include provisions on the topic. The study examined 230 private and public sector employers. Of those that have variable pay, individual performance-related payment methods are applied in close to 50% of cases. In almost 20% of cases, variable pay is based on team performance, with the remaining employers either offering such payments to the entire organisation or applying a combination of all three methods.

In the private sector, 80% of companies were found to use performance-related pay, compared with 40% of public sector organisations. Furthermore, a larger proportion of the workforce in private sector companies is covered by this form of payment than in public sector organisations. In most cases, the variable component applies to two months' pay, though in the governmental and public sector it applies to a maximum of one month, and in 'knowledge-intensive' services it affects as much as three months' pay. KPMG Consulting took a particularly critical look at the principles behind the award of variable pay, concluding that, alongside objective criteria, subjective criteria also play a role at most organisations. The study concluded that that variable pay does not always lead to better performance

Employers' representatives did not agree with the findings of the KPMG Consulting study. They point to the rising number of collective agreements on variable pay as proof that such forms of payment are valid and are becoming increasingly popular among employers and employees. Employers think that it is important that pay keeps step with the economic cycle and with the results of the individual company in particular. They call for an appropriate mix of payment criteria - work content, individual performance and results - within each specific context. Employers' representatives believe that flexible forms of payment are most appropriate in companies where the employees are the most important 'capital goods' or where a strong focus on results is crucial. Within this business context, flexible payment is seen as having a positive impact. The employers' representatives support profit-sharing, a collective form of variable pay, and are also not opposed to individual performance-linked pay, especially for top executives, who are in a position to influence their environments and thus have more control over achieving set objectives.

Variable pay for senior management has recently been an issue of dispute at the Philips electronics group. The Philips central works council (Centrale Ondernemingsraad, COR) has gone to court over the company's share-option scheme for management, seeking the right of consent (by law, works councils have this right over a range of issues) regarding the scheme and the grounds upon which employees receive share options - areas in which the company believes that the COR should not have a say, viewing the share-option scheme not as a 'structured arrangement', but as an option. The COR wants all 31,000 employees at all levels of the company to be eligible for share options, not just management (for example, on joining Philips in 1997, the current financial director received share options now worth nearly EUR 10 million) According to a spokesperson for the Federation of Dutch Trade Unions (Federatie Nederlandse Vakbeweging, FNV), each employee generates added value for the company. The subdistrict court ruled in favour of the COR, but Philips has lodged an appeal.

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