Hungary: wage flexibility and collective bargaining

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Both the government and social partners consider the wages system to be the internal affairs of the firms. It is difficult to identify trends in the use of VPS due to the decentralised structure of collective bargaining and the predominant role of unilateral managerial decisions in individual wage determination. Company level wage agreements focus mainly on average wage increase, and the language on wages systems preserved a traditional approach in which wage supplements connected to working conditions and performance norms for piece-rate are regulated in detail, while stipulations on other forms of VPS are sketchy, allowing further managerial prerogatives.

Section 1. Variable pay: forms, basic data and trends

1) What are the main types of variable payments systems (VPS) used in:

Unfortunately, very few empirical studies are available on the development of payment systems since 1990; statistical data is non-existent in this field.

As a departure point, it is known from the abundant literature produced in the era, that state-socialist system preferred taylorian work organisation and payment by result systems, especially piece rate was widespread in manual jobs. Paradoxically, profit-sharing was known in the state-socialist era, traditionally meaning an annually paid bonus with flexible varied amount, compared to the rigid system of base rates. The wages system also included various supplements referring to hard working conditions (shift-work and other non-standard forms of working time organisation, bad physical working environment, etc.), rewards (jutalom) and bonuses (prémium). Bonuses were tied to predetermined performance criteria, while rewards were paid occasionally ‘for outstanding performance’ without any previously set criteria, therefore often reflecting personal preferences of the management. Interestingly, the wages systems also operated in a fairly informal way; the various supplements, bonuses and even the classification of workers for tariff wages functioned as a pretext for setting wages according to the personal evaluation (even favouritism) of shop-floor supervisors and front managers. The reasons for such disfunctioning of the wages system are rooted in the very nature of the state-socialist economic system (shortage of labour and other production factors, soft budget constraint of enterprises, lack of genuine trade unionism, etc.).

a) manufacturing companies

The few empirical studies conducted following the transition to market economy focussed mainly on manufacturing. Especially the practices of incoming multinational enterprises have been in the centre of field research. However, similar HRM practices rapidly emerged in domestically owned companies too. As a general outcome, case studies revealed a sort of ‘hybridisation’ between the foreign parent companies’ system and the traditional Hungarian system. For instance, many MNEs introduced job evaluation techniques and introduced a job-ladder with tariff wages; in the permissive Hungarian environment, however, this was often done without any meaningful intervention of employee representatives. Determination of base wages through job evaluation studies has been increasingly popular among domestic companies too (even in the public sector), especially with the involvement of some consultancy firms specialised for such services (the most notable example is Hay System). These developments obviously changed the character of wage systems inherited from the past. Classification, bonuses and supplements do not substitute appraisal-set pay systems any more and seniority based systems have been substituted by wages reflecting skills, qualifications, performance and, last but not least, demand and supply in the local labour market.

On the other hand, case studies carried out at Hungarian subsidiaries of multinational enterprises found that many companies introduced the cost-saving and flexible organisational methods (such as 'just-in-time' production, KANBAN, teamwork, job rotation, 'total quality management', flat hierarchies, new pay systems linked to the introduction of appraisal systems, and new forms of employee involvement). These were not only transplanted from parent companies, but in some cases even a more efficient, up-to-the-minute system was established earlier than at existing plants of the same companies in their home country. Innovative companies made use of that work practices and wages systems are hardly regulated by trade unions or works councils, and the employees proved to be highly motivated to adapt to new, flexible work practices. The development of new practices was to a certain extent facilitated by the fairly low unionisation rate at export-oriented manufacturing enterprises in Hungary.

b) retail banks

There is no empirical evidence about pay systems of retail banks.

2) For each type of VPS, please provide information on their quantitative significance as a proportion of earnings.

There is no representative statistics on VPS, the only source are surveys conducted by consultancy firms specialised on HRM. These surveys, however, suffer from manifold methodological problems; questionnaires do not include systematically all forms of VPS; their samples are small; and further bias can be attributed to the fact that the consultancy firms’ own clients tend to be over-represented in the sample. In these reports data on proportion of earnings are often missing.

According to one of these consultancy firms, in 2006 three-quarters of firms applied tools of ‘short-term motivation’ that are more sophisticated than the simple sales-based bonuses. Performance related bonus was the most often used form of ‘short-term motivation’, with 70% of firms using it in 2006. In most cases (55%) such bonuses were defined as a percentage of base wages, while a definite amount was set for 40% of the employees. According to a 2003 survey, this sort of VPS tended to be broad-based systems, i.e. it may be given to every employee in half of the companies. Out of the performance related bonuses 10% were profit-sharing systems in 2003. In most cases (67%) the entitlement depended on the position held in the hierarchy of the organisations only, and 23% of such firms take other conditions into consideration too. Nonetheless, actually only 10% of the eligible employees received profit-sharing. Bonuses tied to indices other than profit were even more widespread. At these firms altogether 81% of employees received some bonuses. On the other hand, every employee received some bonuses at 37% of firms. (The sample of this survey included 50 relatively big firms, the majority being foreign owned.)

A similar research run by the Hay Group found that 84% of the respondent companies applied certain form(s) of contingent wages in 2003. Managers were eligible for contingent wages at 79% of companies, while only 59% of manual workers could expect such payment. Bonuses depending on company performance were more frequent among top managers, while the other forms (depending on individual performance or occasional contingent wages) were common among clerical and professional employees. (The sample of this survey consisted of 201 firms, the majority were foreign owned.)

In an economic weekly, an expert of Hay Group also mentioned examples for the proportion of VPS in the total earning. In 2005 in case of a CEO this could be as high as 40%, and reached 25% for other managerial positions. The total earning exceeded the basic wage by 16-20% for shop-floor supervisors, foremen and in typical jobs with excessive overtime hours (like machine operators, drivers of fork-lift trucks, etc.). Most of the companies practically did not pay rank and file employees sizeable VPS.

As far as instruments of ‘long-term motivation’ are concerned, 37% of the firms gave employees company shares according to the Hay Group in 2004. At the same time another consultancy firm found that 26% of the companies applied similar tools for ‘long-term motivation’, 80% of such firms introduced Stock Option Plans and 30% used Performance-related Shares. The share-option programmes in Hungarian subsidiaries of MNEs often followed the way paved by the parent company. Share-ownership is the only form of VPS which was investigated with regard to its penetration by a large sample survey. In 2004, answering the questionnaire of the Labour Force Survey conducted by the Hungarian Central Statistical Office (Központi Statisztikai Hivatal, KSH) only 1.3% of the employees mentioned receiving company shares from their employer.

3) What have been the main trends in VPS in recent years?

a) which types of scheme have become more prominent / widespread? b) which types of scheme have become less widespread?

According to the above consultancy firms, the share of VPS grows by 1-2% annually; there are no signs of major changes. Nevertheless, according to the survey the share of firms applying VPS has decreased in the past three years. Especially the incidence of profit-sharing has declined, however, ‘reward-like bonuses’ were becoming more widespread. (The latter rewards performances afterwards, without setting any criteria beforehand.)

Section 2. Wage flexibility and collective bargaining

Please state, for each sector,

i) whether it is governed by single or multi-employer collective bargaining arrangements;

In Hungary sectoral bargaining (multi-employer bargaining with employer associations) is relatively weak (low coverage rates, stipulations set very low level of labour standards, uncertain enforcement mechanisms). In manufacturing 8.1% of the employees are covered by sectoral agreements, 30.5% are covered by company agreements. In the financial sector there is no multi-employer agreement at all, and 40.6% of employees are covered by single-employer agreements. (Data from Ministry of Social Affairs and Labour (Szociális és Munkaügyi Minisztérium, SZMM) as of 30 June 2007). Data on retail banking is not available, only at the aggregated level of ‘Financial intermediation’ (NACE 65-67).)

ii) the coverage (percentage of companies and employees) of collective bargaining;

Manufacturing:

Companies: 2.6 %

Employees: 36.5%

Financial sector:

Companies: 4.6%

Employees: 40.6%

iii) the percentage of the workforce that is female

Manufacturing: 43%

Financial sector: 71%

2a. Wage flexibility under multi-employer bargaining arrangements

1) In the sector(s), are there any recent instances of

a) sector agreement(s) which have provided for a wage freeze or wage increases below inflation?

b) ‘unauthorised downwards’ wage flexibility, whereby companies have effected wage freezes or wage increases below inflation which are not authorised by a sector agreement?

2) Is there scope for derogations from the wage norms established by the sector agreement(s) through mechanisms such as hardship, opt-out or discount clauses?

3) Is there scope for supplementary negotiations over wages at company level (two-tier negotiations) within the sector agreement(s)?

4) Are VPS regulated by provisions in the sector agreement(s)?

5) Is there provision in the sector agreement(s) for individual employees to make choices trading an element of wages against e.g. working time (hours/ holidays) or deferred income (pension contributions)?

6) Are there instances of any of the above forms of wage flexibility becoming the focus of industrial disputes?

7) Is there any evidence or debate about a gender dimension to wage flexibility, in terms of its effects?

2b. Wage flexibility under single-employer bargaining

In Hungary company level trade unions and employers conclude ’wage agreements’ on the annual wage increase in the competitive sphere (i.e. private sector plus state owned enterprises). Relatively rarely do these agreements include stipulations on changing the amount of bonuses, as part of the method on how the increases should be implemented. Wage agreements are concluded on a yearly basis, normally in the months after the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) has agreed on the minimum wage and has made its recommendation on the wage increase for lower level bargaining parties. The practice of annual wage agreements started in the early 1990s when the annual rate of inflation was between 20 and 30% and the successful agreements ensured indexation of wages. While in the early 1990s (between 1992 and 1994), company level wage agreements covered 500 to 600 thousand employees, in recent years their coverage was lower. In 2007 wage agreements at companies covered only 167 thousand, 8.3% of the employees in the competitive sector. (Source: Registry of collective agreements, Ministry of Social Affairs and Labour (Szociális és Munkaügyi Minisztérium, SZMM)). Nonetheless, it is very likely that the registry data is underestimating the situation, due to non-compliance with law on compulsory submission of data for statistical purpose. Another survey run by the National Employment and Social Office (Foglalkoztatási és Szociális Hivatal, FSZH) found that wages are regulated by collective agreements (including multi-employer agreements) at three times as many companies as in the records of SZMM, and covered 42% of employees in 2004 . Notwithstanding the enormous methodological uncertainties, whether 8% or 42 % are employees covered by the agreement, it is certain that at the vast majority of companies wages are determined without any intervention of trade unions.

Furthermore, even if the company union concludes a wage agreement, in the understanding of Hungarian trade unionists this does not mean more than developing a broad framework of wage formation. ‘While they fight for higher wages, what they bargain for is the increase of the gross total of wages at the company and/or the minimal wage increase. At the same time they accept the unlimited right of the company management to determine individual wage increases within the frames agreed on by the trade union. In Hungarian trade unions’ interpretation, collectively regulated industrial relations mean the designing of basic frameworks within which there are broad possibilities for the management to make unilateral decisions based on the performance of individuals and groups of employees as well as to bargaining informally with individuals and small groups – outside the trade unions.’ (See: András Tóth: Regulated Employment or Regulated Individual Bargaining? Strategies of Post-Guild and Post-Socialist Trade Unions to Regulate Employment Relations. In: Fazekas K. and Jenő Koltay (eds): The Hungarian Labour Market 2006. pp 148-157. (See http://econ.core.hu/doc/mt/2006/en/infocus2006.pdf)

1) Are there any recent instances in either/both sectors of wage freezes or wage increases below inflation concluded under company wage agreements, with unions and/or works councils?

In 2007 this was the rule rather than the exception. KSH has reported a massive decrease in real wages in the first ten months of 2007. Gross average income rose by 8.2%, while net average income increased by 2.5%. (In manufacturing the net income rose by 3.0%, in the financial sector decreased by 5.6%.) When adjusted for inflation, this corresponds to a 5.2% decline compared with real wages a year before. The drop was due mainly to the 2006 austerity package, which increased both the tax wedge and consumer prices. (HU0708029I)

2) In the relevant sector(s), are organisations without collective bargaining

a) any more likely to implement wage freezes or below-inflation increases to base pay?

No information available.

b) more or less likely to use VPS than organisations covered by collective bargaining?

No information available.

3) Are VPS in the relevant sector(s) regulated by provisions in company agreements with unions and/or works councils?

In manufacturing the language of company collective agreements on wages systems reflect a fairly traditional approach. Firstly, this means that trade unions seek to develop a wage tariff system with well-defined classification rules. (This approach often meets the resistance of company management, for only the minority of collective agreements includes wage tariffs.) Secondly, the stipulations on wages system are often limited to provide meticulous regulations of various supplements enumerated by the Labour Code or defining industry-specific supplements or bonuses that employees traditionally receive at the given company. The first includes wage supplements for shift-work, overtime, on-call work and other non-standard forms of working time organisation, posting, etc., for which default remuneration is determined by the law, but it also allows deviations in favour of the employees through collective agreements. In turn, at many points the law also allows deviations in favour of the employers in terms of the duration of non-standard form of working time organisation (for instance, the amount of yearly overtime ordered by the employer, the length of reference period in working time account systems), therefore a trade-off between flexibility and wage supplements is clearly facilitated by the law. On the other hand, many forms of supplements are usually tied to certain jobs (for instance, cashiers, drivers, trainers of young workers, jobs with extremely bad/dangerous physical working environment) or to certain extraordinary occasions (seniority bonus after 10, 20 years of service, retirement bonus, donating prizes established by the company, etc.) Many of such awards have been inherited from the socialist era together with their old-fashioned regulations.

Almost all collective agreements enumerate the wage systems applied at the company, however, only the minority of stipulations determine which system should be applied for whom (or for which organisational unit or groups of workers). The most common wages systems are hourly wages and performance related pay (in varying forms, from simple individual, proportional piece rate through team-level performance related pay to the combinations with hourly wages). Collective agreements lay down the basic principles of the use of wages systems, and pay special attention to performance norms related to piece-rate systems and often include procedural rules for setting or tightening performance norms.

Usually collective agreements devote far more paragraphs to supplements and wages systems than to Variable Pay Systems. VPSs are often mentioned as ‘incentives system’ by the agreement, but generally the stipulations are rather sketchy, characteristically limited to the enumeration of possibly forms. In these lists there is a huge variety of different rewards (jutalom) and bonuses (prémium) by preserving the wording and its meaning inherited from the state-socialist period: 13^th month pay contingent on achieving the expected production goals or profit margin, occasional production/productivity goals, profit-sharing (or more precisely, bonuses contingent on the company profit), bonuses for savings in fuel/raw material and occasional rewards for excellent performance. The ‘presence-bonus’ is a special post-communist invention: in the early nineties in fighting absenteeism many companies introduced a bonus for those not taking any day off in a certain period, regardless the reason for being absent. However, the typical wording is that bonuses and rewards ‘can be given’, i.e. it remains the prerogative of the management to make a decision on conditions, the amount and the selection of the recipients. Yet, it can be viewed as the merit of these agreements that they try to control at least the occasions, preconditions for eligibility and procedural issues of such rewards. Exceptionally, a few agreements have definite stipulations on the conditions; for instance, setting up a special fund for bonuses equal to a certain percentage of the wage bill, assigning managers responsible for setting criteria for bonuses, predetermining the amount of reward as a function of wages and profit in the audited balance sheet, establishing rules for distribution of bonuses within the team, requiring consultations with employee representatives on principles of distribution, etc. It is a typical stipulation of collective agreements that excludes managers from the scope of its established rules. (Source: Studies on the language of collective agreements. (10 manufacturing industries, various authors) Commissioned by SZMM, 2006-7. In Hungarian: http://www.szmm.gov.hu/mkir/kszelemzesek.php))

4) Are there any examples of company-level agreements concerning provision for individual employees to make choices trading an element of wages against either working time (hours/ holidays) or deferred income (pension contributions)?

a) details of the ‘cafeteria’ provisions involved, including the proportion of wages available for trade-offs; b) information on the take-up by employees covered by such agreements;

‘Cafeteria’ provisions are becoming increasingly popular in Hungary; however, their meaning is slightly different. Under the Hungarian ‘cafeteria’ system employees can make their choice on the composition of non-wage allowances (the options usually include vouchers for meal and holiday resorts, contribution to voluntary health/pension insurance, reimbursement of travel or internet subscription, etc.) up to the maximum value set by collective agreement, or by the employer unilaterally in the absence of collective bargaining. The popularity is partly due to the tax-free status of certain elements, the actual amounts for these tax-free allowances are set by the legislation on personal income tax law. There is no possibility for individual trade-off between wages and non-wage allowances (as the latter are ‘cheaper’ for the employer due to the tax exempt status). Nonetheless, in the course of collective bargaining or making company decision on the ‘compensation package’, wages and the value of the ‘cafeteria’ are treated together, so trade-offs may emerge. On the other hand, such a trade-off also changes the distribution of income, for the amount of ‘cafeteria’ is usually equal for all employees, while the annual rises are proportional to the wages/salaries. There is no statistics on the penetration of ‘cafeteria’ system.

5) Are there instances of any of the above forms of wage flexibility becoming the focus of industrial disputes in the applicable sector(s)?

Not characteristic.

6) Is there any evidence or debate about a gender dimension to wage flexibility, in terms of its effects?

No.

Section 3. Views of social partners and government

3a Employers’ organisations

1) Under multi-employer bargaining arrangements, Is enhancing scope for ‘downwards’ flexibility in basic wage levels (e.g. via hardship clauses etc.) a prominent objective for employers’ organisations?

2) Under multi-employer bargaining arrangements, is enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company level a prominent objective for employers’ organisations?

3) Is the promotion of wage flexibility through VPS a prominent objective for employers’ organisations?

In theory yes, but practically it is not a highlighted topic in their rhetoric. For instance, the high level of wage levies or minimum wage are far more important issues.

4) At organisational level, in each of the two sectors, what are the key rationales leading companies to implement each type of VPS, as applicable?

Savings in labour cost and productivity increase in performance related systems for manual workers; identification with company objectives and increasing profit margin for professionals/managers are the key reasons. (Case study evidences are known from manufacturing only.)

5) Have employers’ organisations considered or addressed any potential gender dimension to wage flexibility, whether in terms of rationale or effects?

No

3b Trade unions

1) What is the position of trade unions towards proposals aimed at enhancing the scope for downwards wage flexibility?

Trade unions contest any form of erosion of wages both at national and company level.

2) Where applicable, how have trade unions sought to regulate use of any increased scope in sector agreements for downwards wage flexibility? 3) Under multi-employer bargaining arrangements, is enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company / organisational level a prominent objective for trade unions?

4) What is the position of trade unions towards each type of VPS? What objectives have they pursued in negotiations and consultation over the introduction and operation of different types of VPS?

The scope of collective bargaining is basically limited to the changes in average wages. Obviously they try to fend off any sort of erosion of the wage level. They pay special attention to performance norms.

5) Have trade unions considered or addressed any potential gender dimension to wage flexibility, whether in terms of rationale or effects?

No

3c Role of Government

1) Have there been any recent government policy initiatives to promote ‘downwards’ or ‘upwards’ wage flexibility, or variable payments systems?

2) Are there any legal provisions which regulate any of the different types of VPS?

In 2003 and 2006 the amendments to the Labour Code refined the requirements of methods for setting performance norms. No other intervention is known.

3) Are there any fiscal incentives aimed at promoting the take up of different types of VPS?

So far the Approved Employee’s Benefit Programme has been the only financial policy instrument which supports companies’ VPS initiatives. (HU0701019Q)

4) Have there been any significant developments in wage flexibility, as broadly defined in the introduction, in the public sector in recent years?

5) Has the government considered or addressed in any way the potential for forms of wage flexibility to have differential impacts according to gender?

Commentary by the NC

To understand the current situation it is inevitable to know about the historical background and current representation strategy of unions. (See 2.b. for details.) On the other hand, the present drop in real wages can be attributed mainly to government measures; they have nothing to do with employers’ wage policy.

Dorottya Boda and László Neumann, Institute of Political Science, Hungarian Academy of Sciences