Pay as you earn
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The annual pay rise could be a thing of the past as employers attempt to control costs by introducing variable pay schemes linked to productivity and profits.
The annual pay rise could face gradual extinction if findings from a CBI survey into variable pay schemes translate into wider company practice across the UK. In an analysis of 300 schemes at more than 100 companies, the CBI/Wyatt Variable Pay Systems survey found variable schemes are becoming increasingly popular and that UK companies would soon follow the US, where about 30% of firms use the schemes and more plan to introduce them.
Variable pay has been a constant topic of conversation among employers during the past year as a means of reducing fixed costs, the survey says. It is defined as that part of the pay packet which is at risk, such as bonuses, spot awards, team incentives and share schemes. It does not include basic pay or any other fixed remuneration for work.
Consolidated
Unlike performance-related pay, which is consolidated into basic pay and is not reduced if performance deteriorates, variable pay "can go up and—crucially--down in line with individual, group and company performance," says the report.
Transport unions are voicing strong objections to variable pay schemes which, they claim, are just another way to reduce costs. The report does not deny this: "Costs can be more closely related to the business's ability to pay," it says. David Higginbottom, general secretary of the United Road Transport Union, says a number of transport firms are operating variable pay schemes. Although many contacted by Commercial Motor declined to comment on their pay policies, TNT says it has just introduced profit-related pay based on the company's targeted profits for this financial year. The
scheme, which is not renewable annually in the same form, means that, if your salary is £20,000 a year, 20% (£4,000) of it would convert from basic pay to profit-related pay, which is a variable figure. TNT says calculations are made so this sum can be predicted with reasonable accuracy.
Higginbottom points to other schemes, including some lorry drivers who are paid on the basis of a percentage of the vehicle's earnings. "We know a lot of drivers that have not had a pay rise in three to four years and some have suffered pay cuts," says Higginbottom. Ile points to the example of Teesside where, he says, pay has fallen by 10% in real terms over the past five years.
Higginbottom, who says his union will fight for the survival of the annual pay rise, believes variable pay schemes raise some safety issues in the transport industry, whose employees, he adds, are already under pressure to improve performance."Drivers are already working longer hours," he says, " and would rather speed than face the sack or a lower pay packet at the end of the month."
EC regulations show that Higginbottom is not alone in this concern. EC Regulation 3820/85 Harmonisation of Certain Social Legislation Relating to Road Transport states: "Payment to wage earning drivers, even in the form of bonuses, of wage supplements related to distance travel or the amount of goods carried, shall be prohibited unless payments are such so as not to endanger road safety."
But no cases have been tested under this regulation because of the difficulty in proving that the incentive is a safety risk. "We will use the EC directive if we can get enough evidence," says Higginbottom. "But the arguments are difficult to counter in the court room and the cast is enormous. Also, any employer would move heaven and earth to stop us setting a legal precedent."
Employers and advocates of variable pay argue that the schemes give workers incentives by offering rewards, get them more involved with company objectives, • encourage greater team working, bring
• in costs' flexibility, and reduce pressure on employers to lay off staff when there is a temporary downturn in the market.
• Survey author Philip Ditton says 2 variable pay does not mean a lower basic pay for workers but agrees that the pay packet would vary from month to month. "They wouldn't suffer pay cuts as such, but bonuses would vary each month," he says.
"One should not look to the annual pay rise as a god-given right," he adds.
— by Giselle Jones In the CBI/Wyatt survey, 95% of respondents operated at least one variable pay system and many operated several. Individual bonuses were used by 75% of respondents, 38% used SAYE and 35% went for discretionary share options. A quarter of the companies planned to introduce cash profit sharing or profit-related pay schemes.
Performance at most companies was measured by volume, timeliness and quality, and variable payments were generally made in proportion to basic pay—a few were calculated in relation to length of service. Awards ranged from 100% of salary for top management, 5% to 15% for clerical staff through to top management, and about 13% for semi and unskilled workers. Team incentives worked out at about 20% of salary for semi and unskilled workers and 7% for top management. Spot awards and profitsharing schemes ran from 2% to 6% of basic pay. Variable pay accounted for about 10% of the average pay packet
• Variable pay: The part of the pay packet which is always at risk. It does not include basic pay, consolidated merit awards, overtime or pensions and other employee benefits. It relates to a range of cash or equity reward schemes that can apply to the individual, work teams, or the whole company, and includes the following: • Individual Bonus Where performance and payout criteria are tailored, at least in part, to the individual and include an element of team/company performance.
• Spot Awards Discretionary task-orientated awards nominated by supervisors or line managers in cash or merchandise. They are generally paid from a pre-established pool immediately after the employee achieves the
target.
• Key Contributor One-off cash or share grants aimed at retaining key staff. The payment is linked to a commitment to remain with the firm for a specific time period. Variable skill/competency pay One-off reward for gaining new skills/knowledge. *Team incentive A uniform award to all team members for reaching a pre-determined target.
• Gainsharing A productivity gain sharing system for participating employees. • Cash profit sharing/PRP Profit-related cash reward, including PRP scheme registered with the Inland Revenue.
• Discretionary share options Share option scheme. Employees chosen at firm's discretion.
• Restricted share option Share awards subject to restrictions such as disposal of shares for a specific period.
• SAYE Share option scheme, save-as-you-earn, linked to a bank or building society. Approved by the IR.
• Profit sharing share scheme Share award schemes, including contributory/matching offer type schemes. IR approved • Other share schemes Same as above, but not IR approved.