UK: Wage flexibility and collective bargaining

  • Observatory: EurWORK
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  • Published on: 27 April 2009



About
Country:
United Kingdom
Author:
James Arrowsmith
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Disclaimer: This information is made available as a service to the public but has not been edited or approved by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

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

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

a) manufacturing companiesb) retail banks

Traditional forms of bonus in manufacturing, such as piece-work or payment by results, are in decline due to changes in work organisation and an emphasis on quality and teamwork. They are not unusual for certain low-skilled jobs, but otherwise have been superseded by collective forms of bonus operating at site and/or company level. In banking, traditional service-related pay systems have been replaced by schemes that allocate increases to pay individually, according to performance, from a collective ‘pay pot’. This is normally based on managerial appraisal but the increase also commonly varies according to position in the pay scale or relative to ‘market rate’. The sector is also at the forefront of using bonuses, whether individual, team or corporate based.

Nationally representative data is available from the 2004 Workplace Employment Relations Survey (WERS 2004). The financial services sector (data is not readily available for retail banks) was reported to have the highest incidence of VPS, with 82% of workplaces using ‘incentive payments’, i.e. payment-by-results (PBR) and/or merit pay (Keresley, et al, 2006: 190). The same figure applied to the incidence of employee share-ownership schemes (ESOS), and the sector also had the highest incidence of profit-related payments, at 67%. Further analysis indicates that use of both merit pay and PBR were above the norm, though paticularly the latter. In WERS, PBR refers to variable pay that is determined by the amount of work completed or the value of work, including commission and bonuses. In 2004, this was used in 30% of all workplaces, but financial services was the only sector with majority usage, at 77% (Gray, 2006). Merit pay, defined as payment dependent on a supervisor’s assessment of individual performance, was used in only 16% of all workplaces but in 37% of those in financial services. In private manufacturing, ‘incentive payments’ were used in 51% of unionised workplaces and 33% of non-unionised cases. Only 10% used ESOS, though profit-share applied in 41% of unionised and 37% of non-unionised workplaces (38% overall). Further analysis of the data indicates that merit pay was used in 13% of manufacturing workplaces and PBR in 27% (data is not available concerning employee coverage). This latter figure is also supported by a representative company-level survey of 1,000 firms in 2003 (Cowling, 2007). This found that output-related performance pay was present in half (40.5%) of all firms, and more likely in larger companies though the figure for the ‘primary/manufacturing’ sector was much lower at 24.8%. Banking was not isolated, though the relevant figures for ‘business services’ and ‘other services’ were 34.4% and 22.1% respectively.

Other data is available from professional associations and independent research organisations. According to the latest annual pay survey by the Chartered Institute of Personnel and Development (CIPD), ‘the traditional annual pay award or cost-of-living adjustment is increasingly a thing of the past within the private sector’ (CIPD, 2007: 10). Rather than standardised increases, companies have introduced greater discretion to distribute ‘pay pots’ according to individual and team performance, while taking into account external factors such as market rates and the cost of living. This tendency is linked to occupational types and level, as well as sector. For example, general cost-of-living increases to base pay were applied to 47% of technical/ professional staff and 52% of clerical/ manual in ‘manufacturing and production’, but only 39% and 40% respectively in ‘private sector services’ (sectors are not further differentiated), where individual criteria where also more relevant. Bonus schemes and incentives were also common, used by 84% of manufacturers and 88% service firms, and more subject to change, with 40% of respondents planning revisions (including to targets or payment levels) and a further 23% in the process of adding schemes to those already in place. Service firms had greater use than manufacturing and production of individualised schemes (69% cf. 51%) as well as provision for ad hoc payments (44% cf. 26%). Team-based systems were reported in only 30% of service and 24% of manufacturing firms. Sectoral differences were also found in the objectives of bonus schemes. In PSS firms, the main concern was to link pay directly to performance (77% cf. 63% of manufacturers with bonus arrangements); in contrast the primary objective in manufacturing was to support culture change initiatives (69% cf. 48% of service sector employers).

A 2006 survey by Incomes Data Services (IDS, 2006a) of 122 engineering companies employing nearly a quarter of a million people reported that pay progression was mainly by acquisition of skills, with performance criteria rarely used except for professional engineers and technicians (IDS). Bonuses were common however, and were mostly based on collective criteria and paid annually. A separate analysis showed that merit pay and bonuses were most likely to be found in the motor industry, with a survey of 42 companies reporting that ‘variable pay is an increasingly important component of the overall earnings of employees in the sector’ (IDS, 2006b: 8). Bonus payments are not as high as in banking however, possibly reflecting lower margins and higher base pay. For example, BMW has a site-based bonus for its Hams Hall engine plant linked to quality and budgetary targets. The payment increased from 2.5% basic salary for 100% completion to 3% in 2005/6. IBC Vehicles uses targets relating to quality and scheduling; safety; and employee attendance which pays around GBP 850 per employee. Rolls Royce is unusual in operating a personal bonus scheme in addition to its corporate arrangements. The former pays around GBP 540 per annum; the latter is based on individual or team targets and is linked to appraisal, paying 3% of salary if fully achieved. Only a few Japanese companies (Honda, Nissan, Toyota) utilised a merit-based element in their pay review and progression; others (e.g. Unipres) that had tried linking base pay to appraisal had abandoned this and moved to bonuses. In contrast, a wider survey found that merit pay was used in 20% of manufacturing settlements, though this varied by industry from 33% in chemicals to 12% in engineering and metals (Welfare, 2006).

The use of VPS is likely to be linked to organisational size and ownership, as well as sector. For example, a recent survey of 302 multi-national companies (MNCs) in the UK found that US firms were most likely and German and Japanese firms least likely to make use of VPS (Edwards et al, 2007). Service-sector companies were more likely then manufacturers to use VPS for their largest occupational group (e.g. 75% of service firms used VPS for this group cf. 62% manufacturing). This was explained in terms of different levels of unionisation and occupational requirements (i.e. sales is a more common and individual feature of jobs in the service sector).

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

According to the Annual Survey of Hours and Earnings (ASHE), in 2006 incentive payments comprised 4.4% of gross annual pay for employees in manufacturing and 9.3% of the finance sector as a whole (NACE 65). This compares to an average of 5.5% for all industries and 4.4% for all services.

Further evidence is more readily available for the banking sector, which is dominated by a relatively small number of firms. A review of 67 finance sector pay awards by Industrial Relations Services (IRS) covering 329,606 employees found that 79% of pay awards had a merit element, with 72% solely using performance awards (Dennis, 2006). The median pay pot increase was 3.5% (which for 58% of organisations was a lower figure than the preceding year). Individual increases range according to organisation, especially as many organisations use matrix formula that incorporate years of service and external benchmarks. A relatively low number of staff judged to be poor performers typically received zero awards but otherwise awards vary. However dispersion in merit pay awards is limited by central tendency in ratings, low pay pots linked to inflation, and union campaigns to limit real pay cuts for staff seen as above market rate (see below). The survey also showed that bonuses are virtually universal in the sector, but schemes are highly heterogeneous in design and implications for pay. Typical bonus payments in banks and building societies appear to be in the range 8-12%. The survey found only two cases of profit-share schemes, at Royal Bank of Scotland and another anonymous bank, both paying around 10% of salary.

Similar findings were reported by IDS in a survey of 41 pay awards in 2006 (IDS, 2007a). It found that finance has ‘the biggest fluctuations in average earnings growth due to the emphasis on non-pensionable bonuses’, with the sector as a whole paying bonuses of GBP 19 billion in the period December 2005-April 2006. At HBOS, most support staff received a bonus of 10% salary for on-target performance in March 2006, with schemes for branch staff paying 12%. Employees also received free shares worth up to 5% salary (to a maximum GBP 500). Nationwide staff each received a standard corporate bonus of 10.4% in June; in March Royal Bank of Scotland staff received an average 10.9% bonus, though this varied according to performance from 5.9% to 38.7%. Workers also received a 10% bonus under the profit-share scheme. At Lloyds TSB, bonuses are also linked to individual and business unit performance, and paid up to 10% salary for non-managerial staff. In terms of basic pay awards, the survey confirmed that most settlements increase individual salaries using a matrix based on individual performance and position relative to the market. Awards therefore vary within as well as between companies. However there is some evidence that the union Amicus has been successful in its campaign of ‘zero tolerance of zero pay rises’, with employees above market rate now often receiving increases linked to inflation, though often paid as a non-consolidated lump sum. For example, at Alliance and Leicester all pay increases up to band maxima were consolidated in 2006, with increases above the maxima non-consolidated and subject to a maximum figure of RPI. In Nationwide the award for staff above their target salary was non-consolidated. In the January 2007 review at the National Australia Group (NAG) increases were consolidated into salaries near, on or above the range maximum for the first time.

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

In particular:

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

In manufacturing the general trend is a move from piecework. A factor for low-paying sectors like clothing was the introduction and subsequent increases to the national minimum wage, which made piecework more complex to administer. In engineering, PBR has been replaced mainly by site (and company) level bonus schemes. The situation in banking is a continued use of individual appraisal to allocate base pay increases, though in practice these are more or less standardised within firms for the majority of staff rated as effective performers. The growth and multiplicity of bonuses is more important in terms of earnings. These have been used to promote culture change and share in business success without adding to fixed costs.

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;

Sector arrangements were terminated by the employers’ associations in banking in 1987 and manufacturing (i.e. engineering) in 1989. Collective bargaining in both sectors is conducted primarily at company level though also sometimes at the level of division, profit-centre or (in manufacturing) site.

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

According to WERS 2004, 63% of workplaces in the financial services sector with 10 or more employees had any collective bargaining, covering 49% of employees (Kersley et al, 2006: 180). The relevant figures for manufacturing were 20% and 39%. According to the Labour Force Survey (LFS), in 2005 union density and collective bargaining coverage was, respectively, 25% and 28% for manufacturing, and 33% and 43% in financial services.

iii) the percentage of the workforce that is female

In 2006 female employment was 56.2% of NACE 65.12, down from 60.8% in 1994, and for manufacturing 26.8% (LFS). The figures provided by the workplace employers’ survey WERS 2004 is almost identical at 57% for financial services and 26% for manufacturing (Kersley et al, 2006: 26).

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

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?

There is some evidence that variable pay is an important and increasing means of wage flexibility in the UK economy. Data from NES (for full-time workers) shows that during the (low inflation) period of 1993-9, 19% of individuals remaining in the same job experienced a pay cut, with those in receipt of incentive pay twice as likely than those without (Nickell and Quintini, 2003). (The same study showed that a further 4% received a ‘zero’ increase in the same period). The LFS, which is a survey of employees, found that 14% of individuals (in the same job) received a cut in base pay in 2002, and around 10% a zero increase (Pissarides, 2003). In terms of gross pay, which includes bonuses and overtime pay, 35% reported a reduction (and only 2% no change). However these studies do not indicate whether a pay cut or freeze was introduced unilaterally or by collective bargaining, nor do they differentiate by sector. It is likely that this practice is more common in manufacturing than in banking, which though highly competitive is also a more profitable sector. The manufacturers’ association EEF reports that during the three months to the end of October 2006, the number of companies reporting that they had frozen pay rose slightly to just over 5% of all settlements. The number of companies reporting that they had deferred their pay settlement also rose to just over 2.5% of all settlements, the highest figure since January 2006. However, again no information is provided whether this was by collective agreement.

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

Sector-specific data is not readily available, but analysis of the WERS 1990 and 1998 datasets suggests that pay individualisation, via individual contracts or pay negotiations, or performance-related pay, is not linked to the decline of collective bargaining (Charlwood, 2007). Continuing workplaces that had abandoned collective bargaining were actually less likely to use performance-related pay, suggesting a ‘voice’ and ‘legitimacy’ role for trade unions in managing more complex pay arrangements. Certainly, banking and – to a lesser extent - manufacturing companies are at the forefront of different types of VPS even though they remain amongst the most relatively heavily-unionised of the private sectors.

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

Collective bargaining is more likely to occur over schemes that affect base pay, such as merit pay arrangements. In banking, bargaining is likely over the overall ‘pot’ and the procedures for allocation, which can extend to the sums applicable to cells in the performance matrix. Bonuses are usually not subject to joint regulation, though management often consult over the broad terms of the schemes. In manufacturing, bargaining is more likely for bonus schemes that are determined by local plant-based criteria than company-wide considerations.

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)?

Cafetaria benefits are increasingly important and may be linked to the concept of ‘total reward’, where employees seek to better ‘engage’ staff by enhancing awareness and choice over the overall remuneration and welfare package. According to the CIPD, ‘it is only within the last five years that comprehensive flexible benefits schemes have started to become more common in the UK’, partly because they can be costly to administer. The 2007 reward management survey found that just over one in ten employers were using flexible benefits, mainly private-sector organisations with over 5,000 employees. The figure for manufacturing and production was 7% and private services 11%. A leading example is the building society Nationwide, which has identified and addresses five different groups in its 17,000 workforce with different wants and needs in terms of employee benefits. It is not clear how far trade unions are involved in negotiating such schemes, though they are likely to be consulted where recognised.

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

Industrial action is relatively rare in UK manufacturing and tends to be linked to restructuring or overall pay settlements rather than variable pay per se. There are only isolated examples, albeit high profile, in banking too in recent years. In May 2005 staff at HSBC bank held a day of strike action over zero pay awards for staff above ‘market rate’ and changes to the bonus scheme which would also disadvantage long-serving staff (UK0505106F). The bank reached a new pay deal with Amicus in August and agreed to work with the union to review its bonus schemes. A similar dispute over zero awards to base pay in LloydsTSB led its two unions (LTU and Amicus) to ballot for industrial action though a strike was prevented in this case. Otherwise, the growth of bonuses and the unions’ priority attached to pensions and job security, given continued restructuring, has helped contain conflict over pay.

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

Unions are keen to ensure that VPS are fair. They are concerned to have procedures in place to restrict potential gender, age or other bias in appraisals; and to ensure equal access to bonuses for groups such as part-time workers.

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?

The British Bankers’ Association has little remit or active interest in employment matters. The EEF would be keen to support policies and practices that advance the interests of its members, e.g. that wages reflect ability to pay, but again has limited formal direct role in the area of pay setting.

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?

As indicated above, merit pay was originally introduced in banking to replace seniority pay schemes that rewarded (and encouraged) long service as a proxy for the accumulation of skills and experience. These schemes were envisaged as localised tools to reinforce direct communication and motivate staff according to new business needs. Long-term cost control was also a factor. In practice, managerial discretion was limited due to the effects of low pay pots, limited dispersion of appraisal ratings and unions pressing for elements of standardisation. Bonuses have grown to take on the functions of staff communication and incentivisation. Furthermore, they usually have no implications for fixed costs growth and, as they are also beyond the remit of collective bargaining, can be much more discretionary and variable. Merit pay is retained however to help underpin performance management systems.

In manufacturing, there has also been a move from individual PBR to underpin teamwork, job flexibility and quality, though it remains significant in some low-skill sectors and jobs. Individual merit pay is less appropriate in an integrated manufacturing context so base pay is normally still paid on a rate-for-the job basis. However there is some wage flexibility in that a significant number of settlements will be at zero or less than inflation according to economic circumstances. This also reflects a decline in collective bargaining across the sector and a weakening of trade unions due to restructuring and relocation. Bonuses have long been significant and now perhaps more so where PBR is in decline. These also tend to be collectively based, linked to mainly quantitative criteria at plant and/or corporate level.

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

These may be more of an issue in banking, given its higher gender mix. Longstanding (vertical) gender segregation means that both unions and employers are sensitive to issues such as equal pay and discrimination. In the last few years Amicus has carried out joint pay audits with companies such as HBOS, Barclays and NAG to investigate pay systems and patterns as they affect gender, part-time workers, age, ethnicity and disability.

3b Trade unions

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

Trade unions naturally resist real wage cuts and to this end they have been more successful in banking.

2) Where applicable, how have trade unions sought to regulate use of any increased scope in sector agreements for downwards wage flexibility?

n/a

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?

n/a

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?

Union priorities in both sectors are concerned with job security and real levels of base pay. In banking, unions have sought to introduce greater procedural transparency about both merit pay and bonus schemes. They have also pursued policies to promote greater standardisation in merit pay awards, as these affect base pay and pensions. They have had some success in this regard. They tend to be wary about involvement in the substantive dimensions of bonuses, given that these are more highly variable. Overall, they would prefer company-level bonuses such as profit-share and share schemes. In manufacturing, unions have successfully resisted widespread experimentation with merit pay on the grounds that it is potentially open to bias and favouritism. Workplace bonuses have long been subject to negotiation, following the piecework tradition of work studies. However new forms of plant bonuses tend to have less direct union involvement over criteria and target setting. Even so, bonuses in manufacturing tend to be much less significant for employee earnings than in banking.

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

According to 2003 NES data analysed by the Equal Opportunities Commission (EOC), the gender pay gap is at its highest in banking, insurance and pension provision, where full-time weekly earnings for men are 43% higher than women. This is more than twice the national average of 18%. A report by the EOC equal pay taskforce (Just Pay) ascribed this to vertical segregation owing to caring responsibilities, and discretionary pay systems that favour male working patterns such as longer hours (UK0104126F). Over half (55%) of women employed in banks, building societies and insurance companies are employed in administrative and secretarial roles, compared to a quarter of the male workforce. Unions have been addressing this through equal pay audits with employers (see above). The full-time weekly pay gap in manufacturing was 26%; measured in hourly terms, this falls to 21% (finance remains at 41%), suggesting that overtime and other additional earnings are more relevant in this sector.

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?

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

From 1987, employers were able to register profit-related pay schemes with the Inland Revenue to enable employees to gain tax relief on payments received. This reflected the then Conservative government’s commitment to financial participation (also manifested by facilitating employee share ownership in privatised companies). Tax-relief ceilings were increased in 1989 and 1991, but amidst concerns that the schemes were open to abuse (e.g. encouraging the substitution of profit share for basic pay awards, for the purposes of tax avoidance), following the election of a Labour government in May 1997, the Finance Act 1997 provided for all tax relief to be phased out by 1 January 2000. This led to a significant reduction in the number of schemes. In ‘manufacturing and energy’ there were 2,951 live schemes in March of 1995 (covering 824,000 employees); 4,385 in 1997 (1,169,000) and 1,104 in March 2000 (308,000). The figures for ‘banking, finance and other business services’ were 1,252 (421,000); 1, 816 (737,000); and 466 (136,000). (Source: Inland Revenue).

Fiscal incentives continue to apply to share incentive plans (SIPs), which are a 2001 relaunch of the all-employee share ownership plan (ESOP). Employee contributions are made from pre-tax salary and no income tax or national insurance is payable on shares held in a plan for five years. According to IDS (2007), the popularity of SIPs has increased in recent years and there are now 653 in operation. Employers usually offer free or matched shares with the intention of encouraging employees to develop a closer understanding of the business and to share in its success. Some companies, such as the pharmaceuticals manufacturer AstraZeneca, pay free shares as an annual bonus, linked to individual performance and salary. Other, such as the bank HBOS, implement them as a standardised percentage of salary but varying according to company performance. However, the operation of SIPs can be complex and they do involve a financial risk for employees.

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

Performance-related pay is widespread in the public sector, including education, health and the civil service. It has its origins in marketisation and managerialisation, introduced in the 1980s, and by decentralisation through agency status and the local management of schools and hospitals in the 1990s. The Labour government elected in 1997 has been alert to union concerns of a resulting lack of cohesion and equity in public sector reward. However, public sector employers also appreciate that performance pay can be of some use in a public sector context. For example, pay linked to appraisal has had the effect of increasing productivity in the civil service (Marsden, 2004). This is less the effect of financial incentivisation than by a reinforcement of the performance management process of communication and clarification of work priorities. However, incremental pay and across the board settlements are also important. According to a 2006 survey of merit pay by IRS, only 12% of public sector pay awards were based solely on performance in 2006, compared to 34% in the private service sectors and 20% of manufacturing settlements (Welfare, 2006). Non-consolidated and team-based bonuses have also been recommended to the government in an influential report ‘Incentives for Change’ (Makinson, 2000), but in a context of resource constraints this is likely to have most impact on senior staff.

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

The government has a range of initiatives and bodies designed to address issues related to equal pay and female labour market participation and career progression (e.g. the Women and Work Commission, Women and Equality Unit, Equality and Human Rights Commission). Most recently, the implementation of the UK’s Gender Equality Duty in April 2007 has generated an increase in public-sector organisations (as well as those that supply goods and services to the sector) carrying out Equal Pay Reviews. The legislation requires the public sector to promote gender equality which includes a renewed commitment to eliminate pay discrimination.

Commentary by the NC

VPS is important in the UK. According to the 2007 IRS pay survey of 350 private sector employers (covering more than a million employees), 35.6% of pay awards are based wholly or in part on merit pay in 2006 (IRS Employment Review, 882, October 2007). Rising inflation is thought to have contributed to an increase in merit pay, e.g. the number of companies with standard basic plus merit components increased to 12% from 6% the previous year. In these two sectors, merit pay is fairly universal in banking but rare in manufacturing. Across the UK, bonuses have also been increasing for some time, partly in response to low inflation containing basic pay awards but also as a means to control labour costs through non-consolidated earnings growth. Variable annual bonuses are most important, in terms of relative significance for earnings, in the financial sector, but also have a high overall incidence in manufacturing. Hence there is no clear evidence that VPS is less widespread or developed in the presence of collective bargaining. The impact of collective bargaining on VPS varies according to the type of scheme in place, which is itself linked to sector considerations.

Further references

  • Charlwood, A. 2007. ‘The de-collectivisation of pay setting in Britain 1990-1998: Incidence, determinants and impact’, Industrial Relations Journal, 38:1.
  • Cowling, M. 2007. Performance related pay coverage in the UK. Brighton: IES Working Paper.
  • Dennis, S. 2006. ‘Finance sector sees paybill budgets tumble’, IRS Employmment Review 854, 8 September. 30-35.
  • Edwards, P., Edwards, T., Ferner, A., Marginson, P. amnd Tregaskis, O. 2007. Employment Practices of MNCs in Organisatinal Context.
  • Gray, M. 2006. ‘Increase in extent of performance-related pay’, UK0612059I
  • Incomes Data Services, 2007a. ‘Pay in financial services’, IDS Pay Report 973, March. 7-14.
  • Incomes Data Services, 2007b. ‘Share incentive plans’, IDS HR Studies 840, February.
  • Kersley, B., Alpin, C., Forth, J., Bryson, A., Bewley, H and Oxenbridge, S. 2006. Inside the Workplace. London: Routledge.
  • Marsden, 2004. ‘The role of performance-related pay in negotiating the effort bargain: The case of the British civil service’, Industrial and Labor Relations Review, 57: 3. 350-70
  • Nickell, S. and Quintini, G. 2003. ‘Nominal wage rigidity and the rate of inflation’, The Economic Journal, 113 (October), 762–781.
  • Pissarides. C. 2003. EMU and Labour Market Flexibility. London: HM Treasury. http://www.hm-treasury.gov.uk/documents/international_issues/the_euro/assessment/studies/euro_assess03_studworcestershire.cfm
  • Welfare, S. 2006. ‘Stability reigns at 3%’ IRS Employment Review, 858. 32-36.

James Arrowsmith, IRRU

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