Flexible remuneration and financial participation by employees: state of play in the Netherlands

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Both the use of flexible remuneration systems and financial participation through share option schemes have increased markedly in the Netherlands in the 1990s. Generally, employers applaud this development but within the trade unions there are mixed feelings.

Recent research amongst 400 companies, each with a workforce of between 20 and 500 employees, indicates that two-thirds of Dutch employers have introduced flexible remuneration systems. For the Dutch economy as a whole, this means that 20,000 employers now apply a system of flexible remuneration. These systems cover one-third of the three million people currently employed by these firms. The survey, published in October 1997, was carried out by TrendMeter, an employers' research institute in which the largest Dutch employers' association, a bank and a consultancy company all participate.

About one-third of the employers favour a system that links remuneration to individual performance. Some 13% are in favour of remuneration being partly linked to the financial results of the company, while more than half of the employers are in favour of a combination of the two systems. Research shows that an average of 8% of final pay varies according to the performance of the employee and/or company concerned.

The most widespread form at the moment is profit-sharing: about 25% of Dutch firms with more than 10 employees (some 15,000 firms) apply profit-sharing schemes. Between 1,500 and 2,000 firms have share option schemes, mainly for the members of the board and senior management. Only around 700 firms have introduced financial participation through shares for a significant proportion of their workforce.

Employers more positive than unions

Most employers and employers' organisations are strong proponents of flexible remuneration schemes. One of the most frequently voiced arguments is that if remuneration is linked to profits, then pay costs will automatically decrease in times of economic hardship. Employers in sectors of the market in which there is a shortage of certain categories of personnel, such as financial services or automation, even consider flexible remuneration as a means to avoid a wave of pay increases. Furthermore, 86% of employers believe that employees perform better when part of their earnings is linked to their own performance or to the performance of the group as a whole.

Within the trade unions, though, opinions are divided. Senior officials at the Federation of Dutch Trade Unions (Federatie Nederlandse Vakbeweging, FNV) have expressed serious doubts. The official responsible for coordinating the collective bargaining process recently stated that the introduction of flexible remuneration should be seen as the "tail-piece" of negotiations on remuneration. The first task of negotiators is to secure a fixed pay increase. Only after having achieved that, should negotiations be directed at agreements concerning training and leave. If and only if there is still room for other items, should attention be paid to share options and profit-sharing schemes. The FNV rejects the substitution of flexible remuneration for fixed pay. However, in many cases prompted by the employees themselves, negotiators have less of a problem with flexible remuneration.

The Federation of Managerial and Professional Staff Unions (MHP) and the Christian Federation of Trade Unions (Christelijk Nationaal Vakverbond, CNV) have taken a more positive stand towards the introduction of flexible remuneration. CNV, however, has demanded that performance-linked pay should not replace a proportion of fixed pay, but should be seen as a supplement.

Share options and shares for employees

Over 1995-7, prices on the Amsterdam Stock Exchange have increased significantly. This has stimulated remuneration through share options. Research conducted by the Dutch Institute for Participation (Nederlands Participatie Instituut) shows that around 2,000 firms (4% of Dutch firms with more than 10 employees) have introduced share option schemes or other forms of financial participation for management and/or employees. In only one-third of these firms are the arrangements open to all employees, although a distinction is drawn between lower, middle and senior staff. One such example is Fortis, with 11,100 employees in the Netherlands. According to its share option plan for 1997, employees can put their names down for 100, 500 or 750 (certificates of) shares, depending on their pay.

At ING, all employees in the Netherlands receive 100 share options. A restricted group of senior staff members is entitled to between 500 and 1,000 options. According to the company's annual accounts, approximately 20 members of the board and its subcommittees own over 1.5 million options.

The trade unions have taken a more critical stance regarding share options for higher echelons of management because they believe that they tend to direct the activities of the board to short-term goals like stock exchange gains, instead of the long-term interests of the company and all its stakeholders, including the employees. Moreover, the FNV warns against the possible risks for employees if stock prices should collapse or if the company were to go bankrupt.

Roccade

At IT specialist Roccade, the flexible remuneration system is integrated into the collective agreement. In this agreement, covering 4,000 employees, collective pay increases have been abolished completely. Instead, employees are awarded a pay increase, varying from zero to 14%, depending on their performance over the previous year. For the unions, this collective agreement was considered a victory in itself because, until recently, collective agreements in the IT sector were virtually non-existent.

The central works council has demanded that at the forthcoming privatisation of Roccade, financial reserves be set aside for the purpose of employee share participation. In earlier statements, the central works council had mentioned a sum of between NLG 5,000 and NLG 10,000 per employee. According to the works council, and in view of the extreme shortage of IT specialists in the market, financial participation could stimulate employees to remain with Roccade.

Penalties

One of the main aims of flexible remuneration is to introduce financial incentives. Though incentives can be positive, the reverse is also true. A survey of collective agreements carried out by the Dutch Ministry of Social Affairs and Employment reveals that one in three firms have introduced negative incentives - that is, penalties - especially the reduction of pay and the withdrawal of holiday days in cases of sickness.

Although the unions are against penalties, they have not been able to keep them in check altogether. In most collective agreements, however, it is stipulated that during sickness full wages will be paid. However, in 6.7% of the firms, only 70% of the normal wage is paid and, in 4.6% of the firms, between 70% and 100% is paid. Yet, while the unions appear to favour the carrot over the stick, positive incentives based on low rates of absence are indeed exceptional.

One such exception is Sligro: employees of this company who had not been taken ill at all during 1996 received two shares in the company, on the condition that the company's overall absence rate for the year remained below 4%. For 1997, a similar arrangement exists, but the overall rate has now been lowered to 3.75%. In the course of 1996, 450 of the 1,000 employees benefited from this arrangement. In addition, Sligro introduced a profit-sharing scheme for all its employees, and the profit-sharing bonus is paid out in the form of shares.

Commentary

A large majority of employers are in favour of extending the possibilities for flexible remuneration. The unions, however, are generally less enthusiastic. They fear that the position of employees who have difficulty meeting the increasing productivity standards, as well as those with health problems, will worsen. Moreover, flexible remuneration usually results in a less equal distribution of incomes, and it is often extremely difficult to measure individual performance.

Opinions are also divided when it comes to the financial participation of employees in their own company. The unions draw attention to the risks involved if stock prices should plummet or if the company were to go bankrupt. Employers stress the motivating effect of financial participation on employees. Current shareholders often fear a dilution of their shareholding. Finally, the attitude of the Government is ambiguous: on the one hand financial participation has been fiscally regulated, but requests by employees regarding participation when state firms are privatised have not been met.

Attention should be paid to the inherent area of tension between certain kinds of flexible remuneration on the one hand and flexibilisation of labour on the other. Through financial participation, employers appear to be attempting to strengthen employee loyalty. At the same time, employers want to create a more flexible workforce by decreasing the number of employees with a fixed contract. Therefore, financial participation would seem to be reserved for a select group of core employees. (Robbert van het Kaar, HSI)

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