Government lifts ban on public sector bonuses

The improvement in Latvia’s economy has prompted the government to restore public sector bonus payments that were banned in 2009 to help tackle the country’s budget deficit. At the end of 2011, employees at the State Revenue Service received bonuses for combating the shadow economy, and some police service workers also received bonuses. In September 2012, bonuses were paid by state-owned stock companies and to workers in state and local government institutions.

Public sector wage cuts

In 2009, when Latvia’s budget deficit became acute, the Saeima, the Government of the Republic of Latvia, capped the salaries and bonuses of public sector employees. Between 2009 and 2011, cuts in the public sector wage bill accounted for almost half of the money saved through deficit reduction measures. Salaries in the sector decreased by an average 30%. Virtually all forms of performance-related bonus were stopped.

State stock companies help fill the treasury

To increase the amount of money coming in to the treasury, the government imposed a two-year ban, starting in 2010, on the payment of bonuses by state stock companies. The companies had to transfer 90% of their profits to the national budget.

However, criteria were set for the payment of bonuses even during the crisis. A state stock company could pay a bonus if:

  • it did not owe taxes to the state or local government budget;
  • if its annual report for 2009 and 2010 showed a profit, or if any losses were a result of an investment programme and not the result of illegal activity or no activity.

In 2009, 20 stock companies fulfilled the criteria.

At the beginning of 2010, the government amended the criteria to specify that before a stock company could pay bonuses, it had to show a minimum profit of LVL 500,000 (€715,900 as of 28 November 2012). Further requirements stipulated that:

  • the company had to be competitive in the international or local market;
  • it could not be receiving subsidies from the state or local government to carry out its main functions;
  • the return on its own capital had to exceed 4%;
  • it had to be engaged in the transport, energy, communications, forestry or water supply sector.

In April 2010, the government allowed 16 stock companies to give bonuses.

Salaries restored most rapidly in state administration

Financial motivation measures in state administration were restored at the end of 2011. In November, employees of the State Revenue Service (VID) received bonuses of 75% of their basic monthly salary, and in December 24% of police employees received bonuses or monetary awards. At the end of 2011, the Chair of the Saeima Economics Committee, Vjačeslavs Dombrovskis, insisted that the salaries of public sector employees should be increased. However, he added that increases should be introduced gradually and in accordance with uniform criteria in order to avert the chaotic situation that prevailed before the crisis.

At the end of 2011, Prime Minister Valdis Dombrovskis announced that as of 2012, state stock companies and state institutions or administrative agencies would be allowed to pay annual bonuses. He said they should not be more than 20% of a month’s wages, and could only be paid as long as they operated within the framework of the current salary fund.

In September 2012, the government announced that from the beginning of 2013 all state stock companies would be allowed to pay bonuses.

In 2012, the ban on payment of bonuses to officials and workers at state and local government institutions was also lifted. However, the limitation on the size of the bonus remains in force – not more than 75% of a month’s wages.

Commentary

The government has explained that it is moving quickly to increase salaries in the public sector because poor pay has led to the resignation of key specialists. The government used this argument to justify doubling the salaries of some officials of the state-owned Mortgage and Land Bank of Latvia (LHZB) at the end of 2011.

In the opinion of salary specialists, the government’s intention to control bonus payments by setting strict criteria has not been achieved, and there has been no justification for the purpose or amount of the bonuses paid. Nevertheless, the same specialists agree that the pay of employees in the public sector does need to be increased and that the payment of bonuses is the most flexible way to do that.

The process will continue, as the coalition council in the government has begun discussions about increasing wages with the councils and boards of state- and local government-owned companies.

Raita Karnite, EPC Ltd.

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