Performance pay and wage flexibility
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Discussant comments for NIESR seminar on performance related pay on 26 june 2014 (detail can be viewed in notes)
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Performance pay and wage flexibility
- 1. Supporting material for discussion of ‘Performance pay and wage flexibility in the Great Recession’ by Alex Bryson, John Forth, Lucy Stokes and Martin Weale Mark Beatson Chief Economist CIPD
- 2. Why do employers use variable pay? Type of variable pay Individual PBR Group PBR Profit-related pay ESOPs Merit pay Motivation Cost flexibility Incentivise individuals/teams ‘Good HR’ (HPW practices)
- 3. Why do employers use variable pay? Type of variable pay Individual PBR Group PBR Profit-related pay ESOPs Merit pay Motivation Cost flexibility Incentivise individuals/teams ‘Good HR’ (HPW practices) Not measured in ASHE Poorly measured in ASHE?
- 4. 31 15 30 18 54 28 20 29 9 54 Payment by results Merit pay Profit-related pay share ownership schemes Any of these incentive schemes 2004 2011 Source: Workplace Employment Relations Study, 2004 and 2011. Prevalence of variable and performance- related incentive schemes, 2004-2011 (% of workplaces with 5 or more employees where some use was made of these schemes)
- 5. Employer provision of performance-related pay, 2011-2013 (% of employers) 74% 67% 33% 79% 65% 29% 72% 55% 26% Base pay progression linked to individual performance Employer offers performance- related reward scheme Employer offers long-term incentives 2011 2012 2013 Source: CIPD Reward Management surveys.
- 6. Cash bonus payments to employees in the previous 12 months, 2008-2013/14 (% of employees) 21% 19% 22% 18% 18% 18% 11% 10% 9% 8% 8% 6% 2008 2009 2010 2011 2012 2013/14 Bonus available - received Bonus available - not received Sources: CIPD Employee attitudes to pay surveys, 2008 to 2011 and CIPD Employee Outlook survey, winter 2013/14.
- 7. Impact of the economic downturn on pay and rewards, 2009-2014 (% of employees) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Frozen pay Cut pay Reduced employer pension contributions Base: all employees, including employees who did not think their workplace had been affected by the recession and don’t know responses. Employees could select more than one impact from a range of responses. Source: CIPD Employee Outlook surveys.
- 8. Changes in the nominal pay of employees in the previous 12 months, 2008-2013/14 (% of employees) 26 42 45 49 41 70 51 50 46 51 -3 -5 -4 -5 -3 2008 2009 2010 2011 2012 2013/14 Pay freeze Pay increase Pay cut Excluding don’t know/can’t remember responses. Respondents were instructed to exclude promotions, demotions, regrading and new jobs. Sources: CIPD Employee attitudes to pay surveys, 2008 to 2011 and CIPD Employee Outlook survey, winter 2013/14.
- 9. Performance reviews, their perceived link to pay and employee engagement, spring 2014 (% of employees) 40% 32% 49% 55% 63% 49% 5% 5% 2% No performance review (21%) Pay not linked to performance review (49%) Pay linked to performance review (24%) Engaged Neutral Disengaged Excludes 6% of employees who did not know if their pay was linked to their performance review. Source: CIPD Employee Outlook survey, spring 2014.
- 10. • Analysis of 2010 MOPS survey of 37,000 US manufacturing establishments [Bloom, Brynjolsson, Foster, Jarmin, Patnail, Saporta-Eksten and Van Reenen (2014), IT and management in America ]: – Management practice scores positively associated with productivity and other business outcomes (profits, growth, R&D, patenting) – Management scores positively associated with IT investment – Mean management score increased 2005-2010 (based on recall) – Increased use of incentives and targets (based on recall) – Biggest increase in use of data-driven performance monitoring (based on recall) • If data makes it easier to measure individual and group performance, will employers still need to rely on performance- related pay? What about technology?
- 11. Thank you
Editor's Notes
- Good to be here this morning. The 30 second version of my comments is that I agree with the conclusions drawn by Lucy and her co-authors: performance-related pay has played a cameo role at best in the unprecedented fall in real wages that we have seen since about 2009. The action has been setting of basic pay, where we saw a few – but still more – wage cuts and an unexpected and unprecedented use of wage freezes – and persisting long after the worst of the recession was over. Of course this has been good for employment and unemployment, perhaps the more difficult question is to what extent it has contributed to, rather than reflects, our productivity slowdown?
- First, I’m going to take a step back. Why do employers use variable pay? This slide suggests three motivations – which are not entirely independent: Cost flexibility (originally the rationale for the tax breaks on profit-related pay back in the 80s) Incentives, by which I mean the effort/reward bargain - ‘Good HR’ or High Performance Working, where a relationship is made between pay and performance as part of a broader set of practices intended to shape employees’ attitudes, commitment and behaviour. I link these to 5 common categories of variable pay and my suggestion is that some are more likely to be linked to certain motivations than others – or have a stronger impact. The solid lines are strong links, the dashed lines are weak links. So if prime motivation is cost flexibility, employers likely to get more purchase from individual and group PBR and profit-related pay than ESOPs (where the cost to the employer is to an extent fixed, assuming they provide them) and merit pay. If the prime motivation is to get more effort from employees, then again PBR works well assuming measurement is straightforward . Profit-related pay and ESOPs may be more problematical because, outside small firms, the efforts of an individual or a team may have too little impact on overall profits or the share price. While for merit pay, the financial reward alone for a high rating is often relatively low. Merit pay probably has more effect – for good and ill – because of the recognition it provides. Ditto for profit-related pay and ESOPs – they emphasise the alignment of the individual behind the corporate goals.
- The problem is that only the first three are probably measured to any reliable extent in ASHE.
- ASHE suggests little movement on incidence of PRP since the mid 2000s. This is of course consistent with the workplace data from WERS – which I’ve included here because I already had the chart prepared for a forthcoming report. Overall, no change in the overall % of workplaces offering something but some changes within - less ESOPs, more merit pay, which offset each other here and probably are measured imperfectly at best in ASHE!
- Our last 3 CIPD Reward Management Surveys also point to less employers using performance-related pay – note our survey is principally larger employers, so the direction is more important than the level.
- Data from our regular surveys asking employees about their attitudes to pay asks them about one category of variable pay – ‘cash bonus payments’. The % receiving these has dropped a little over the last 2 or 3 surveys.
- Employers responded to the recession in various ways, including redundancies, shorter hours etc. But what has surprised everyone has been the extent of wage freezes and – in some cases – wage cuts. (This paper has a spike in nominal wage reductions in 2009, also seen in the Blundell et al paper using ASHE although their levels are lower). This graph shows employee responses to questions about changes at their workplace due to the “economic downturn”. Of course this is based on employee perceptions. Also, over time, is the drop-off fading memory or a change in underlying conditions? But it shows how widespread perception of pay freezes was.
- This chart uses data from employees when asked whether their nominal pay had increased in the previous year. We see the % saying it had not changed has only recently started falling.
- So performance pay doesn’t seem to be giving employers much cost flexibility – they’ve chosen to realign basic pay (and starting pay) instead - so what is it giving them? This chart deals with one part of variable pay that I suspect ASHE might not cover very well – merit pay – although it may not just be that particular form of variable pay. Employees were asked whether they believed their pay was linked to their performance review. A quarter of employees said it was, half said it wasn’t and 21% said they didn’t have a performance review. We compare this to our standard measure of employee engagement (derived from a battery of questions). We see that employees are more likely to be engaged if their pay is linked to performance than if it isn’t – or, indeed, if there was no review at all. Not reported here, another question asks employees whether they thought their performance review was fair. Here we find that 52% of employees whose pay is linked to their review thought the review was very fair or somewhat fair – compared to just 32% for employees whose pay was not linked to their performance review. Now there may be other explanatory factors and I’m not suggesting causality. It’s possible that employers make the link between pay and performance review because engagement is reasonably high (in particular, trust in management).
- One final thought on the future – will technology change things? This slide presents some results from a large scale US survey which uses the World Management Survey approach of measuring management practices directly. Apart from the implication that firms with structured management practices outperform their less structured peers, note that the association of IT investment, data-driven performance monitoring and greater use of incentives and targets – but to a lesser extent (although the data are based on recall questions). It raises the question of what happens if it becomes much easier to cheaply and accurately monitor the performance of employees? Apart from possibly needing less managers, will this lead to a rebalancing of carrot and stick. Will lean become increasingly mean?