Increase in extent of performance-related pay

Findings from the Workplace Employment Relations Survey 2004, published in mid 2006, show an increase since 1998 in the proportion of British workplaces that use performance-related pay schemes. However, the incidence of profit-related payments and employee share ownership schemes has remained unchanged. Considerable variation between sectors in the use of variable pay schemes is also evident.

The Workplace Employment Relations Survey 2004 (WERS 2004) (UK0607019I) covers three types of variable pay schemes: performance-related pay, profit-related pay and employee share ownership schemes. The survey provides data on the incidence of variable pay at workplace level. It reveals that, in 2004, performance-related pay was the most common form of variable pay in British workplaces (Table 1). Variable pay was also much more prevalent in the private sector than in the public sector.

Table 1: Use of variable pay schemes in 2004, by sector
Incidence of three types of variable pay systems at workplace level, by sector
  % of workplaces
  Private sector Public sector All
Performance-related pay * 44% 19% 40%
Profit-related pay ** 37% 15% 36%
Employee share ownership scheme ** 21% 16% 21%

Base: * all workplaces with 10 or more employees; ** all trading sector workplaces with 10 or more employees.

Source: Kersley et al, 2006 and additional web tables (145Kb PDF) 7.1, 7.2 and 7.3

Performance-related pay

In the survey, performance-related pay systems include payment by results and merit pay. In 2004, 40% of workplaces provided payment by results or merit pay. However, the format and wording of the WERS 2004 performance-related pay question had changed from 1998, when 19% of workplaces had ‘individual or group performance-related schemes’. Nevertheless, it is possible to infer from this finding and from the 1998–2004 panel survey that the proportion of workplaces using performance-related pay has increased since 1998. The panel survey, where the 1998 questions were replicated, found that 32% of continuing workplaces had performance-related pay schemes in 2004, increasing from 20% in 1998.

Payment by results refers to variable pay that is determined by the amount of work completed or the value of work, for example commission and bonuses. In 2004, payment by results was used in 30% of workplaces. Financial intermediation was the only sector where a majority (77%) of workplaces implemented a payment by results scheme. The three sectors with the next highest proportions of workplaces awarding payment according to results included wholesale and retail (44%), construction (40%) and business services (39%). Payment by results was more widespread in non-unionised workplaces (33% of workplaces) than in unionised ones (22%).

Merit pay is defined as payment which is dependent on a subjective assessment of individual performance by a supervisor or manager. This form of pay was used in only 16% of workplaces in 2004. The three sectors with the highest proportions of workplaces providing merit pay were electricity, gas and water supply (40%), financial intermediation (37%) and business services (27%). Among unionised and non-unionised workplaces, the proportion of workplaces providing merit pay was practically the same (16% respectively).

Merit pay was less widespread than payment by results in all sectors, with the exception of electricity, gas and water supply and health. Furthermore, merit pay was more common in workplaces with 500 or more employees, while payment by results was more prevalent than merit pay in workplaces with fewer than 500 employees.

Profit-related pay

The proportion of trading sector workplaces providing profit-related payments in 2004 amounted to 36%, down from 39% of such workplaces in 1998. Again, the format of the profit-related pay question in 2004 had changed from the question cited in the 1998 questionnaire. Hence, a more reliable comparison can be drawn from the 1998–2004 panel survey, which showed that the incidence of profit-related pay schemes since 1998 remained broadly unchanged: in both 1998 and 2004, 41% of continuing workplaces had profit-related pay schemes.

In 2004, profit-related pay appeared to be more common among the largest organisations and establishments. The majority of workplaces with 500 or more employees had employees who benefited from a profit-related pay scheme. Financial intermediation and electricity, gas and water supply were the two leading sectors in the provision of profit-related payments (67% and 59% of workplaces respectively). The proportion of unionised workplaces (43%) providing profit-related payments was eight percentage points higher than the non-unionised workplaces (35%) providing such options.

Employee share ownership schemes

About one fifth (21%) of trading sector workplaces operated employee share ownership schemes, which is slightly up from 19% in 1998. Although the format of the question relating to the share ownership schemes in 2004 was also different from the 1998 format, it is possible to infer from the 1998–2004 panel survey that there has been little change in the incidence of share ownership schemes since 1998: in both 1998 and 2004, 15% of continuing workplaces used such schemes.

In 2004, financial intermediation (82%) and electricity, gas and water supply (70%) were the leading sectors in the provision of share ownership schemes. These schemes were more widespread in unionised workplaces (46%) than in non-unionised ones (15%).

Commentary

WERS 2004 shows that performance-related pay is more widespread than profit-related pay and employee share ownership schemes, and that the proportion of workplaces covered by performance-related pay systems has increased since 1998. This finding appears to suggest that, under increasing competitive pressure, more employers are looking to emphasise and give incentives to improve individual performance rather than linking pay to organisational performance.

Further information

Kersley, B. et al, Inside the workplace: Findings from the 2004 Workplace Employment Relations Survey, London, Routledge, 2006.

More information on the report and the survey, including the first survey findings (540Kb PDF), is available at: http://www.routledge.com/textbooks/0415378133/default.asp.

Molraudee Gray, IRRU, University of Warwick

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