The personnel managers of eleven private sector organizations were asked what they perceived to be the main influences on pay levels in their organizations. Company performance was named as the main influence with market rates and the cost of living cited as the second and third influences on pay. On the face of it these findings suggest that the Government objectives of making pay more responsive to financial performance and market forces are being achieved. However, company performance appeared to have a very small influence on pay levels compared with market rates and inflation, and the market rates of significance were the rates paid for comparable jobs in comparable companies within the same market sector rather than the local market rates or the pay required to secure recruitment and retention. It is suggested that employers may be loath to disappoint employee expectations that pay will keep ahead of inflation and in concert with pay rises for comparable groups, if employee productivity is increasing.
The research has required an initial interview in each organization, with a representative of personnel, to gather background information about the organization and discuss the possibility of later interviews with employees. The interview asked about the structure of the organization, the types of jobs and employees, the process of wage setting and the influences on the overall level of pay awards. We designed this interview as a prerequisite to the main data gathering exercise but it soon became clear that the information provided, especially information about the influences on the levels of pay increases, was important for understanding the relationship between pay and the economic environment of the organization - at least as perceived by personnel managers.
These findings will be discussed in this paper. The personnel managers' accounts of the main influences on levels of pay in their organizations will be examined with respect to recent prescriptive literature on pay setting and Government advice on pay.
Changes in the business environment
During the 1980s and 1990s organizations in the UK and Europe have faced increasing
pressures to cut costs and become more competitive. International competition, especially
from South East Asia, and the removal of trade barriers have led to a 20 per cent erosion of
the European Community's share of the world export market since 1980 (Sparrow and
Hiltrop, 1994). In comparison with competitors from the newly industrialised economies,
such as Hong Kong and Singapore, UK labour costs are high and UK companies have been
forced to find ways of reducing the size of the labour force and increasing the productivity
of employees to be more competitive.
To this end much recent and continuing change in organizations concerns internal restructuring and alterations to pay setting arrangements. One change has been the devolution of many large organizations into relatively independent business units with local pay setting arrangements to make pay rates more responsive to local labour markets and business unit performance. A second change has been the removal of levels of the management hierarchy and the amalgamation of job grades, partly to reduce the size of the workforce but also to create more scope for flexibility between roles, jobs and responsibilities. It has been suggested that the basis of pay is shifting from status, in terms of job descriptions, level in the organizational hierarchy and length of service, to contribution, in terms of performance and commitment to organizational goals, to encourage the development of flexibility (cf. Beaumont, 1993).
Whilst it is certain that many organizations are undergoing these kinds of structural changes (cf. Millward et al, 1992), it is less certain that pay has become more responsive to local labour markets, company performance or employee performance. Much of the literature on pay setting is prescriptive rather than descriptive and there is little evidence, as yet, that there has been much change in the ways of determining rewards (Smith, 1992). The next section will consider why so much emphasis has been placed on pay as a means of delivering productivity and cost-effectiveness.
The renewed interest in pay
The 1980s saw a resurgence of interest in pay as a motivator and as a tool in organizational
change (cf. Thompson, 1992; Mahoney, 1992). Part of the reason for the interest is the
promise offered in the reward management literature that new pay strategies are one way in
which human resource management (HRM) can affect the economic success of
organizations.
For instance, Armstrong and Murlis, who publish one of the best known guides to reward management (Reward Management: A Handbook of Remuneration Strategy and Practice. 1994), now in its 3rd edition, argue that appropriately administered reward management can achieve the following aims:
Reward management, thus presented, is attractive to personnel managers because it suggests a way in which human resource strategies can secure future employment for employees through increased productivity. It also places HRM in a more strategic role.
Another reason for the interest in pay has been the political attention given to pay as a means of making companies more competitive. Kessler and Bayliss (1995) have argued that the objective of Government policy towards pay during the last 15 years has been to make pay more responsive to market forces and company ability to pay. They cite the following statement by Kenneth Clarke as typical of the Government line on pay:
"If we can move to a system where pay increases are primarily based on performance, merit, company profitability and demand and supply in the local labour market, we will dethrone once and for all the annual pay round and the belief that pay increases do not have to be earned". (Kenneth Clarke, Minister of State at the Department of Employment, talking at City University in February 1987. Cited in Kessler and Bayliss (1995), p. 211.)
Much Government legislation has been geared towards reducing the power of the trade unions and abolishing wage regulatory bodies, such as the Wages Councils, to allow organizations more flexibility in pay determination.
The employers' associations have also been active in creating a climate where the basis of pay might shift. John Banham, chair of the CBI in 1991, emphasised how 'performance' must underpin pay for the whole spectrum of jobs:
"Pay has to reflect performance across the board, in the boardroom as well as the shopfloor, in the public as well as the private sector". (John Banham, BBC Radio 4, 17 April 1991.)
Thus HRM literature and political pressures have supported the introduction of new systems of payment at work, but there are countervailing pressures for the maintenance of traditional pay systems. The role of social norms and employee expectations in maintaining the annual pay round and existing comparabilities will be discussed next.
Influences on the determination of pay
In a text book on salary administration in 1980, Armstrong and Murlis urged that companies
should resist claims in pay negotiations for salaries to be index linked and prioritise the
company's ability to pay. They argued that it was not the responsibility of organizations to
protect employees from inflation. Despite this advice the Workplace Industrial Relations
Surveys (WIRS) found that the cost of living was the most frequently cited influence on pay
settlements during the 1980s (Millward et al, 1992). Indeed there was an increase in real
earnings throughout the 1980s despite high levels of unemployment (Kessler and Bayliss,
1995).
One of the reasons for this 'downward wage rigidity' (cf. Claydon, 1994) is employees' expectations that their pay will keep pace with inflation and comparable rates of pay elsewhere. In their 1994 text Armstrong and Murlis again stated the necessity to prioritise ability to pay but added:
"... it is often advisable for an organization to consider what it has to be able to afford to pay to get and keep high quality employees." (Armstrong and Murlis, 1994, p. 21)
Clearly there is a potential conflict between keeping wage costs in line with company earnings and meeting the levels of pay which employees might be able to demand elsewhere. Those companies which have pay satisfaction may be loath to let their rates drop relative to their competitors in the labour market by not keeping pace with inflation. Even if higher rates of labour turnover do not result from relative falls in the level of pay - and they may not if alternative jobs in the local area are scarce - loss of morale, lower effort and industrial action can occur. Brown (1989) has argued that pay is important to motivation not so much because it acts as an incentive for effort, but because it acts as a disincentive when expectations provided by the going rates elsewhere are not fulfilled.
It might be argued that since expectations provided by external relativities are so important, it should not be too difficult for organizations to bring wages into line with local market rates. However, there is social psychological evidence that groups will seek comparisons with higher status outgroups to justify claims for better conditions (Bourhis and Hill, 1982), and, thus, if local comparisons represent a threat to pay levels they are likely to be resisted. Since the precedent set under National wage bargaining was for comparisons within market sectors, employee expectations are further weighted towards comparisons with similar jobs in similar organizations rather than jobs requiring similar skills and competence in the local area.
The aim of this study is to examine which factors, in the views of personnel managers, exerted most influence on wage settlements. The extent to which the Government objectives of substituting local market rates for national rates and relating pay rises to company ability to pay will be examined.
The views of personnel managers are crucial to understanding influences on pay settlements. They have been in the maelstrom of the changes taking place in organizations; to some extent in a strategic role, but more especially in a role which requires them to implement financially driven, large scale and frequently unpopular changes within a short space of time.
METHOD
The research methodology for this ESRC project as a whole is qualitative. The main focus
of the research will be on five financial services and five manufacturing organizations in
which detailed interviews will be conducted with personnel managers, employees and
employee representatives. Access to organizations has been staggered so that, thus far,
interviews have been carried out with personnel managers(3) from each of 3 financial
services companies and 5 manufacturing companies. In some of these organizations further
interviews have been carried out with employees and union officials but the results of these
interviews will not be discussed here.
The data to be examined in this paper was collected in initial interviews with these 8 personnel managers, plus, for the purpose of comparison, personnel managers from 3 further organizations -oil, computer software and retail companies. These initial interviews gathered information about the structure and business of the organization, the types of jobs and employees, the process of pay determination and negotiation, and the main influences on the level of the most recent pay award. Although the interview ranged over methods of pay setting for all members of the workforce, it concentrated on the pay determination and the influences on the levels of pay of the core operating staff. Most of the 11 interviews were taped and transcribed but in some of the earlier interviews, before the value of the information was recognised, detailed notes were taken.
The following table describes the 11 organizations.
Business Work- Local Approx. pc Approx. pc of Labour
(4) force wage of core workforce turnover
(5) setting workforce covered by
unionised collective
bargaining
A Computer
software 170 Yes 0pc 0pc ?
B Oil 850 Yes 50pc In transition Very low
C Retail 80000
250(6) No 30pc 90pc 100pc+
D Insurance
broking 2000 Yes 0pc 0pc Very low
E Insurance 1200 Yes 50pc 80pc 15pc
F Insurance 9000 No 80-90pc 80pc Very low
G Manufacturing 41000 Yes 95pc 90pc Very low
H Car Industry 2000 Yes 90pc 85pc Very low
I Engineering 25000 Yes 95pc 90pc Very low
J Engineering 300 Yes 95pc 60pc Very low
K Engineering 670 Yes 95pc 79pc Very low
It should be noted that the interview questions were very open-ended. This reduced the risk of 'leading' the accounts, but incurred some loss of comparability in the responses. The findings reported in this paper will be fed back to the respondents and their comments invited as a means of clarifying this picture of pay determination.
RESULTS
The diversity of pay setting arrangements in the eleven organizations, even
within sectors, was huge. For instance, in one of the insurance companies
employees were represented by MSF in the other they were represented by an in-
house staff association. In some of the manufacturing companies several
bargaining groups were recognised, in others single table bargaining had been
established. Many of the organizations were undergoing or had recently
undergone fairly major restructuring such as changes in the grade structure
of employees, decentralisation of pay setting or the introduction of
performance related pay.
Despite this diversity and the degree of recent change, clear commonalities emerged in the accounts of the influences on the levels of pay. The results will be described under sub-headings related to influences on pay levels.
Annual pay round
All of the companies in the sample had an annual pay review. All of the
companies with a large percentage of the workforce covered by collective
bargaining had an annual pay round with a set date for completion. One
exception to this was the oil company where a large pay rise had been agreed
the previous year as part of a negotiated deal to delay a further review for
two years. This was to allow time for changes in grade structures and pay
setting arrangements to be introduced. A personnel manager from one of the
engineering companies mentioned a similar deal in her company some years
earlier. The two non-unionised companies did not promise an automatic review
of pay but in practise this did happen annually in conjunction with setting
the financial budget for each business unit.
Ability to pay
9 of the 11 respondents stated that company performance was a major influence
on pay rises, usually the main influence. The following quote is typical:
"We would, in our own mind, have done our surveys, looked at, also, what the business could afford and said in our own mind, well aside from any other issue, 3 per cent is the absolute maximum that we are going to be able to pay this year. That will be driven in the first instance by what the business can stand and in the second instance taking into account settlements in the industry, market rates and what have you."
In most cases, as above - where surveys of other settlements were mentioned, the respondents mentioned inflation or external relativities in conjunction with ability to pay. For example:
"Well its two influences really, isn't it, its the guidelines that we are set. It will be our budget for next year, what load we will be getting in the factory next year, because we will have a view by the end of the year what business we are getting, and it will depend on the RPI at the time. And the RPI does have an impact on our ability to secure an agreement. .....(the unions) will say inflation is about 3.5 and here you are you miserable beggars you're only offering us 2.5."
Although company performance was cited as the most important influence on pay settlements, further comments from the respondents suggested that its influence was small relative to the influence of inflation and external comparisons on pay levels. This issue will be picked up in the 'Discussion', but two limitations on the impact of company performance seem to be important. There was first of all a danger, where performance awards were consolidated, of building these into wage costs.
"But always conscious of the fact that if you go for a generous settlement in a good year, sure as hell lean years are going to follow and you've built that into your cost base for ever and a day."
Even where company performance rewards were passed on in the form of non-consolidated bonuses, as in one of the insurance companies, the bonuses were a very small percentage of basic pay, perhaps to avoid expectations that would be disappointed in a downturn. Only one company recognised company performance as quite a large percentage (up to 17 per cent) of basic pay. This was awarded in non-consolidated quarterly bonuses based on the quarterly performance of the business.
The other limitation was the reluctance to pass on losses to employees. Several respondents mentioned the need to protect the income of employees from severe falls in company performance, especially where these were seen as cyclical troughs in business. Nevertheless, over a period of time, lower performance was felt to tell on pay:
".... compared to 16 years ago, we are not as profitable a company. That's probably the major fact. Over the last five years, particularly, I think the annual increment has been much lower than in the past. Bonuses have stopped. Initial rates of pay, I think, are now much nearer the norm. We've got less profitable."
Inflation
All but two of the respondents mentioned the influence of inflation on wage settlements.
Although only one respondent felt it was the main influence on pay rises, none of the
respondents iterated the Armstrong and Murlis view that companies should resist the index
linking of pay. A few referred in passing to the 'cost of living' rise when distinguishing it
from individual performance related increments or bonus awards(7).
Market rates
All of the respondents mentioned monitoring market rates in some way or another and 9 of
them stated external comparisons as a major influence on pay awards. Most monitored pay
levels in other companies through multi-level contacts between personnel departments and
between union officials. These contacts sometimes consisted of informal telephone
conversations, but most of the personnel managers belonged to networks that met regularly
to swop information about pay and benefits. The most notable thing about these contacts was
that they were mainly with very similar companies - their competitors in the same market
sector. The following quote illustrates the process:
"We made a profit last year ..... So that was the factor. Oh, there was another factor ... there is a certain amount of work done at this time of the year looking at what other (similar companies) are paying in terms of increases and that also introduces some normative behaviour around the level. ..... there is normally some kind of very quick exercise round about June, which is, 'What did Smith pay? What did Jones pay? So what was the norm.' So, therefore, if we pay 'x' we are neither seen to be wildly short or wildly higher than any of those. So there is an incentive to look reasonable in comparison with other (similar companies), all of whom are pretty much in the same boat as us."
Only one respondent mentioned monitoring the local rates paid for jobs requiring similar skills and competencies by participating in a local salary survey and local business network. Four of the manufacturing companies paid above average rates for the locality but average rates in comparison with similar manufacturers. The finance companies paid closer to local market rates but most probably because of the geographical proximity of competing companies. The high turnover experienced by the branch of the retail company in the sample was a result of below average pay rates for the immediate locality. Ease of recruitment for a relatively low skilled job in a metropolitan area meant the high level of turnover was sustainable, though a source of concern to the personnel manager.
All but one of the companies had rejected the idea of paying in the upper quartiles within their own market sectors and tried to pay around the median for the job. However, as the quote above shows, they were careful not to pay below the median. One respondent from an insurance company noted that although they paid median rates they offered an attractive package in terms of benefits and training.
Six of the respondents subscribed to, and participated in, salary surveys, but two complained that they were time consuming or not terribly helpful because job titles provided too vague a basis for comparison between jobs. On the whole salary surveys seemed to be a secondary form of monitoring rates compared with direct contacts with competitors, and mainly used for determining the pay of new jobs. Three respondents mentioned feeling that their organizations had 'got it right' in terms of internal differentials and, thus, that monitoring settlements in their competitors provided a more efficient guide to the appropriate rate.
Fairness
An important question to raise is to what extent pay concessions to inflation or external
comparabilities are a result of the bargaining power of unions or beliefs about the legitimacy
of such influences? We cannot answer that question yet, but several respondents mentioned
the desire to reward employees for effort and increased productivity and the problem of
doing this within budget limitations. This kind of sentiment is illustrated in the following
quote:
"... our volumes are relatively small; we haven't got the advantage of the economies of scale, that we may not be able to fully reward our workforce for the efforts that they put in. ..... I'm conscious of the fact that, and that's probably true of most manufacturers at the moment, that profit margins are tight and people are pulling an awful lot in a lot of organizations, maybe don't believe that they're getting the reward that their efforts justify."
DISCUSSION
Influences on pay rises
Although company performance was cited as the most important influence on pay
settlements, it seemed likely that the percentage movement due to company performance was
small. It may act mainly as a counterweight to ambitious union claims in pay negotiations -
in which case company performance is probably no more influential today than at the start
of the 1980s. The interviews being carried out with trade union officials should provide
more insight into this issue. One personnel manager emphasised the importance of what the
business could afford in determining pay settlements but then added candidly:
"I don't want to make it sound too scientific, Julie, because to be brutally frank it isn't that scientific. Its a question of, well, inflation looks as though its going to be about 2 per cent, Smith has settled at 3 per cent, Jones has settled at 3.25, Brown has settled at 2.75, our forward volumes aren't looking very healthy at the moment, we probably need to settle at 3 per cent. Or on the other hand, it could be that we're looking at a more attractive situation and we could afford to settle at a little bit higher than what the going rate is."
Company performance may have a more measurable effect over several years if downward trends in business persist. The effect may be seen as incremental. If lower profits continue to legitimate tight controls on pay rises, poor company performance will gradually lower pay - though not perhaps, as the quote above suggests, below the median rate. It is not clear if the persistance of higher profits can have the opposite effect.
Inflation seemed to act as an anchor in collective bargaining. Most of the 1994 settlements recalled by the respondents were very close to, or slightly above, the inflation rate. In all of the manufacturing companies the respondents expressed the view that the productivity of employees was increasing and some bemoaned the limitations of budget increases for recognising and rewarding the effort of employees. In such circumstances it may be felt unfair by employees and employers if pay increases do not keep pace with inflation. In one company the respondent stated that increases in productivity had funded pay rises in real terms over a number of years.
The levels of settlements in comparable companies exerted a very strong influence on pay rises. In those large organizations which had decentralised and introduced wage setting at plant level, the aim was usually stated as making wages more responsive to the product market rather than the local labour market - a finding also reported by Kessler and Bayliss (1995). The tight linking of pay settlements between competitors in the private sector is one reason why inter-industry wage differentials stay so stable, and why organizations have continued to pay rates over those required to recruit and retain locally.
There is also the possibility that pay may be resistant to local labour market forces because organizations do not always have accurate or efficient means of monitoring local rates or comparing jobs, skills and competencies in the local labour market. However, monitoring local rates did not appear to be an important concern of the respondents in this study, probably because, as Kessler and Bayliss (1995) pointed out, the only major geographical differential in pay is between London and the rest of the country and:
"... the Government policy of decentralisation is flawed for it is based on a fallacious view of labour market mechanisms and a misunderstanding of private sector practice." (Kessler and Bayliss, 1995, p. 221-222.)
Influences on the perspectives of personnel managers
It has been noted at various points in this paper that the study investigated the views of
personnel managers rather than objective measures of influences on pay settlements. Many
studies are only interested in accounts as approximate measures of reality but we are
interested in the views of personnel managers (and in due course - employees and employee
representatives) in their own right. Whilst these views or 'representations' of reality might
not be accurate reflections of reality, they do reveal the discourses that influence the moral
and political climate of pay setting. It is for this reason that we have paid attention to the
language used to talk about pay and quoted the study respondents and Government and text
book advice on pay. In due course, when comparisons between the accounts of personnel
managers, employees and employee representatives become possible, we will examine
whether each group holds different discourses about the legitimacy of pay
determination.
There is already some tentative evidence from the interviews with personnel managers that their thinking about pay was influenced by the literature on reward management. Nine of the eleven managers emphasised the importance of company performance despite the small direct effect of company performance on pay. The relationship between pay and performance has been an important and much debated issue in the literature. The focus on company performance might reflect social representations (Moscovici, 1984) of pay shared by the personnel managers as a result of their training and reading of personnel journals, but not by other groups in the workforce. In contrast the Government has emphasised the importance of the local labour market but the reward management literature has not, and none of the respondents in this study placed much, if any, emphasis on local market rates.
We will conclude by asking to what extent is pay becoming more driven by market forces? The results of this study suggest that pay is not particularly responsive to the supply and demand for labour. Only two of the personnel managers mentioned any problem with recruitment and retention and in both cases labour turnover was stated to have no effect whatsoever on pay levels.
Instead most of the respondents talked about changes in the structure of the organization and the design of jobs which had, or were going to have, an impact on pay. Chief among these changes were measures to develop employees and increase productivity through training, multi-skilling, devolving responsibility downwards and the development of specialist skills. It has been argued (cf. Guest, 1995) that if market factors drive HRM, then companies have a choice of three strategies for gaining a market advantage: innovation, quality or cost based strategies. The emphasis placed on employee development in the organizations participating in this study suggested that they were pursuing strategies based on innovation or quality rather than low cost labour.
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Footnotes
(1) This study was funded by the ESRC - Grant Ref. L1222510111.
(2) Both at Department of Organizational Psychology, Birkbeck College, Malet St., London, WC1E
7HA.
(3) Usually the respondent was the on-site personnel manager, but in some cases it was the personnel
director for the group or another member of the group personnel team such as the remuneration and
benefits manager.
(4) The companies are crudely described to protect anonymity. Names and functions have also been
disguised in the Results and Discussion sections.
(5) The numbers for C, F. G and I refer to the number of employees in the group.
(6) Number of employees in the branch.
(7) Interviews with employees so far suggest that employees are much more likely to refer to annual
settlements as "cost of living" rises.