Paper prepared for the 8th European Congress of the International Industrial Relations Association, September 3rd-6th 2007, Manchester, UK

The management of variable pay in banking: forms and rationale in four European countries. James Arrowsmith (IRRU, University of Warwick), Heidi Nicholaisen (FAFO, Oslo), Barbara Bechter (University of Vienna), Rosa Nonell (University of Barcelona) E-mail: James.Arrowsmith@warwick.ac.uk Abstract

Banking is a major employer in most large European countries and has faced common pressures in terms of competition and technological change. Pay systems have also been revised in response to changing business objectives and new forms of work organisation, facilitated by the ‘organized decentralization’ of collective bargaining from sector level. This paper examines systems of variable pay in banking in four countries (Austria, Norway, Spain, UK) with very different institutional arrangements for industrial relations. It finds extensive use of VPS in each case and shared managerial objectives in terms of performance management and cost control. Forms of VPS vary, with Norwegian banks in particular favouring collective forms of bonus, but overall there is a common drive towards individual (merit) pay and multiple bonus arrangments reflectin g the scope for management discretion. In broad terms, then, what the case of pay-setting in banking suggests is a course of fading path dependency at national level.

1 Introduction

Internationalisation and intensification of competition has had major implications for human resource management (HRM) and industrial relations (IR). Institutionally, almost all countries of continental Western Europe have embarked on a course of, while multi-employer bargaining has withered away in the UK (Traxler et al. 2001). In terms of agenda, employment flexibility has become increasingly prominent, facilitated by a weakening of trade unions and slack labour markets, rationalisation pressures and capital mobility. Many firms are also becoming more ‘strategic’ in their management of human resources in order to promote ‘high performance’ working and maintain competitive advantage (Boxall, 2007). A growing area of debate is how far and in what ways might systems convergence result from the opening of markets and institutional deregulation (Katz and Darbyshire, 2000; Marginson and Sisson, 2004). Faced with common pressures in the forms of competition and technological change, a key question is how might employers in the same sector but in different countries respond.

Banking is a particularly useful sector in which to study the mediating effect of institutions. Not only is it one of the largest, and most unionised, of the private service sectors in Europe. Employers have experienced common pressures, and a search for similar solutions, in different national contexts (Thornley et al, 1997; Regini et al, 1999; Lawler and del Rosal, 1999). Across Europe, privatisation and deregulation has introduced greater competition and sales-orientation, and the consolidation and rationalisation of the sector. New technologies have led to self-service

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and remote banking, and facilitated the separation of back-office operations from branches. As a result, there have been significant changes in work organisation (e.g. teamwork), pay (e.g. incentivisation), working time (e.g. extended opening and atypical work), and human resource management (e.g. the reform or dismantling of strictly regulated, hierarchical internal labour markets). All of which has been facilitated by a decentralisation of collective bargaining to the firm. Yet, on the other hand, competition remains broadly domestic in retail banking, which some argue leads to ‘different national reactions to similar pressures for change’ (Mayer et al, 2001: 73). Unfortunately, there is very limited empirical research with which to assess how far management objectives are shared, or realised, across very different contexts.

This paper responds to this gap in knowledge by an examination of management objectives and organisational practice over pay, focusing on the banking sector in four countries. Six companies were selected for direct comparison in countries with very different systems of industrial relations and corporate governance: Austria, Norway, Spain and the UK (see section 3). Pay has, of course, long been a core interest of employment research. As an important cost for organisations, and the means of livlihood for workers, it forms a defining feature of the employment relationship. More recently, pay systems have attracted attention as organisations implement innovative arrangements in response to competition. In particular, banking has been at the forefront of management efforts to tie pay arrangements more closely to performance, in the form of appraisal-based ‘merit pay’ for distributing basic pay awards, plus various systems of supplementary bonuses (van het Kaar and Grünell, 2001). These ‘variable payments systems’ (VPS) are the core focus of the research.

The defining features of VPS is an explicit attempt to shift to performance-related criteria, whether focused on the individual employee, work group, establishment and/or company as a whole and, as a consequence, increase the proportion of pay which is ‘at risk’. This is a clear contrast to the universalistic, standardised and predictable characteristics of time-based pay. Three types of VPS are conventionally identified: bonuses, including piecework or payments-by results (PBR), commission, and productivity and sales bonuses, where there is a direct relationship between pay and (in the main) employees’ output; schemes that encourage employees to work to certain standards, such as merit or performance-related pay based on management appraisal; and profit-related pay schemes, which entitle employees to a share of the company’s performance. Specifically, the paper addresses two sets of research questions:

(1) What are management goals in introducing VPS, and what form do they take in each country?

(2) Haw far is (1) shaped or constrained by the institutional context of national IR systems?

In the next section we briefly review the relevant literature before addressing, in Section 3, issues of methodology and research design. Section 4 maps VPS in two ways, by reviewing the IR context in the sector, and setting out the forms of VPS in use. Section 5 specifically focuses on management rationales. The final section represents the discussion and conclusions.

2 Literature Review

Understanding of pay innovation is largely framed by three disciplinary approaches. Economics refers to theories of incentivisation, labour market flexibility and productivity; IR scholars focus on the collective dimension to pay-setting; and the HRM approach develops the managerial and strategic perspective. Each of these is briefly considered in turn.

Insights from economics

Orthodox economics assumes, ceterus paribus, that payment systems will be linked to performance. For example, classic incentives theory addresses the principal-agent problem of

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how to effectively elicit work effort and align it with organisational goals without incurring exessive monitoring costs. Applied most specifically in terms of executive remuneration, it recommends a system of pay incentives to structure self-discipline to this end. In this sense it resembles some motivation theories in psychology, particularly expectancy theory which suggests a virtuous circle linking effort and performance to reward which is valued by employees (Marsden, et al, 1999). Workers, of course, are naturally more risk-averse than top management (Prendergast, 1999). However the emergence of a bonus-driven boardroom culture (Erturk et al, 2005) might make organisations more susceptible to the belief that individual and variable forms of pay are a means to elicit performance. Orthodox economic approaches also suggest that trade unions interfere with market systems in which earnings would otherwise reflect the different productive capacities of workers, either innate or acquired (Minford, 1985). The growth of variable pay might also thus be linked to trade union decline. The diffusion of VPS within sectors is also linked to institutional features such as market concentration and firm size, and labour market conditions and the competion for labour (Lazear, 1996). Job factors are also seen as important, particularly ease of performance measurement (Heywood, 1997; Cowling, 2002). Product market competition is also posited as a driver for pay systems convergence (Burgess and Metcalfe, 2000). However, it is also recognised that there are limits to how far economic theory, orthodox or neo-institutionalist, can explain actual pay practice without reference to behavioural notions of fairness, social responsibility, trust or culture (Baker et al, 1988).

The view from IR: pay decentralisation and implications for unions

A relevant focus of the IR literature is the relationship between VPS and collective bargaining, and specifically the implications for trade unions. Kessler and Purcell (1995) suggest that performance pay might marginalise union involvement in pay setting through a process of decentralisation and individualisation, especially as bargaining agenda are reoriented towards local competitiviness concerns (Marginson, et al, 2003). Certainly, VPS challenges union positions based on collectivism and standardisation. Yet collective bargaining and variable pay need not necessarily be opposed as, according to one study, ‘employee involvement in pay system design and implementation is critical to ensuring acceptance and effectiveness’ (Cox, 2000: 372). Union involvement offers management the advantages of ‘voice’, identifying employee concerns and problem-solving, and ‘legitimacy’ in the process of implementation (Bowey and Thorpe, 1986). VPS might also promote better engagement of unions with the local membership, as they attend to procedural as well as substantive concerns (Marsden, 2004). Furthermore, trade unions are not necessarily concerned with crudely maximising ‘rents’ through distributive bargaining, as ‘much of their activity is concerned with shaping a moral economy informed by notions of just process and just outcomes’ (Heery, 2000: 77). The meaning of ‘justice’ is open to interpretation, providing a potential tension in terms of VPS. On the one hand, VPS is to be opposed because it is contrary to equality-based notions of fairness. It also exposes employees to market-risk, and being divisive undermines collective capacity to resist. On the other hand, members themselves may be open to management overtures because of equity-based notions of fairness. Certain schemes may be seen as fairly differentiating in terms of effort and performance. Much depends on the type of VPS under consideration. Profit-related pay tends to be less problematic for unions than other forms of bonus or appraisal-based pay. It is commonly viewed as a return to labour over and above what may be secured through conventional bargaining, and is seen by employers as a means of reinforcing communication and financial participation rather than individual incentivisation as such (Pendleton, 1997). Also crucial is the general state of industrial relations, with ‘high trust’ workplaces more likely to pursue a cooperative approach to union involvement in VPS (Dalton, 1998).

The HRM approach: organizational change and strategy

HRM represents the purposeful development of ‘people management’ policies and practices designed to improve business performance. It is an international trend, and increasingly characterized as ‘strategic’ (Scullion and Linehan, 2005; Boxall and Purcell, 2003). ‘Pay flexibility’

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is often seen as one of the basic components of strategic HRM (e.g. Guest, 1989; Tyson, 2002). Multiple schemes may be used for different purposes (Gerhart and Rynes, 2003). Bonuses have grown as a means of employee incentivisation and control, offering ‘substantial time period to time period swings in pay, thus tying more money directly to performance’ (Lawler 1981: 87). ‘Merit pay’ arrangements are used to motivate employees, and to reinforce team obligations, but also to underscore management responsibilities for goal-setting, coaching and discipline within the workplace. The spread of new techniques such as the ‘balanced scorecard’ has also enabled more strategic integration between individuals, group and organizational goals (Nankervis and Compton, 2006). VPS has also been explicitly advocated as a strategic response to international competition, deregulation and weakening institutions of collective bargaining (Lawler, 1995). In practice, variable pay may be closely linked to broader management strategies of organisational change (Poole and Jenkins, 1998), but changes in pay systems are also commonly made incrementally and in ad hoc fashion (Brown and Walsh, 1994). The question remains as to how coherent or ‘strategic’ are management goals in introducing VPS, particularly within different institutional settings.

Implications

Thus, the economics literature sugggests that organisations are naturally inclined to VPS and that this is likely to increase in response to competition, the weakening of trade union and as a product of mimicry. The IR literature suggests that VPS can marginalise trade unions, but that this is contingent on context and form of VPS used, and may not be in management’s best interests. The HR literature takes the notion of strategy further, associating VPS with strategic forms of HRM, whilst aware that this can take ‘hard’ or ‘soft’ forms.

From all of this we may deduce five specific sets of possible management rationales. Arranged in a loose, and overlapping, continuum from ‘soft’ to ‘hard’ objectives, these goals include:

• Stakeholder reward: a demonstration of employees sharing in company success, concerned to maintain employee loyalty and identification with the organisation, and possibly motivation (Tyson, 1996). Profit share is the primary example, though company factors may also be imputed into performance bonus or even merit pay calculations. Such a reward strategy may represent a benign response to sustained company profitability, or a ‘win-win’ form of ‘fair-share capitalism’ (Bryson and Freeman, 2007). But it can also be a means to dampen pressures to increase fixed pay costs and/or serve as a compensatory response to rationalization, work reorganisation and intensification.

• Performance management: in which the operation of VPS is designed to reinforce the communication of business goals and operationalisation into team and individual objectives, and ensure that managers pay due attention to the monitoring, coaching and development of their staff (Armstrong and Baron, 2005). Merit pay is an important example as it is linked to managers discussing and appraising individual employee performance against agreed targets, goals and desired behaviours.

• Productivity: Related to this is a desire to improve work efficiency. Increasing competition, product innovation and technological change place new demands on what staff are required to know and do. Labour has to be more productive and adaptable, and there is renewed emphasis on the retention of top performers. Bonus systems are the most common means to incentivise staff but can also incorporate multiple measures of performance including qualitative and collective dimensions (Brown, 2002). Specific schemes can be used to support targetted business initiatives like sales drives; underpin teamwork and customer service; reinforce messages about business and work priorities; encourage the broader acquisition of skills; and retain key staff.

• Cost-control or cost-cutting: Labour costs are normally a high proportion of total costs and, notwithstanding generally high levels of profits in banking, commercial pressures have led to closer control of costs as well as concerns to improve productivity and customer service (Storey et al, 1997). A shift from base pay to variable and often non-consolidated earnings

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contains fixed costs (Burke and Terry, 2006). It is also possible that the fragmentation of pay and earnings arrangements under VPS might disguise and thereby suppress overall paybill increases. Furthermore, some bonuses can be designed to be largely self-financing.

• Industrial relations: variable pay, especially discretionary and individual forms of VPS, reduces the scope of collective bargaining over pay and thus union influence (Heery, 2000). This might be a goal in itself, to weaken trade unions; a subsidiary goal to promote those indicated above; or indeed an effect rather than purposive strategy.

These objectives are considered in relation to the research data in section 5. First we turn to methodology and contextualisation.

3 Methodology

A multiple case-study approach has been described as ‘crucial’ to the understanding of developments in pay (Kessler 1994:123). It facilitates the identification and analysis of organizational contingencies, and enables a clearer assessment of managerial goals and how these are influenced by internal and external context. Comparing organisations across countries provides added value, especially where a large number of cases are involved, by examining how far pay systems are tied to institutional settings and the degree to which similar causal conditions generate different outcomes (Ragin, 1994). Of course, pay and collective bargaining involves a complexity of institutions and levels, and we assume country, sector and company effects. The research design combines a ‘bottom up’ and ’top down’ perspective to explore the relative importance of the different levels (Marginson & Sisson 2004:20). This involves (a) generating a significant sample of cases within each national sector and (b) matching their characteristics (ownership, size, business activity) across countries so as best to reveal intra-sector and inter-country differences and similarities. The aim is to generate some wider understanding by a systematic scrutiny of the conditions that produce particular types of VPS. In this sense the analysis follows an iterative approach, ‘analogous to experimentation in the natural sciences’, combining nomothetic and idiographic methodological traditions (Hyman, 2001: 208, 210).

The retail banking sector is particularly suitable for cross-national examination as it is a large employer in most European companies, with significant union density and influence, and has been at the forefront of introducing VPS. The selected countries have significantly different institutional arrangements, which are hypothesized to influence the scope for, and form of, VPS. Austria represents the continental dual system marked by highly-coordinated bargaining at industry level, generalization of collective agreements, and enterprise work councils that have a very restricted role in pay issues and are subject to a peace clause. Norway represents the Nordic tradition of centrally coordinated bargaining marked by a two-tierd, single channel system where central agreements are complemented by ancillary local bargaining subject to strict peace clauses. The less articulated, multi-level ‘Latin’ system is represented by Spain, where the national level collective agreement sets basic provisions but grants significant discretionary capacity to company-level management. Local works councils are entitled to negotiate and call strikes, though in banking small branch size has focused bargianing activity at company level (Miguélez et al. 1997). The UK represents the Anglo-Saxon pattern of ‘unorganised decentralisation’, with no sector arrangements and collective bargaining mainly conducted at company level, subject to strict statutory regulations concerning industrial action. Each country provided six case studies: three commercial banks (large, foreign-owned; large, domestic; medium domenstic); two savings banks (one large, one small); and one direct bank. The focus was on payments systems for non-managerial employees.

The empirical research commenced in 2005 and involved the close partnership of leading research centres: IRRU, University of Warwick; FAFO, Oslo; Institut fur Wirtschaftssoziologie, University of Vienna; the Autonomous University, Barcelona (political sciences) and University of Barcelona (Research Institute of Applied Economy, IREA). It involved a two-stage approach. First, senior representatives of trade unions and employee associations were interviewed at

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sector level in order to map the broad patterns of VPS and the policies of the relevant organizations. Interviews were then conducted in each case-study organisation with senior management and union or works council representatives. These interviews (around 75 in all) followed a standardized semi-structured schedule across each country that covered economic and market context; industrial relations and collective bargaining; payment systems; the VPS in place or recently abolished; management objectives in relation to these schemes; the position of trade unions towards VPS; and the extent to which schemes are subject to union influence, including collective negotiation. Published and internal documentary data were also utilised. Access agreements at several companies were conditional on anonymity; therefore each case is assigned a pseudonym. A brief description of the cases is provided in Appendix 1, tables A1-A4.

4 Mapping VPS in the four countries

In this section we contextualise the research by very briefly reviewing the regulation of payment systems. We then summarise the forms of VPS in use in the case study companies.

Collective bargaining systems

The collective bargaining system is most articulated and, at company level, restricted in terms of pay in Austria. Collective bargaining over pay occurs at sector (type of bank) and, within limits, at company level. The bargaining parties at multi-employer level are the relevant sub-units of the GPA (Union of White-collar Employees) and WKÖ (Chamber of Economics). Union density is 47% and collective bargaining coverage 100%. Industry-level bargaining is concerned with the annual overall re-enhancements (‘Valorisierung') of the wage schemes, delivering equivalent percentage pay increases for all sectors. This does not necessarily work as an actual wage increase, however, as where pay at firm level already exceeds the collective agreement, this is unaffected by the valorisation and is basically absorbed. The exception is ‘works agreements’ (WA) savings banks, which are authorised to bargain over pay at company level. Here, a clause in the collective agreement stipulates that the valorisation should act as an actual increase through the company agreement, which is one reason why pay arrangments in these banks are more expensive. At company level, the actors are management and the Works Councils (WCs), though in practice works councillors are closely integrated into the union. WCs are not authorised to fix basic wage increases, except in the WA savings banks where they can modify pay clauses so long as the work agreement as a whole is not inferior to the sector agreement. This distinction first arose in the 1950s, when the sector was more diverse and a number of banks sought greater leeway for company-specific adjustmets; today it mainly tends to be around a dozen larger savings banks (covering around 70% of employees) able to pay above the sector-agreed rate.

In Norway, multi-employer bargaining covers the entire banking and insurance sector, since harmonisation in 2002. The main parties are FA (all banks are members) and Finansforbundet. Union density is 75% and collective bargaining coverage estimated to be 83% (managers and certain other occupations are excluded). Sector-level bargaining is conducted annually, awarding an annual wage increase. (Note that one bank, the MNC in our study, has been granted an exemption from the provisions of the sector collective agreement for a trial-period of two years. In this bank, all pay is distributed at company level). The sector collective agreement provides an obligatory pay grade system but does not stipulate minimum wage rates or the point at which companies must place categories of employees. The ‘basic agreement’ lays down a procedural framework for those companies implementing their own agreements, which have been compulsory since 1998. Company-level agreements regulate a number of pay-related issues such as pay system, procedures for job classifications, and the use of variable pay elements. Arrangements for payment-by-results, so-called ‘one-time-payments’ (by management discretion), bonuses and profit sharing are not regulated by the sector agreement and may also fall outside the remit for company-level bargaining, though consultation is usual. Pay in the sector is very transparent as all types of pay are reported to the sector wage statistics. These figures demonstrate that earnings in finance have been higher than in other sectors due to the effect of

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bonus payments, particularly profit share.1 All employees receive the general sector increase, which normally will be given as a percentage-based adjustment of the pay grades. Additional company level pay increases are given each 1 July. In the larger banks, management and the union will agree on a broad ‘economic framework’ for the annual company level pay adjustment, which is implemented by one of two standardised procedures. Under the traditional ‘§14.5 procedure’ (so called after the relevant clause in the basic agreement) management produce a list of employees that should receive the company-level wage increase and this is discussed with union representatives, who may also have their own list. A new procedure, introduced in 2001, is a ‘pay interview’ between the individual employee and her/his immediate manager. The pay interview resembles an appraisal discussion around pay, skills development and performance. Based on these interviews the employer decides who will be given a pay increase and how much. Union representatives are thus not involved in the individual distribution but have a role in establishing the broad principles and overall distribution criteria. The pay interview model can only be introduced by the agreement of both parties at company level. Up to 2006 the parties at sector level recommended companies use the pay-interview model; since then the union no longer favours one particular model.

In Spain there are different national sectoral collective agreements for savings banks and commercial banks. Unlike in Norway and Austria, where the agreements still set substantive rules (and in Norway and certain Austrian savings banks, also govern actual rates of pay), in Spain these act as a framework that establishes only a minimum reference for setting pay. The national sectoral agreement regulates, every two years, basic pay increases and scales by occupational level and seniority; the statutory pay supplements and the profit-related and productivity schemes. The sector agreement also sets a maximum figure for the share of variable pay in the total wage, and states that variable pay should be based on objective criteria and transparency in implementation. It also provides rights to information and participation for workers representatives. Company-level bargaining mainly occurs in the savings banks, which contributes to higher pay in this sector. The basic pay of employees is improved by different types of personal and job supplements in which seniority continues to be significant. These supplements, together with extra payments such as profit-related pay, are determined by collective agreement. The ‘productivity incentive’ is a statutory extra payment set in the sectoral collective agreement and is paid to all employees in the companies, regardless of their individual performance or specific occupational category. As any other statutory pay supplement, it is a consolidated payment, pensionable and non absorbable. It is equivalent to a half monthly wage in the commercial bank sector and two months wages in the savings banks. Profit-related pay is regulated by a formula established in the national sectoral collective agreements to calculate the number of annual extra payments. In the commercial banks, a progression of quarters of monthly pay is established, from a minimum of one extra payment to a maximum of 3.75 extra payments, depending on the dividends paid to shareholders. This maximum was set in collective agreement for 1996-1998 and it has been achieved by most of the largest banks. The savings banks do not issue share dividends, so the formula established in the collective agreement is calculated on the basis of administrative profits. The number of statutory extra payments may vary from a minimum guaranteed of 1.5 monthly wage, irrespective of profits, up to a maximum of 2.5 extra payments.

The sector agreement also normally increases pay bands by inflation, and this was formalised in 2004 following a period of wage moderation associated with the costs of large-scale ‘voluntary’ job losses. However an ‘absorbtion principle’ means that pay increases agreed in the collective agreement may not necessarily mean an increase in the same proportion in the employee’s actual wage. Pay supplements which employers might unilaterally add to agreed wages in Spain are established as a “most favourable condition” so they cannot be withdrawn or altered, though they might be absorbed by later pay increases. It means that the pay level existing prior to a pay increase remains unchanged if it is already above the level of that increase or, if it is lower, is 1 For the finance sector (nace 65-67) the percentage of employees with bonuses has increased from 13% in 1997 to 56% in 2005. Average payments (for those who receive bonuses) have doubled over the period. Bonuses mande up 3.5% of wages in 2004, 6.5% in 2005 and 8% in 2006. (Statistics Norway, TBU).

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increased only as much as to bring it up to the new level. This method of neutralising pay increases is legally recognised in the Workers Statute (1980), and endorsed in the fifth clause of the banking sectoral collective agreement. Implemented at management’s discretion, as a means to modulate wages according to the productive needs of the company, it has emerged as an instrument for pay individualisation. Actual pay rates in the companies are commonly above the theoretical wage reference set for specific functions or job posts. Hence management have much discretion over whether to ‘absorb’ the pay increase or distribute it as a supplement in the form of individual performance-related pay, based on employee appraisal.

In the UK collective bargaining is conducted at company level, following the employers’ termination of the sector agreement in 1987. Until this time pay and conditions were fairly standardised and employee relations marked by employer paternalism (Upchurch et al, 2004). The employee side was also weakened by rivalry between the general union BIFU (Banking, Insurance and Finance Union), which had around 10,000 members in the mid-1980s, and the in-house staff associations which together had ten times as many (Morris, 1986). Since then, many staff associations have become trade unions and merged with BIFU and its successor UNIFI, which itself merged with Amicus in 2004. Amicus (which merged with the TGWU to form ‘Unite’ in 2007) now has around 160,000 members across the finance sectors. Collective bargaining focuses on the annual pay increase. The distribution of the collectively agreed ‘pay pot’ is commonly implemented individually accorning to mannagerial appraisal, often according to a matrix that adjusts the award according to service or in relation to ‘market rate’. The union may sometimes be involved, however, in negotiating the distribution of actual percentage awards according to merit ratings, though this need not be formalised. Bonuses are rarely covered, though unions may be consulted over the schemes and any significant changes. Banking is now a pace-setter in the diffusion of VPS. According to a 2004 survey of 35 pay settlements in banking, 80% of organisations used an all-merit approach to determine employee pay increases, compared to 68% in 1997 (Dennis, 2004). The use of bonuses is also widespread: according to the Annual Survey of Earnings and Hours, bonuses accounted for just over 10% of employees earnings in 2004.

Forms of VPS in use

A summary of the main types of VPS in use in the cases is found in Appendix tables B1-B4. As indicated above, variable pay schemes are not formalised by collective agreement in the Austrian cases (see table B3) except in the savings banks works agreements, where relevant, so in principal there is more scope for management discretion in the commercial banks. This management prerogative applies even where the sums involved are significant for employee earnings (e.g. 10% of the wage bill in ATC2 and likely to be similar in ATC1). Works councils are generally not powerful bodies in the Austrian banks, but they have some influence in the savings banks where there is a requirement for a WA. Austrian labour law requires a WA where a scheme involves monthly income variation, which is another factor why some companies prefer to pay bonuses once a year. In ATS2 there is a WA which stipulates the process and the value of both the bonus and performance pay scheme, though the profit-share arrangement is not covered in this way. In ATS1 a works agreement lays down the rules for performance pay and for the incentive system for sales employees. The volume of the profit-share bonus is negotiated between management and the WC, but there is no formal agreement. In the larger ATS3, there is no co-determnination covering the performance pay or profit-share schemes, even though it is a WA savings bank, though there is information and consultation. This bank also uses competence for pay progression purposes, rather than automatic increments, following a change to the sector agreement in 2005. In terms of forms of VPS used, there is a tendency to use mixed criteria in judging performance pay awards, encompassing quantitative measures, especially in terms of team or departmental targets, and individual goal-setting and managerial assessment. Some part of pay is linked to individual interview or discussion in all cases, though in the direct bank only in relation to the ad hoc bonus.The savings banks each utilise a profit share scheme – as stipulated in the sector agreement - but this is not found in the commercial or direct banks (ATC2 converted

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its scheme to help fund its VPS). Indeed, the direct bank has no VPS apart from provision for ad hoc reward of exceptional performance, which is also found in ATC1.

In Norway, all the cases use some form of individual assessment to allocate the sum available for distribution at company level (table B.2). Half use the pay interview and half the §14.5 approach. The amounts received by employees vary across and within the companies, but largely lie within the range 1-5% and are around 3% on average for those in receipt. This is a similar figure to that of the UK (see below), however, allocation is much more discretionary in Norway in that in any given year only a minority of employees (e.g. 20% in NOD, 33% NOS1; 26% NOS2) are in receipt. This permits a greater dispersion in the actual distribution of this performance-related pay (PRP), something which is favoured by senior management in contrast to the traditional egalitarianism of the ‘social democratic principle’. The HR director of NOC2 said line managers were encouraged to differentiate more and that dispersion was increasing; the HR director of NOS1 similarly argued that those in receipt should be a smaller minority since ‘fair pay is not equal pay’. In practice, however, there is some rotation of annual payments. In the large savings bank, for example, only 42 out of 942 employees received no PRP in the time span of 3 years, partly because the union monitors anyone receiving nothing in three successive years, and partly because managers may not want to face individual employees and argue that they do not deserve any PRP, not least if it is seen as a poor reflection on management. A final factor is that at any one time the sums involved are relatively limited for most employees. All the companies also use profit share, including the direct bank which in 2006 converted its team bonus to a financial participation scheme available to all employees. The sums involved amount to around 4-6% of pay on average, and are received annually except in two cases (NOC1 and NOC3) where they are accumulated and paid on retirement or on leaving the company. In addition, output-related bonuses are found in NOC2 and NOS1. The latter has the most comprehensive VPS arrangements, involving a dual system of (a) bonus linked to a balanced scorecard, covering most employees and paying around 9% on average, and (b) a team bonus for branch staff, based on sales performance. This is available to the best performing third of the bank’s teams, and paid around 4-5% in 2005. In addition, a discretionary bonus was made available to managers to distribute in 2005; this varied according to results but was 2-3% of earnings per employee at the case study site. NOC2 has a system of individual bonuses for sales staff, paid to around a third of those eligible and also averaging around 4-5% in payout. Otherwise bonuses based on individual criteria are rare and somewhat opaque. NOC1 has such arrangements for a small number of specialist staff, and, like most other banks, NOS2 has provision to pay individuals for extraordinary performance, though as elsewhere this is infrequent, and usually involves less than half a dozen employees per year. NOC1 and NOC2 do have arrangements for managers to reward individual top performers in dedicated sales staff, but within their budgets, so this is not systematic and information is difficult to obtain.

All the case study banks in Spain combine some form of bonus with merit pay, or in the case of ESC4 and ESS1, discretionary pay supplements targeted at particular groups of employees. ESS1 utilises appraisal in allocating its retail bonus. Sophisticated ‘balanced scorecard’ approaches, which gather different types of performance data (quantitative, qualitative; individual and team) from a range of sources, were used in ESC1, ESC2, ESC3, and ESS1. Bonuses therefore commonly use multiple criteria incorporating broad quantititive measures and employee appraisal results. The latter assumes lesser importance in the savings banks, where overall business results are more relevant. Merit pay awards take into account competency development and position in pay scale as well as measures of performance. In each case both merit pay and bonuses account for a significant proportion of employee earnings, on average around 12-25%. Company-level agreements (which unlike in other sectors are conducted directly with trade unions) focus on salary increases and grading or contracts structures, leaving much dicretion over the form and significance of VPS to local management. Furthermore, financial institutions have over time developed their own career progression systems which bear little relation to those established in the sectoral collective agreement; this places the final decision on individual promotion (and thus wage progression) firmly in the hands of management. The unions also

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believe that the ambiguity of the new classification system set in the collective agreement, which only regulates the function of branch manager, means that the promotion of employees is now under complete control of management at company level. Furthermore, actual pay rates in the companies are commonly above the theoretical wage reference set for specific functions or job posts. Hence management have much discretion over whether to ‘absorb’ the pay increase or distribute it as a supplement in the form of individual performance-related pay, based on employee appraisal.

In the UK, all companies apart from the direct bank operate a form of ‘merit pay’ or PRP to determine the distribution of the annual increase to base pay, with significant bonuses awarded on top; UKD does, however, use appraisal scores for the purposes of the bonus. The amount available to be distributed as PRP is negotiated with the relevant trade unions, which are also consulted about the appraisal systems that generate the ratings on which the distribution is to be based. However, for the large majority of employees there is limited actual pay dispersion in terms of PRP received. This is for three related reasons. First, the benchmark for negotiating the ‘pay pot’ is inflation, and this has been relatively low for some time. An informal ‘rule of thumb’ of inflation plus 1% is common, but this generates a paybill increase of around 3-4%, which limits the scope for differentiation by appraisal, especially where matrix schemes load payments for those below ‘market rate’. Second, there is a concern within collective bargaining, particularly of the unions but also generally accepted by management, that those rated the equivalent of acceptable (i.e. meeting the requirements of the job) should receive a pay increase at least equal to inflation. This is more or less formalised in some companies, especially where negotiations extend to the sums to be allocated to appraisal ratings (as in UKC2, UKC3, UKS2) but was also customary elsewhere, and serves to further reduce the sums available for distribution according to performance. Third, appraisal ratings themselves tend to demonstrate limited dispersion, whether reflecting managerial ‘central tendency’ or the absence of a normal performance distribution within work teams. Thus, to take one example, with inflation at 2.9%, UKC2 agreed a pay pot in 2005 of 3.5%. This was to be implemented individually in a range from zero (ratings five and six) to 7% (rating one). However, with nearly 90% of employees rated between 2 and the ‘satisfactory’ rating of 4, PRP pay dispersion was effectively limited to around 0.6%, except for the relatively few ‘star’ and poor performers. There is much more variety between organisations in terms of type and level of bonus arrangements, and there is also much more dispersion in the distribution of bonuses than in PRP within the cases. Bonuses also involve significant sums. Criteria for mainstream retail staff can involve any combination of individual performance (against targets or based on appraisal score), team or branch performance, and corporate results. Dedicated sales staff and product advisers are more highly and individually incentivised and may receive commission-type pay in addition to general schemes. Multiple bonus schemes are common, and together can amount to a significant proportion of earnings (up to 14%). Profit share was only found in UKS1, where it was a major form of reward (around 12% earnings on average), though a similar payout in the other building society was linked to branch performance.

5 Management rationales

5.1 Stakeholder reward

The concept of ‘stakeholder reward’ concerns financial participation, linkled to company performance, and is basically designed to emphasise unitarist notions of reciprocity. The use of bonuses based on company profit is standard practice in the Norwegian cases, and the schemes have made substantial payments in recent years as the banks have performed well. Indeed, bank profitability was a factor in the introduction of the schemes, as growth in fixed pay was constrained by pattern-setting bargaining (employee demand was an explicit factor in NOS2; elsewhere they have been used for some time or, in the case of NOC3, were introduced by the Swedish owners). Only in NOS1 was any other form of bonus more significant for most employees, though this was based primarily on team rather than individual performance. Payments are thus not usually related to individual or team performance, so are not viewed as

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motivational tools by management. Rather, management prefer systems that are easy to run and perceived as transparent and fair by employees (indeed, NOD replaced their team-bonus system with profit sharing because employees judged the criteria unfair and management found it ‘heavy’ to run; NOS2 considered a more elaborated sales-related scheme but opted for profit-share on grounds of simplicity). If any instrumental objective was evident, it was a belief that financial participation encourages lower labour turnover, though there was little hard evidence for this. In Austria, the ‘stakeholder reward’ objective was evident only in the savings banks, and also in ATC1, which moved from the savings bank sector to the joint stock banks sector in December 2004. Here, a proportion of profit is dedicated to the bonus scheme, which is allocated according to standardised criteria such as tenure and hierarchy, but also with measures of team and individual performance. Management stressed that the use of profit-share does not necessarily signify benign generosity however, though this might seem the case in sustained good times. Management in ATS3 also emphasised that it helped support the wider principle that pay should be linked to organisational success as well as, more generally, flexibility in the pursuit of organisational goals. Stakeholder reward was also mainly a feature of the savings banks in the UK, plus UKC1 which operated a profit-share scheme which was converted to a share-save after tax benefits were phased out (the free share allocation is linked to company performance and was worth 3% of base salary in 2004 and 2005). UKS1 has a company-wide bonus resembling profit share, and UKS2 has a sum allocated from company profits to be paid quarterly to employees based on branch performance. Both schemes regularly pay out double figure percentages in terms of employee earnings. The UKS1 scheme is viewed by management as a form of ‘reward’ that helps employees identify with the company and understand its business priorities. The union also believes it was relevant that it was introduced when de-mutualising societies began to introduce share-ownership benefits for their workers. The rationale was thus to help retain staff loyalty to mutuality, plus elements of benchmarking or mimicry – in the words of the Senior Rewards Manager, ‘because in the marketplace other people do it’. There is no link to individual performance in order to maintain simplicity and as current thinking is that introducing an individual element would undermine the performance management system by over-focusing on the ratings. In Spain, bonuses are linked to corporate performance but there is less emphasis on stakeholder reward and more on differentiating and individualising pay in order to motivate and recognise employee performance. Hence in ESC1, ESC2 and ESC3 the bonus is linked to individual and team performance as well as commercial success in meeting targets. A similar approach applies in the savings banks. In each case, the initiative for the adoption of a new pay policy, and the implementation of performance-related pay, comes unilaterally from management.

5.2 Performance management

Individual appraisal is increasingly important in virtually all the banks, of whatever type or country, and is commonly linked in some way to pay. In Norway, both procedures used to distribute performance-related pay are based on criteria designed to reinforce monitoring, appraisal and coaching. The §14.5 system has appraisal interviews but these are not reinforced by a focus on pay, whereas the pay interview is explicitly designed to be a more modern HRM tool as management has to conduct systematic individual interviews with all employees. Both management and the unions were convinced that management get a more accurate and detailed knowledge of the skills and performance of all employees, not just the strong and weak performers, through the pay interview process, which has been backed by thorough training of line managers and employees. Familiar problems remain in practice, such as lack of management time or follow up action, and a tendency to focus on sales (which can be stressful for employees) rather than overall performance development. Managers also said that the amount of money involved may be too small to have a great impact on motivation. Only the large savings bank employs a more sophisticated HRM-tool (the balanced score card) in order to develop skills.

In Austria, performance pay is underpinned in all but one of the banks by an appraisal process based on individual discussion of objectives and linked to training and promotion. The exception

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is ATD, which is a small bank with a very flat hierarchy. This means that performance management is less significant in career development terms. The routine nature of the work also implies less emphasis on appraisal as a means of motivating employees and improving performance – rather, the Taylorist division of labour lends itself to continual monitoring and control of employees via technological surveillance and direct supervision. Performance management has in contrast gone furthest in the savings banks because of the new sector agreement in 2005. This enabled greater pay differentiation, emphasising employee competency, and also revised job profiles and qualifications. The new pay structure is intended to encourage a ‘performance orientation’ on the part of staff by means of greater pay differentiation within as well as ‘on top’ of the sector framework, and through the competency approach. In the UK, appraisal pay was widely seen as the best way to link pay increases to employee performance when the service-related salary schemes were dismantled. It was also marketed to employees as a fair system of pay, by linking reward to effort and performance, and also in equal pay terms, as men tended to benefit more from the service-related scales. All the cases use employee appraisal and all but one use this for merit pay increases to basic salary; the exception, UKD, prefers to use appraisal in allocation of the bonus (management said using it for base pay would be ‘disruptive’). However in each of the five merit pay schemes, pay dispersion is actually quite low. Over time, merit pay has effectively been eroded as a performance-pay tool and replaced by bonuses, which management believe have a clearer ‘line of sight’ between performance and reward, and are also more variable and cost-effective. Merit pay schemes persist largely to support performance management schemes geared towards behavioural compliance to new forms of work organisation (e.g. teamwork; selling). Appraisal is seen as an important process of setting employee objectives, monitoring performance and discussing outcomes, and rating is seen as a useful way to structure this dialogue. In turn, it is believed that ratings will be taken more seriously be management and staff if there is some link to pay, however small, as a result. In Spain employee appraisal is integral to VPS, and reflects the banks’ increased performance-orientation plus a trend towards decentralization of management. All the case studies also use appraisal of skills and competencies (commitment, multiskilling, adaptability, team work etc.) as a means of pay progression. Line managers determine the updating or the absorption of discretionary pay supplements based on the grading obtained in the evaluation process. The HR function is closely involved by designing the competencies profile for each function, while Finance establishes the wage increase for each grading. It also has an important role in the implementation of the balanced scorecard, which is used for training, development and succession planning as well as performance pay. The BSC has been widely introduced to promote ‘high performance’ working and to consolidate company culture following mergers and acquisitions.

5.3 Productivity

Work organization in all the banks has been transformed within a generation. Increased competition and sector consolidation has increased cost consciousness, led to new product offerings, placed an emphasis on sales as well as service, and promoted technological changes such as remote banking – all of which has led to a shift in workforce skills and activities. All the banks in Norway report that they thus now recruit different employees, with higher and more formal education and oriented to sales-driven tasks. However changes in pay have lagged behind. In each of the Norwegian cases, managers stress that performance-related pay is necessary not just to improve sales performance but to attract and retain highly-valued employees. Hence merit awards are targeted to a minority of workers. Yet discretionary and highly-differentiated pay is also seen as risky. Managers as well as employee representatives argued that this would face problems of legitimacy amongst most employees and could de-motivate average performers. Management also seemed to accept that it could have perverse effects in terms of teamwork (“If wage differentiation between employees gets too big, the team stops functioning as a team” – HR director, NOS1). Only two of the banks in the study therefore have an individual sales-oriented bonus (NOC1, NOC2), and both operate in ad hoc fashion i.e. at management discretion and based on finding funds within existing budgets. Two more have team-bonuses in which sales is one of other components, though in practice top sales performers

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often get the largest increase. Otherwise, VPS is relatively standardised and collective in Norway, and thus somewhat loosely linked to the work organisation and labour market goals espoused by management.

VPS tends to be more highly differentiated in the other countries, and explicitly linked to work reoraganisation goals. The stated objective in the Austrian bank ATC1 was to improve labour flexibility and the sales orientation of staff, as well as facilitating for them a share in the company’s success. In the savings banks, the reform of the sector framework was designed to recognise (and reinforce) changes in the nature of jobs, as well as permit wider pay differentiation. At company level, ATS1 introduced a bonus system in 2000 to acknowledge the increased importance of sales, and sales staff can now earn twice as much performance pay as back-office staff. In ATS2 a new management board drove a reform of the pay system in 1998-9 in order to increase productivity, primarily in sales, and improve overall service orientation. It was also designed to allow younger staff, more likely to be in such customer-facing roles, to more rapidly catch up to older workers whose position before earlier changes had been protected. In this sense it resembles somewhat the Norwegian banks’ concerns to recognise different demographics and address the needs of younger, sales-oriented staff. As indicated above, the exception that proves the rule concerning work organisation goals was the direct bank ATD. Management said that monetary incentives were not viewed as having a systematic motivation effect in terms of work performance. Instead, this was achieved by close supervision and training, and by securing flexible working time to improve customer service. However the nature of the work permits routine monitoring of workers’ relative performance and, in this context, the ad hoc bonus scheme was seen as a useful instrument to recognise and reward exceptionally high performance.

In the UK, bonus schemes are the principle vehicles to improve productivity. These differ between companies in their scope (individual or team) and their significance for earnings. However they are commonly seen as effective in terms of incentivising staff to meet desired outcomes because there is a clear ‘line of sight’ between behaviour and outcome; where they are also based on managerial targets they also offer the advantage of being readily changeable. The broad objective of the schemes is to encourage high performance from all staff and to reward – and retain – high achievers:

‘The variable element is there to leverage performance beyond target, beyond what you would reasonably expect somebody to do in the job’ (Senior Rewards Manager, UKS1)

The predominant aim is in creating high-performance culture. We want to be able to differentiate the payment that we are making to our people to really reward those people who are performing at a higher level... (and) to engender a high-performance culture where everybody is striving to perform at a high level because they are rewarded for doing that’ (Rewards Manager, UKD).

The Spanish cases also demonstrate that pay systems change was closely related to a change of business focus. For example, in two cases a strategy of expansion via stock exchange quotation and the acquisition of other banks led to management terminating voluntary extra payments for new employees, and transferring it into VPS. This strategy of expansion also involved the extension of commercial functions among the staff of the company and the mobilisation of extra effort from employees to meet more ambitious growth targets. More generally, the introduction of VPS was seen by company managers as a strategic opportunity to differentiate employees according to contribution to the firm, so undermining the emphasis on occupational category and seniority in the national sectoral collective agreements. All the case studies also reported that they had raised educational and skill requiremnents for recruits in response to changes in business goals and work organisation, and that younger staff were more amenable to VPS.

5.4 Cost control

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Cost-cutting was not a major objective in the cases, though cost control featured significantly. In particular, bonuses, unlike increases to fixed pay, do not commit employers to future expenditure. In Norway, only one bank (NOS1) set a limit for the size of variable pay according to total pay.VPS was commonly a non-consolidated payment on top of increases in fixed pay, but this was rarely seen (directly) as a cost-cutting exercise, for example by suppressing growth in basic pay. Possible exceptions were the direct bank, where younger employees and management colluded to direct some of the economic frame for company pay towards lump-sum payments instead of consolidated pay, and NOC2, where the “One Time Pay” bonus for sales staff led to union protests as they believed it might reduce the future ‘economic frame’ negotiated for distribution under §14.5. However, in general profit-share was attractive to management as a form of cost flexibility/ control, as it reflects company performance and permits significant rewards that do not add to fixed pay. Similarly, cost was rarely an explicit (though no less relevant) feature of VPS in Austria, as payments are made in addition to the increases stipulated in the sector agreement. Many bonuses, especially those linked to revenue generation as in ATD, are also designed to be self-financing. However in recent years cost management has become a particular concern in the savings banks sector, and in ATC1 which left the savings bank sector chiefly on grounds of cost following unsuccessful pay reform discussions with the WC. Also a factor in this company is a concern to address the legacy of mergers, which had the largely unanticipated effect of increasing wagebill costs by a process of upward harmonisation. Significant reforms were introduced in the savings banks sector agreement in 1992, 1997 and 2005 to reduce the impact of seniority pay and limit the burden of pensions. The latter introduced pay differentiation with in the collective agreement, but the reforms also promoted performance pay in two other ways. First, the ring-fencing of staff then in post caused problems as the younger, and more qualified, cohort of staff grew in size. This prompted the introduction of performance awards for recompense, as the method of ‘special contracts’ and grade inflation became less manageable. Second, the sector agreement stipulates that income changes of ‘active employees’ entails income changes for pension holders, but pay increases linked to individual performance are exempt. Performance pay can thus also be seen, to some degree, as an instrument to disentangle wage increases from pension payment increases. Hence a major overall goal of VPS in the savings banks is to slow (automatic) wage bill increases and bring them into line with the banks’ performance, i.e. profits. However this does not necessarilly mean a cost reduction approach – in ATS1 for example savings from the CA reforms have been used to finance the performance pay system. The primary concern has been to introduce a ‘modern’, flexible and market-oriented pay system rather than achieve significant reduction in costs per se.

In the UK both merit pay and bonuses have an at least implicit cost rationale. The costs argument for the introduction of merit pay was recalled by the compensation and benefits manager in UKC1: the seniority system ‘gave everybody something but some a bit more’, and this was viewed as no longer affordable in the new competitive marketplace. Furthermore, with inflation low, the case for focusing the available monies ‘to the places you really need it’ could be more forcefully made. The union also believe that the company used the introduction of performance pay to shift from a ‘rate for the job’ approach, which traditionally paid at the upper quartile, to the lower level of ‘median of the market’. Bonuses are also seen as a means of cost containment as they do not cumulatively add to fixed costs, have no implications for pensions, and are more readily controlable by management. The unions also feel that significant bonus payments adjust employees basic pay expectations downwards to cost of living, which is valuable to banks in a context of low inflation and high profits. However the unions also said that they have to be realistic given other major priorities such as safeguarding pensions and jobs (or redundancy terms) given off-shoring, outsourcing and branch rationalisation as the banks try to improve their cost/income ratios. All the bonus schemes lie outside the scope of collective bargaining, partly reflecting historical reasons (they used to pay low amounts, hence were not a major union concern) and, more recently, union concerns to avoid being seen to endorse systems that have highly variable, if significant, effects on earnings. Management too want to maintain them as rapidly adjustable and often highly localised business tools related to product market priorities, and also want to ensure they remain contingent forms of pay that do not add to fixed costs. Bonuses are usually shaped primarily by operations management and finance. In Spain VPS is

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paid on top of the increase agreed at sector level, though sector rates are usually below those effective at company level. However, the absorption of pay increases at company level, which permits much of performance-related pay, is not mainly aimed at reducing wage costs but at the redistribution of these rewards among commercial staff by means of variable pay linked to the achievement of targets. VPS is generally non-pensionable and non-consolidated which helps contain costs. The sector agreement also places a limit on the maximum share of variable pay in the total wage. Thus, overall, according to management, VPS facilitates cost containment rather than cost-cutting as such. In contrast, for the unions it is clear that discretionary pay and the resulting absorption of pay increases is aimed at reducing wage costs, especially those of clerical staff whose wages were overestimated in comparison with market wages in the sector. Unions do not necessarily object to this strategic aim of reducing costs, since they understand that it is necessary for competitiveness; however, they do have concerns over the transparency of the schemes and the potential impact of mergers.

5.5 Industrial relations

Across the cases, VPS is rarely introduced with the explicit objective of diminishing trade union role or influence, though this is likely to be an effect of decentralisation and an increase in managerial discretion over pay. In Norway there is a shift in responsibility for earnings from sector level bargaining to company level, but only one bank (NOC3) is currently exempt from the central level increases. At company level there is peace clause, but in all except NOC3 union and management negotiate over the economic frame for company distribution. The role of the union representatives at company level is presently less concerned with actual pay distribution (perhaps more so in the §14.5-system banks) than with defining the criteria and procedures for performance pay, though the overall distribution is discussed in the employment committee where the union is represented. Local representatives have less direct influence on the distribution of merit pay as a result of the introduction of the pay interview model in three of the cases, but they generally seem satisfied because the criteria are more transparent and fair. Bonuses are outside collective bargaining. The unions are more wary of bonuses as these do not represent permanent increases to earnings, but find it hard to oppose them where they are paid on top of fixed pay. They are generally more sceptical of sales bonuses than flat-rate profit-share, which they favour. The situation in Austria is somewhat similar, though the union may be even more anxious about the consequences of decentralisation because works councillors, who bargain at company level, often face problems of resources or expertise, and because works agreements have less legal security than collective agreements (e.g. they can be ‘denounced’ by the negotiating partners). Indeed ATC2 and ATS2 have no full-time works councillor, even though in the latter case VPS is highly regulated by WA, as employees feel this could adversely impact on career opportunities in the bank. The general position of the WCs concerning VPS is that they welcome additional payments, even though they are not compulsory, and hence not guaranteed, as they are in advance of the CA. However they would prefer these to be more standardised (such as profit share) in order to avoid arbitrariness and opacity. Bonuses, which management stress to be ‘voluntary’, often lie outside WC regulation and these have generally increased in importance. Co-determination at company level serves as a means of supervising the process of performance evaluation and reward, particularly in the savings banks (the 2005 savings bank CA increased co-determination rights as performance criteria must be fixed in work agreements and WC are obliged to supervise the process). In ATS1, for example, management state that money of itself is insufficient as a motivator, and that VPS can de-motivate if the criteria and/or the assessment process are not transparent. The WA, which is highly formalized, fulfills this function. Other banks may be more aggressive however, such as ATC1 which moved from the savings to the commercial banks sector after pay negotiations with the WC broke down. The union responded to this with an ultimately unsuccessful legal action.

The introduction of merit pay in the UK might also been expected to have weakened the unions by decentralising some pay setting to managers. As one senior union official in UKC1 put it, the union’s key concern is to:

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‘place more regulations around how individual pay is determined. That’s the greatest philosophical divide between us and management. Ideally the company would like the branch manager to decide pay. Our job, because the members want this, is to reduce the discretion of local managers. Insofar as there are battle lines this is one – clawing back control’

For merit pay, in most cases this has effectively happened. Unions retain collective bargaining over the pay pot and in many cases the actual distribution, with most employees getting much the same pay award. Some respondents also argued that the generation of employee grievances through appraisal-set pay might even strengthen trade union engagement with employees. However, bonuses remain outside collective bargaining, and there was some concern this was constraining what the union could achieve over basic pay. Whereas the company view of bonuses is dynamic, based on changing product requirements and priorities, the union position is based on consistency, stability and accessibility. However, there was normally close consultation with the unions about the (major) schemes. The savings banks in particular value good industrial relations and indeed market this to staff and externally as part of their distinctive ‘caring’ ethos. A different threat to unions has emerged from differences in employee interests, roughly on the lines of relatively new and well-established employees. Long-term employees recruited to mainly administrative work often have greater trouble accessing bonus payments; at the same time they might receive lower basic pay awards if they are judged as over ‘market rate’. This led to a dispute in UKC1 as thousands of staff rated in their appraisal as good performers received real pay cuts, though the union found it difficult to galvanise wider support. A similar polarisation was reported in UKC3, which bought a privatised bank and ring-fenced their staff at time of merger in 1995, so that they retained seniority and had no merit pay. The union membership is now equally divided between the ‘old’ and ‘new’ groups, and finds it a challenge to serve both at the same time. In Spain a similar picture unfolds of management stating that union marginalisation is of no concern to VPS, though union respondents reporting that it might have such effects. Employers argue that VPS is designed to enable line managers to pursue a results-oriented culture, and that it is a more equitable system than pay based on seniority and job classifications. However, according to unions, the introduction of VPS is a way to redistribute increasing profits in a way that enables management to increase its control over the workforce, promoting individualisation and the deregulation of industrial relations within the company, not only in reference to wages, but also in terms of professional career and working time. At company level, pay policy (voluntary pay revision and performance-related pay) is annually established by the Human Resources Unit in accordance with General Management guidelines. Unions only have information rights but not a role of consultation and negotiation. Decentralisation to company level therefore weakens the position of the unions.

6 Discussion and conclusions

It is useful to very briefly reprise the key findings in terms of collective bargaining systems, forms of VPS in use and rationales.

• In terms of bargaining context, in each country the company level is increasingly important, and this grants management significant autonomy over VPS. In Austria, VPS is seen as ‘on top’ of the sector collective agreement, and thus at management’s discretion. Indeed, only in works agreement savings bank is any bargaining permitted at compeny level over pay. In Spain the sector is basically a minimum framework, and wage drift grants management significant scope to increase VPS by decisions over absorption. In Norway, company-level collective agreements have been compulsory since 1998, which implies bargaining over aspects of pay such as the §4.5 framework. However, implementation is largely a management concern, either by the §14.5 or pay interview models. Profit-share, the principal means of VPS in this country, is entirely at management’s discretion, albeit in some cases (NOS2, NOC2, NOC3) in consultation with employee representatives about the systems and

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sums involved. In the UK, the unions maintain a strong voice in the determination of merit pay schemes, but bonuses, which are increasingly more important in employee earnings, are beyond collective bargaining.

• Forms of VPS show distinct similarities, but also some differences, between the countries. First, merit pay is almost a universal phenomenon. Only in the direct banks is appraisal less likely to be used to determine annual pay increases, perhaps linked to different forms of performance management. This was the principal ‘business’ effect observed; the main ‘ownership’ effect was a tendency of savings banks to favour collective VPS. Second, only in Norway is profit share a generally important means of VPS, with other forms of bonus relatively limited in extent and amount, though it is also used in the savings banks in other countries. In contrast, Austria and the UK use various systems of bonuses in addition to merit pay, though it is in Spain where multiple-systems are most advanced. Here the BSC is commonly used to manage individual, team and corporate level targets and bonuses, but is is infequently found in the other countries.

• Apart from ‘stakeholder reward’, management objectives are broadly similar in terms of VPS. Stakeholder reward was mainly associated with the Norwegian cases and savings banks elsewhere, manifested in the form of profit-share. Performance management and productivity were global objectives, associated both with merit pay and bonuses. Performance management was everywhere underpinned by appraisal, which in the case of Spain, Austria and the UK was in turn was reinforced by a link to pay; in Norway appraisal was related to pay only indirectly (though there is nothing in the collective agreement preventing it). In each of the three countries with multi-employer bargaining, sector-level reforms or developments were associated with promoting performance management at company level (the pay interview model in Norway; competency framework in Austrian savings banks; wage drift in Spain). Productivity was further enhanced by changes in recruitment patterns, and pay systems reform to reward young sellers. Bonuses were important to this end in all except Norway2, where management preferred selective (minority) implementation of the company-level pay award. Cost emerged as a relevant if not explicit factor, with VPS recognised as a way of rewarding employees without commiting to fixed wage costs, and unions concerned that this could dampen basic pay. Industrial relations motivations were not identified as relevant, though the decentralisation of pay setting and the growth of earnings not covered by collective bargaining could serve to weaken union influence.

There is thus much in common across the four countries in terms of pay developments at company level. Seniority pay systems have been abandoned or weakened; there is increased use of individual employee appraisal, commonly linked in some form to merit pay even if pay dispersion is fairly limited; and various forms of bonuses are also widely used. However this takes the form of standardised profit-share arrangements in Norway, whereas in the UK it is more likely (the large savings bank apart) to be linked more closely to individual and team performance. Indeed, the situation in Austria is not dissimilar to the UK at company level. Variable pay provides substantial additions to earnings and is often delivered through sophisticated schemes operating multiple criteria to reflect performance at different levels. This is because variable pay is seen as an ‘add on’ to the sector agreement, hence there is large scope for management discretion and limited regulation by WCs. In Spain too, employers have a very large discretionary capacity to design and implement VPS, as it is outside the remit of company as well as sector-level bargaining.Indeed in their use of sophisticated and multi-level bonus arrangements the Spanish banks are arguably at the forefront of VPS in terms of HRM, reflecting the rapidity of change in the sector, driven by mergers and acquisitions. Hence, perhaps surprisingly, Norway seems the outlier case in operating relatively standardised pay systems overall.

The reason for this seems to be a combination of culture and structure. The latter refers to trade union preferences and their strength and role at company level. The former defines what is

2 Managers in Norwegian banks can apply team or individual bonuses locally, but they have to find the sums out of their own budgets. It is difficult to obtain evidence about how commonly or systematically this occurs.

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broadly acceptable in terms of reward systems. Hence profit-share schemes are legitimate to employees and their representatives in terms of social-democratic nostrums of fairness and equality, as they represent a collective share in corporate success. Equally, with sustained profits, management would find it difficult not to reward over and above fixed pay, which is constrained by the pattern-setting bargaining of the LO and NHO. Though individual and team bonuses are used in ad hoc fashion to reward top performers in discretionary fashion, organisations have refrained from their systematic and widespread use as they fear a negative reaction from the workforce as a whole which, in a country of relatively low income inequality, generally has low tolerance towards systematic wage differentials (Kuvaas 2006). Unions were certainly more hostile to significant bonuses based on individual/team appraisal (in NOD such a bonus was terminated following union opposition; in NOC2 the union protested against a sales bonus and believed that they would get rid of it; in NOS2 a more advanced bonus program was worked out, but never implemented because management concluded the system would be dysfunctional because it was likely to employee conflict with notions of fairness). In any case, profit share is favoured as a relatively simple and cost effective scheme.

Management objectives are also broadly similar across the companies, reflecting common pressures in terms of product markets and work organisation. First, the weakening of the seniority principle reflects both a labour market and a performance strategy, introducing notions of market pay and affordability whilst also motivating and retaining better-performing employees, particularly the younger or newer ones specifically recruited to meet new job requirements but not immediately best-served by time-based incremental pay. Appraisal is now commonly linked to pay progression but also important is its function to reinforce the performance management process of individual communication, competence development, management coaching, succession planning, and discipline. The development of VPS thus also signifies a HR management strategy that responds to the more rapidly changing business environment, and often the decentralization of business and HR responsibilities to local managers. Furthermore, problems of task multiplicity or complexity, work integration and measurement issues also means that organisations favour some role for the subjective or personal appraisal of performance (Burgess and Metcalf, 1999).

Second, bonuses are generally more significant in terms of employee pay than merit awards. This is because they are seen by management as a means of incentivisation or reward that is valued by employees, and flexible and cost-effective for management. Staff welcome periodic lump-sum payments, and may see the schemes as more transparent and systematic than merit pay. The schemes are discretionary, so potentially readily adaptable to changing business priorities, may be largely self-financing, and do not add to fixed, pensionable pay costs. Only in Norway is the union usually involved in bonuses, e.g. in the the two cases with comprehensive bonus arrangements (NOD and NOS1) there have been bonus agreements between the union and management. This reinforces the impression that the union is stronger and more involved at company level, and that management are more willing to accede to them a role in order to incorporate their concerns. Third, a strong collective dimension is evident in most VPS, whether at team or organisational level, though pay is more likely to be individualised for staff in sales roles. This is because VPS must be seen to be fair if it is to be accepted by staff, and by line managers who have to implement it and respond to employee concerns. As a result, variable pay schemes tend to be bounded by various parameters on local management discretion and the dispersion of outcomes.

In each case, VPS presents difficulties for trade unions though overall, unions in each country demonstratre a pragmatic adjustment to VPS. This reflects a priority to maintain real increases in basic pay and, where they exist, the continued relevance of sector-level arrangements. The main forms of VPS, bonuses, were seen as additions to earnings that many employees appreciate. In any case, though ‘fairness’ was an important universal principle, pay differentiation not necessarily seen as inherently unfair. Union concerns tended to be highest where workplace union representation and role was weakest (Austria, Spain). A further difficulty was that unions

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now represent different interests in the workforce (eg sales/ support; younger/ older) which perhaps makes change easier for management to propose. They also have other issues and priorities to address such as outsourcing, pensions, and rationalization. The unions continue to be often closely consulted in the design of schemes, including performance management and appraisal mechanisms, though the depth and breadth of involvement is more pronounced where basic pay is affected as bonuses are seen by management as discretionary instruments. As a consequence a growing proportion of employee earnings is outside formal collective bargaining. Unions also voiced concerns that one effect of the growth of VPS is to suppress what is available for basic pensionable pay increases, which have demonstrated limited real growth despite significant productivity improvements and high levels of profits. However, industrial relations are constructive in almost all cases, with few signs of dispute.

A perhaps surprising finding was the limited level of systematic or routine evaluation made by the banks of their pay systems, even in response to change. In Norway it was reported in two banks: NOS1 evaluates its wage and bonus system comprehensively, in the light of the BSC, to the extent of having one person work full-time on this; NOC3 also evaluates the effects of their trial-period exemption thoroughly. In Austria there is little formal evaluation evident yet, though under the terms of the new savings bank agreement the effects of performance pay systems must be evaluated based on criteria fixed in work agreements. ATS3, for example, is planning to conduct eveluation of performance pay every two years after introduction. No provision for evaluation was found in Spain. In the UK bonuses are evaluated in terms of quantitative outcomes, plus informal feedback from managers, and merit pay via routine employee attitude surveys. In general, any reviews were much more likely to be made with respect to bonuses, particularly concerning sales, rather than any of the issues to do with base pay, because these incentives were associated with precise goals and targets and were more amenable to measurement. This meant that many changes to pay, some large and potentially very costly, were essentially un-evaluated, at least in formal terms. A similar finding was made by Corby et al (2005) in their research into 15 large, unionised organisations in the UK. They explained this in terms of difficulties in establishing causal links between intentions and desired outcomes; the time it takes to implement large-scale change; and pressure not to make ‘waves’ once the change has been established. Reinforcing this is what we found to be ‘personnel’ factors, which operated at two levels. First, the almost continual re-composition of the HR teams within these large organisations, as staff moved onwards, upwards or outwards, meant for a short organisational memory. Second, new senior managers often wanted to make their mark by introducing changes to pay, without the confines of a review of current or earlier schemes, nor planning for the evaluation of their own project. This meant that for some there was almost constant change; the main union in UKC1 for example had recorded 39 changes to pay and appraisal and grading structures in a 20 year period.

What do these broad similarities, within starkly different institutional settings, signify? First, the findings offer some support for the argument proposed by Streeck and Thelen (2005: 4) that liberalisation is a direction of institutional change influencing different regime types and that, being incremental, is all the more transformative. We can see this at two levels. First, sector-level collective bargaining arrangments have followed an adaptive mode to market liberalisation and internationalisation that permits greater discretion at company level. Successive changes in the Norwegian sector agreement has granted a decentralisation of pay-setting to companies, and even attempts at re-regulation (such as the Austrian savings bank agrement of 2005 which sought, in part, to address the growth of individual contracts) can be seen as as adjustments to the new reality, permitting greater pay differentiation within the sector framework as well as ‘on top’. In Spain the introduction of VPS is a strategic policy towards to differentiate between employees, reduce costs and increase flexibility in wage policy in terms of the regulations established in the collective agreement and to distribute productivity gains. Second, at company level, the opening of product markets has prompted similar responses in terms of technologies and work organisation, which has also led to a re-constitution of the workforce with younger employees more open to innovation in terms of pay as well as work organisation. Companies have thus taken the opportuinities provided by the widening ‘space’ permitted at sector-level for

19

VPS in an experimental, but somewhat similar way within countries, but also largely across countries too. As Morgan (2005: 415) puts it, ‘firms are active participants in their own fate; they do not simply reproduce a dominant recipe but on the contrary search for their own position in markets’, albeit in a ‘tight selection environment’ conditioned by practical and political constraints.

In short, in banking, first order changes in markets and technologies have shaped similar pressures in terms of work organisation and labour force requirements and are promoting some form of convergence in broad pay practice which institutional systems then have to cope with. These substantive convergence tendencies have occurred (UK apart) within sectoral frameworks that have permitted an increasing scope for organisational discretion over variable pay. Raised entry requirements and staff training in support of a growing emphasis on sales has had implications for HRM and pay strategies, enhancing management's options and incentives to introduce VPS in each country, at the same time as unions have found a growing constituency of their members more accepting of VPS overtures. There are thus strong common tendencies in pay arrangements towards VPS, including widespread appraisal-set pay and use of bonuses, if not any move to uniform common systems of VPS. This has occurred notwithstanding the national segmentation of product markets for retail banks. It echoes the conclusions of a study of company-level employment pacts in European banking, which argued that ‘a process of cross-border ‘isomorphism’ is apparent across organisations within the sector’ (Marginson and Sisson, 2004:159).

The findings demonstrate that decentralisation from sector to company level has opened a greater space for management discretion to pursue common objectives of performance management and cost control through variable pay. Differences remain, not least in the significance of the sector collective agreement for base pay. There are also differences concerning the forms of VPS deployed, with Norwegian banks generally favouring collective forms of bonus (as savings banks elsewhere); Austrian and UK banks utilising merit pay and multiple, individual and collective bonuses; and Spanish institutions using sophisticated BSC approaches to combine appraisal-pay and multiple bonuses. But overall the effect is similar: increasing use of appraisal-set pay and increasing significance of bonus schemes for employee earnings, which has the effect of diminishing union influence over pay. Indeed, from the point of view of management objectives, union role and effect on employee earnings, convergence in terms of VPS at company level is such that most of the 24 cases could readily be placed elsewhere in the national tables of Appendix B. In broad terms, then, what the case of banking suggests is a course of fading path dependency at national level, at least in the practical terms of pay-setting.

Acknowledgements

The research was funded by the ESRC in the UK (award RES-000-23-0453); the Norwegian Research Council; and the Austrian Science Fund (FWF), each under a European Science Foundation scheme to promote collobaorative research in social science. The Spanish research was funded by the Department of Education, Research and Technological Commission.

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Appendix A: The case study companies

Table A1. The UK cases

Name Ownership Market, economic performance Employment characteristics

Industrial relations

UKC1 UK ‘high street bank’; some limited overseas operations.

Pre-tax profits > £4.2bn but continued (‘voluntary’) job losses due to branch rationalisation; outsourcing of processing; offshoring of call centres. Cost: income ratio (CIR) 50.8% (2006; 52.8 2005). ROE return on equity: 26,6 %

Total employment c. 70,000; Retail 35,000 (FTE) in >2000 branches; 63% female.

Two rival unions reflecting merger history. In-house union dominant in membership terms and less co-operative with management. High overall density (c. 75%). Separate bargaining process; in-house union usually does not sign agreement. Single bargaining unit.

UKC2 Ex-mutual that subsequently acquired a bank.

Operating profit: £548 m 2005. Branch rationalisation strategy. CIR 53.0 (2006; 55.2 2005). ROE : 21.5 %

Total employment c. 9000; >250 branches employ 5,500

2 separate (national) bargaining units, with 3 unions (one mainly managerial), reflecting mergers. Branch cuts most affects in-house union. Overall density 50%.

UKC3 Subsidiary of large foreign group.

Group profits around £2.9bn; UK 0.36bn, up following investment and rationalisation strategy. CIR 62.9 (2006; 68.2 2004)

c. 9000 in around 400 branches;

One union. Constructive IR despite rationalization. Density c.55%. Single bargaining unit for UK retail (terms and conditions now harmonised from two separate banks)

UKD Subsidiary of large UK group.

Group profits £11.7bn 2006. No recent data for UKD (profit was £33m 2001). Group CIR 51.0

c. 3,400 in two sites (2,500 and 900);

One union. Constructive IR despite increased competitive pressures. Density < 50%. Single bargaining unit covering subsidiary but different pay rates for the two sites

UKS1 Large mutual. Profits around £0.5bn. CIR 58.7 2006 (64.1 2004). >16,000, with c. 10,000 in 680 branches

One union (ex-staff association). Constructive IR. High overall density (c. 75%). Single bargaining unit.

UKS2 Medium-size/ regional mutual.

Profit a record £56.6m 2005, up 8.8% on 2004. (No CIR available)

> 1200, including 550 in 49 branches

One union. Low membership but rising with renewed recruitment campaign. Good IR. Single bargaining unit.

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Table A2. The Norwegian cases Name Ownership Market, economic performance Employment

characteristics Industrial relations

NOC1 Nationally-owned commercial bank, large-size

Pre-tax banking profits (NOK 1000s) = 8900 000. Dowsizing after merger between two banks. Market share 38% retail, 16% corporate. Wages =46.4% costs; CIR 55,2%

7,812 employees . c. 50% women. 193 branches

Two unions. Finansforbundet around 64% of employees and Falo (an umbrella org for finance employees organised in two LO-unions) 6%. Overall density some 70%. Two-tier bargaining. Employer organised in FA.

NOC2 Foreign-owned commercial bank, large-size

Pre-tax profits NOK mill=c. 3000 for the group. Market share 15% in both retail and corporate. Labour costs = 58%; CIR=60%

3645 employees in 120 branches. 48% women. Average age around 40.

One union. Finansforbundet organises around 70% of all employees (90% if calculated on basis of relevant occupational groups). Employer organised in FA.

NOC3 Foreign-owned commercial bank, large-size

Pre-tax profits SEK mill=c. 12000 for the bank branch offices in the group. Market share 3% retail, 8% corporate. Labour costs = 62,3% (group level). CIR 44.9% (2006)

No of employees in norway= 530 (and increasing). 50% female. 41 outlets.

One union, Finansforbundet, density 60%. Employer organised in FA Company has 2 years dispensation from the central level social partners to practice a pay system where all pay is regulated at company level..

NOD Foreign-owned direct bank, small-size

Pre-tax profits NOK 1000s= c. 70. 300 000 retail customers, i.e. 10% of all internet customers. Labour costs = 35%; CIR – n.a.

122 employees and increasing (+ 70 part-time temps). 43% female.

One union. TU density is 60%.Employer is organised in FA.

NOS1 Nationally-owned savings bank, large-sized

Pre-tax profits NOKmill = c. 800. Both retail and corporate. Regionally based in business intensive region. Market share = 40-50% in region. Labour costs = 55.1%; CIR 51.24%

942 employees. 55% female. Average age 47 years. 52 outlets.

Two unions. Finansforbundet organises 80% of all employees and HK (a LO-union) organises 4%. Employer organised in FA.

NOS2 Nationally-owned savings bank, medium-size

Pre-tax profits NOK mill= 250. Decreasing profits. Both retail and (small) corporate clients in the region. Labour costs = 53,5%. CIR 52,8 (increasing)

258 employees. 70% female.Average age 47. Some part-time (not so usual in banks). 20 outlets.

One union. Union density is 86%. Employer organised in FA.

Note: All economic data from 2004

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Table A3. The Austrian cases

Name Ownership Market, economic performance Employment characteristics Industrial relations

ATC1

Foreign-owned AG listed on stock exchange. Head of the company: until 2005 Germany, now Italy. 10.100 golden shares (hold by the WC and the AVZ foundation)

Total balance: € 117.1 bill (2004) CIR: 64,9% (2004). Labour costs: 57% (2005); ROA: 0.43% (2004); ROE (before taxes): 9,7 % (2004). Profit (before tax): total group €, 1.301 mil; national contribution €650 mil.Total number of customers:1.8 mil in Austria, 4.5 mil in CEE. Largest bank in Austria ranked according to total balance sheet (2005): Market share:17,46 (2003)

11,146 employees (140, 000 group), 56,8% female. 30% of women are part time. 97% are white collar workers Tenure: 21,2 years men, 17,9 years women (on average). Number of establishments in Austria: 393. Subsidiaries: 5. Establishments abroad: 1,177, subsidiaries abroad: 13

Employee-side: GPA (union of white collar workers, section for finance). Employer-side: Voluntary association of the banking sector, until Dec. 2004; now Voluntary association of the savings banks sector. But the bank is still member of the (obliged) Savings banks association at the chamber of economics (WKÖ) because the bank has been originally constituted according the savings bank act.Duration of CA: one year. Workplace representation: fulltime WC, white collar WC. .

ATC2

Nationally owned AG listed on stock exchange. Part of a voluntary/ democratic association aiming to foster regional economy. The 3 banks of the group hold 13% share in the other .

(data for 2004): Company earnings: €6.765 mil ; Labour costs: 66,43%; ROA: 12,49%; ROE: 8,8%. Profit (before tax): €38,1 mil. Ranked according the total balance sheet between place 10-20 approx.

870 employees (plus 18 abroad), 48,7% female. 18% women part time. 95% white collar. Tenure: 10 years (on average). 37establishments (1 abroad), 17 subsidiaries and 1 abroad.

GPA (section for finance) and Voluntary association of the bankingsector. Duration of CA: one year. Workplace representation: No fulltime WC, 29 white collar WC. Density rate: 20%. WC influenceis limited to the authorization in CA or labour act.

ATD

Nationally owned, part of a group: independent subsidiary of the BAWAG (owned by Austrian federation of trade unions until 2006)

(data for 2004): Total balance sheet: €288 mil ; profit (before tax): €1.3 mil. 120, 000 customer accounts. Independent subsidiary of the 4th largest bank in Austria, ranked according the total balance sheet (2005). Market share: 6,53% (2003)

58 employees (bank under investigation), 70,7% female. 33% women part time. 100% are white collar workers. No branches. Total number of employees for the entire group: 6,000

GPA section for finance and at employer side the voluntary association of the banking sector. All banks of this sector are covered by the CA whether as obliged member at the chamber of economics in the association for the banking sector (as ATD) or member of the voluntary employer association of the banking sectorDuration of CA: one year. Workplace representation: No fulltime WC, 3 white collar WC (2 of them replacement). Density rate: 67%WC has no influence (WC comment)

ATS1

Since 2002 AG, listed at stock exchange. 74,75% shares held by Anteilsverwaltung (SpK investment management), 25,25% by the City of Dornbirn and the Anteilsverwaltung

(data for 2005)Company earnings: €26,147m, Profit (< tax): €18,568m. CIR: 55,02%; ROE (Dec 2004): 8.4% ROA (Dec 2004 after tax): 0.68% Largest savings bank in the federal state

Number of employees: 320 (bank under investigation), 52% female. 35% of women working part time. 100% are white collar workers Number of branch offices:16 Tenure: 10,66 years (on average)

GPA Voluntary association of the savings banks sector. Duration ofCA: one year. Workplace representation: No fulltime WC, 8 white collar WC (8 in replacement). Density rate: 20%. WC has marginal influence on individual wage increases; but WC can influence performance pay because of the need for WA. Company is a work agreement savings bank

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Table A3 continued

ATS2

Public limited company (AG), 100% ‘Anteilsverwaltung’ owned (a private endowment originating from a non-profit mutual savings bank). In 2005 the bank merged with another savings bank of the region (approx. 100 absorbed)

(data for 2006): Total balance: €138.535 mil ; earnings: €1.115 mil. CIR: 73,96%. (data for 2005) Labour cost:76%; ROA: 2,3%; ROE: 5,9%. Profit (before tax): €5,343,500 Largest savings bank of the region lower Austria

Number of employees: 459 (bank under investigation), 55,7% female, 52% of the women working part time. 68% are white collar workers. Number of establishments: 46.Tenure: 18,3 years men, 13,3 years women (on average).

GPA and voluntary association of the savings banks sector. Duration of CA: one year. Workplace representation: No fulltime WC, 3 blue collar WC and 7 white collar WC. Density rate: 50% WC can influence the bonus system, and he can recommend employees’ for salary adjustments.Company is no work agreement savings bank and not authorized to bargain on wages at company level.

ATS3

AG, 64,5% shares are widespread holdings; 30,5% held by the Erste private foundation; 5% Austria Verein. 57,9% of the stocks are held in Austria. Stock option program for employees: max. 2million ordinary stocks, 54,000 options for the managing board, 1.946.000 for managers and obliged employees.Company is head of the savings bank group

(data for 2005): Company earnings before tax: €1.214,8 mil; Total Balance: 152.660 mil €; CIR (2004): 63,4%l Labour cost (2004):57,09% ROE: 18%; Profit (before tax): n.a. Total number of customers of the group: 15,2 million. 2nd largest bank in Austria ranked according the total balance sheet (2005). Market share: 10,21% (in 2003)

Number of employees: 4.437 (bank under investigation), 53,8% female, 37.6% of the women are part time. 100% are white collar workers. Number of establishments: 229. Tenure: 17,1 years men, 16,3 years women (on average) Total number of employees for the entire group: 29.300: in Austria 7.800 and abroad: 21.500

GPA (union of white collar workers, finance) and Voluntary association of the savings banks sector. Duration of CA: one year Workplace representation: 4 fulltime WC, 22 white collar WC Density rate: 30%. Pronounced codetermination. Codetermination in matters of correctlabour grading, negotiations on company’s success bonus, recommendation of employees’ for salary adjustments. Company is a work agreement savings bank and authorized by the savings bank CA to bargain on wages at company level.

27

Table A4. The Spanish cases Name Ownership Market, economic performance Employment

characteristics Industrial relations

ESC1 Large commercial joint stock bank with highly diversified shareholding

Net group profit €3,086 m. (all data 2005). Pre-tax profit €6,823. CIR 43,2 %, ROE 37%, ROA 1.12%. Market share 18.78%

30,235 employees, 37% female, 48,7% university grade. Av. service 18.2 years.

Representation at workplace council is CCOO-COMFIA 22 %, UGT-FES 15%, CGT-FESIBAC 13%. National (2 years) sector agreement establishes basic pay /pay scales by occupational level and seniority, the statutory pay supplements and the profit and productivity schemes.

ESC2 Medium joint stock bank with highly diversified shareholding

Total asset: €93,038,481. Net attributable group profit €878 m. in 2005, pre-tax profit €1,414m. CIR 50,53 %, ROE 21,02%, ROA 1,38%. Market share, 5%

Total employment 12.000, 25% female, 80% of new hires have no more than 2-3 years experience

3 unions at sectoral level, in workplace council two unions, CCOO-COMFIA 30% and UGT-FES 8,4%. National (2 years) sector agreement establishes basic pay /pay scales by occupational level and seniority, the statutory pay supplements and the profit and productivity schemes.

ESC3 Medium commercial bank joint stock private owned

Total asset: €52.320.395. Net attributable group profit €453 m. in 2005. Pre-tax profit €644 m. euros 2005. CIR 50,53%, ROE 15,19%, ROA 0,94%

Employment 9,433, 41% female, 46,3% university grade. Average age 41 years and seniority 17 years

3 unions at sectoral level, in workplace council two unions, CCOO-COMFIA (20%) and UGT_FES (17%). National (2 years) sector agreement establishes basic pay /pay scales by occupational level and seniority, the statutory pay supplements and the profit and productivity schemes.

ESC4 Small subsidiary of large foreign UK group.

The results for 2005 were of €8,1 mill, against an estimated losses budget of 6,8 mill. Contribution before taxes €8,062m

304 employees, 37% female. Average age 47 years and 22 years of average service

At company level , UGT 83% union representativity and 40% of density in the company (120 employees.) CCOO, 8% (25 employees.)

ESS1 Large savings bank, non- profit, independent institution

Total asset: €180.352 m. Net income of group €1210 m. Pre-tax profit €1,791 m. 2005. CIR 52,2%, ROE 18,5%, ROA 0,9%. Market value €16.774 m.

Total employment 25,254, 59 % female, 75% university grade. Average age 38.4 years, seniority 12.4.

National Sectoral Collective Agreement and 3 unions, union density 44%. At company level the CC.OO workplace branch has more than 10.000 members (CC.OO rate 50%); SECPB, autonomous company union rate of 33,7%, and UGT, rate of 10.8%.

ESS2 Medium-size, regional savings bank

Total asset: €16.232.730 Pre-profit tax 102.619 (2005), operating income 147.195, CIR n.a., ROE 9,91%, ROA 0,63%

2524 employees, 34% female, average age 35.89. 80% university degree.

National Sectoral Collective Agreement and 3 unions, union density 44%.

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Appendix B: Profile of VPS Table B1. Profile of VPS in the UK cases

Type of VPS

Coverage Criteria Frequency Quantitative significance (% of earnings)

Merit pay All employees Individual appraisal around Balanced Scorecard (BSC) - matrix removed 2004

Incorporated into monthly salary

Varies. 2006 pay pot = 4% but 3% dedicated towards market and minima uplifts. Leaves 1% available to managers to distribute acc. to performance.

Bonus Some ’20 to 30’ schemes covering all employees

Individual sales and BSC Varies 5-6% for main retail workforce

Share scheme All employees Free shares plus matching Annually 3% salary (up to ,max. 3000 shares)

UKC1

Flexible benefit package

All employees Allowance to purchase benefits or take as cash

Annually 4%

Merit pay All employees Appraisal and position in pay range

Incorporated into monthly salary

Varies 0-7% but in practice most get around RPI (at least ‘satisfactory’ rating = at least RPI increase). 3.5% pay pot.

UKC2

Bonus Customer-facing employees in branches and call-centres (around 60% of non-mgt staff)

Varies: is 20- 30 schemes. Branch bonus is generated by team performance but allocated individually

Varies Varies. Company and union say overall is a median bonus payer.

Merit pay All employees Appraisal and position in pay range

Incorporated into monthly salary

Varies 0-7% but in practice most get around RPI (at least ‘satisfactory’ rating = at least RPI increase). 95% received a pay increase; 82% at or above RPI. 3.5% pay pot plus range movement of 1%.

Bonus All employees. (Separate arrangements apply to business/premier customer IFS centres, which are much more incentivised)

General bonus covers all retail staff. Determined by individual appraisal (BSC) but moderated by company performance (profits)

Banked quarterly but paid at Christmas.

Non mgt 5.5%-14%

Specialist sales staff: ‘key sellers’

Individual, sales-related, criteria Varies: some quarterly, some twice a year

Varies by role but average around £1,500

UKC3

Non-sales staff: ‘frontline incentive scheme’

Team and individual performance

? Varies by role but average around £880

29

Table B.1 continued Bonus No merit pay. Two types

bonus schemes: Annual bonus and various sales incentives

Annual bonus linked to co. and individual performance (appraisal moderates fixed % attached to role level)

Annual 2005 range 0-25.5%, average = 14%. (Limited dispersion by individual performance in practice,e.g. annual rating index: 1.0= meets targets; difference between 1.3 and 1.4 only around £50. Scheme was revised Jan 2006, at same time as revision to parent co. scheme, to widen dispersion)

UKD

Incentive bonus. Paid in vouchers.

Monthly or quarterly.

Varies but average 5-10%

Merit pay All employees Individual appraisal Incorporated into monthly salary

Paybill increase of 5.70% of which 3.83% for base pay (rest for salary progression of low paid and some allowances): pay award of 3.5%, 5.25% or 8% according to rating

Bonus Corporate and incentive bonus schemes

Corporate bonus for all employees (17,000): 4 key performance measures (cost, profit, narket-share, income).

Annually 2005 = 12.8%

Retail bonus (9,500 staff): team Quarterly Varies from 2%. Averatge £50 per quarter. Paid in vouchers

UKS1

Incentive bonuses (retail sales specialists, 500): Individual

Monthly (with part annual)

Highly variable: 20-100+%, average = £7,000

Merit pay All employees Appraisal (BSC) Incorporated into monthly salary

3% pay pot but employees with at least ‘good’ rating (95%) gest 2.5%, leaving 0.5% for management discretion

Bonus ‘Performance Incentive Pay Schemes’ (PIPs)

Team (branch) performance, but distribution also reflects individual performance (more so for sellers). Similar arrangements for the 150 call centre employees

Quarterly Sellers (mortgage and savings advisers) range 0-7%, on target = 3.5% per quarter (i.e. 14% p.a.); other branch staff 0-5% range with 2.5% OTE (i.e. 10% p.a.)

UKS2

Head office bonus Linked to business targets for the 668 head office staff

Quarterly. Generally slightly lower than branch PIPs payouts.

30

Table B2. Profile of VPS in the Norwegian cases Code Type of VPS

Coverage Criteria Frequency Quantitative significance (% of earnings)*

PRP – pay interview model

All, but varies who that get

Competence, ability to co-operate, work performance (results), responsibilities, values

Pay interview annually. Incorpo-rated into monthly salary on permanent basis

On average 1% annually (2005). Varies between individuals from no increase till substantial increases.

FP- profit sharing scheme

All No formal criteria, but based on company results. Discretionary decision by CEO/board.

Payouts at retirement or if leaving the company

Ca 3% of total wages allocated in 2005

Ad-hoc bonus for commersial banking unit (one time payments)

Employees in this unit

No criteria. Sum distributed to bank managers, who decide how to distibute.

Was paid in 2005 (expected to be some arrangement for 2006 as well)

Limited info (2-3 percent average?)

NOC1

PBR- bonus, used by i.e. business market department + international payments

All in units but only 125 of 7000 employees

10 factors ranging from reducing loss till carrying out planned training. A total score set the total bonus pot.

Annually 0.5=1.0% on average; 5-10 % for those in receipt depending on wage level and size of bonus (varies between EUR 2400-3600)

PRP – individual assessment §14.5

All, but varies who actually get.

Capability, qualifications and formal education, positive attitude, contribution to workplace environment

Annually. incorporated into monthly salary on permanent basis

Varies from 0-4% ( EUR 600-1800 for those who get). 1-1.5% on average

OTP – one time payment bonus

Employees doing sales, 1/3 actually get

Individual performance in sales. Managers also assess other, not specified, performance criteria.

Annually Varies from 0%-8% (EUR 1800-3600 for those who get)

NOC2

FP – profit sharing All Based on results of company Annually 4% (EUR 1800) NOC3 PRP – pay interview

model (given as fixed pay)

All, but varies who actually get.

Performance due to sales, tasks, management. Competence, job content.

Annually No information, but approximately average of sector. 2004. Not distributed equally.

FP – profit sharing All A defined share of company surplus is allocated to employee fund.

When employee turn 60 or retire

Not relevant as there is no annual payment, but very substantial sums for those with long seniority in the bank.

*% of total earnings is calculated on the earnings from wage statistics for employees in bank and insurance, 2005. Managers and specialists are not included in this statistics

31

- Table B.2 continued –

PRP – individual assessment §14.5

All, but varies who actually get

Capability, performance, initiative, interpersonal skill and competence.

Annually. Incorporated into monthly salary on permanent basis.

0-3,2% (EUR 600-1200 for those who get). About 20% of employees get PRP.

NOD

PBR – team bonus All Performance of division measured by 5 goals based on tasks of division. Transformed from 2006 – based on company results.

Annually Maximum 2,1% (EUR 960) if all goals reached. From 2006 transformed to financial participation equal for all employees.

PRP – pay interview model

All Ability to work independently, educational level, sales, special skill/tasks

Annually Incorporated into monthly salary on permanent basis.

At least 0,8% of earnings are to be distributed annually by this system. 1/3 of employees get this pay – on average 3% increase.

Bonus, component 1, balanced-score card

Most Measured individually. Based on sales (account for only 1/16), number of completed tasks, customer portfolio, quality of work. Vary in divisions. Divisions without balanced-score card get an average of others.

Annually Varies from 0-17,2% ( EUR 0-7800). Average 8,7% (EUR 3600-4203). All 3 bonus components together can maximum amount to 20-25% of total earnings (EUR 12008)

Bonus, component 2, profit sharing

All Company profit. May also be given if the bank performs well even though the set target is not reached

Annually Maximum EUR 1200 in 2005, EUR 1800 in 2006. 4 % of pay on average

NOS1

Bonus, component 3, sales bonus

Employees at the branches

On basis of sales result of each team. The best 1/3 of the teams get. General quality of the team, sales, availability and competence are assessed.

Annually EUR 1440 in 2005.

PRP, individual assessment, §14.5

All Performance and other criteria. Decision made on overall evaluation

Annually. Incorporated into monthly salary on permanent basis.

0-3%.

PBR (Ad hoc bonus) All, but few get

No formal criteria, Ad hoc based reward for extraordinary effort

Normally once a year, given to only 2% of workforce

Varies.

NOS2

FP, profitsharing scheme

All Pre-tax operating profit exceeding expectations (budget)

Ad-hoc, can be given at any time. Given to only 2% of workforce

4-7% in 2005 dependent on pay level. Less other years.

32

Table B3. Profile of VPS in the Austrian cases

Type of VPS Coverage Criteria Frequen

cy a) Formalization (in CA and/or WA);

b)Co-determination Quantitative

significance (% of earnings)

Performance payments (since 1999). Managerial board dedicates a percentage of profit: amount varies year by year and also by performance of each business area

Data not available

Company earnings, individual performance, job requirements. Weightings depend on hierarchy. Individual perf. has 5 dimensions: qualifications; team cooperation; leadership performance within the department; contribution to team development; customer satisfaction.

annually a) No. Add on to CA. Agreements on objectives are discussed between supervisor and employee. b) No. Goals and performance assessments are individually discussed between employee and supervisor. WC accepted the performance dimension but criticized the lack of formalization).

Data not available

ATC1

Spontaneous bonus

only paid for excellent performerance

Discretionary, depending on individual job performance.

At any time

a) Add on to CA. b) No.

Small budget: individuals receive some €100

ATC2

Success bonus (since 1997). Funded by using the voluntary (but frequent) 15th and 16th month salry practice plus absorbing a balance bonus scheme

88% total (all except senior management)

3 dimensions: quality, quantity and behavior, weighted according to job requirements (e.g. higher quantitative weights for market-related jobs and lower for back-office work). Results (points) of the performance evaluation are multiplied with the job factors.

annually a) Add on to CA. Agreements on objectives are stipulated between supervisor and employee. Employees can call in WC if disagree about their evaluation. b) No WA but overall budget is negotiated annually between the Managing Board and the WC

10% wage bill

Spontaneous bonus (since 1999)

93% coverage and all receive

Discretionary management decision. No formal criteria. Each department head receives a budget according to number of employees (expenditure is not obligatory)

One to four times a year.

a) Add on payment. No formalization. b) No, individually discussed between head of department and employee.

0.9% wage bill Maximum €1200 p.p./p.a

ATD Flexibility bonus (since 2005) – not strictly VPS as not variable

43% Related to willingness to work flexible hours

monthly a) Add on to CA. b) Part of the employment contract.

Fixed amount of €50 which each employee receives

33

- Table B.3 continued - Performance pay (since 1993): savings from pay scheme reforms are redistributed as PP.

100% all staff

Job evaluation factor and MBO with 4 criteria: job requirements, agreement on objectives, performance attitude, and executive functions.

monthly a) Add on. WA b) Yes, criteria, and rules concerning the execution of PP are laid down in WA.

10% wage bill

Voluntary balance bonus (since 1993)

100% Company success annually a) Add on, voluntary; b) Volume of the bonus bargained between management and WC but no formal agreement, no WA.

3.5% wage bill Max. half month’s pay

Incentive system market (since 2000)

68.8% (market employees)

40% is paid as team bonus and 60% as individual bonus; latter discretionary by supervisors

annually a) Add on b) WA

1.5% of the premiums; 12% wage bill.

ATS1

Incentive system back office (since 1990)

31% (administrative employees)

Extraordinary performance, discretionary proposal by supervisors (max. 50% of employees), subject to managing board confirming who/ amount.

annually a) Add on b) WA regulates budget and 50% rule

2% wage bill

Bonus payments for employees with granted entitlements (Altrechte) – but not VPS

38% (i.e. 175 in employment before 1985)

Supervisor can decide if the bonus becomes annually valorised based on individual performance.

monthly a) Add on b) Rules are laid down in WA

Available sum is excess of €3000 in payments from CA

Performance pay (1985 but redesigned 1999 by new managing board)

24% (111 never in receipt 15/16th monnths pay)

MBO goal attainment interviews between management and employee, criteria differ by business areas

annually a) Add on b) S ystem design, bonus value and performance evaluation process laid down in WA

10% average (15% available for younger empoyees)

ATS2

Company success bonus. (profit share): when the company exceeds (self-) defined targets a fixed share of the profits is distributed within the workforce.

100% (but Altrechte only paid when company exceeds goals exceptionally).

Depending on company earnings; each employee receives the same amount

annually a) Add on, voluntary b) no

Data not available

Performance pay (1992) Based on company and individual performance for the business areas

77% (all except senior management)

Quantitiative targets for departments 85% (e.g. Marginal income, number of customers acquired, customer saturation index); qualitative criteria for individuals 15% (MBO and goal attainment interviews between supervisor and employees).

annually a) Add on payments b) No co-determination: information and consultation. No WA in place for performance and success bonuses.

4% wage bill; 6-15% earnings

ATS3

Group success bonus (profit share)

All employees First 2% profits over target distributed to annually See above Data not available

34

Table B4. Profile of VPS in the Spanish cases Type of VPS Coverage Criteria Frequency Quantitative significance

Merit pay , (1991)

Discretionary, pay revision for technical staff (75% of total)

Pay Band Systems and bonus reference (internal and external equity criteria), individual skills appraisal. Discretionary and consolidated, non pensionable

Incorporated into monthly salary

n.d

Bonus (1991) Individual bonus 8,149 employees; team 16,823

Management by results, reference bonus, individual score achievement, team performance appraisal and BSC. Discretionary, non consolidable and non pensionable

Annually Individual: wage bill 8.2%, employee earnings 24,8%; Team: wage bill 5%; employee earnings 10.7%

Extrabonus High performance staff (score 150+)

Reference bonus , results each bussiness unit division, discretionary non consolidable and non pensionable

Annually 20-50% increase over ordinary bonus in employee earnings

ESC1

Commercial incentives

Those 10% branches in same classification with better results

Allowance to purchase benefits or take as cash, non consolidable and non pensionable

Annually 20% increase over ordinary bonus in employee earnings

Merit pay, individual pact (1990)

64% employees Discretionary pay depending on individual assessment and position. Consolidated, absorbable and non pensionable

Incorporated into monthly salary

Wage bill 14.5%, earnings 12,5%

Bonus system in commercial network (2002)

28% of employees (3,324); a 3% share of the target profit is distributed

General bonus covers all retail staff. Productivity and efficiency criteria and minimum 85% score in individual appraisal and BSC. Discretionary, non consolidable non pensionable.

Annual Wage bill 4,5 %, earnings 3.9% .

ESC2

Bonus, long term incentive (2004)

All employees in the programe previous awared de bonus

Subject to attainment of 2004-06 long term programme. Discretionary, non consolidable non pensionable.

Biannual Wage bill 14.5%, earnings 12.0%.

Merit pay (2000)

All technical staff and employees in commercial funcions

“Annual Theoretical Wage reference” set in a group of map of functions, BSC and based in skills and competence appraisal. Discretionary, consolidable, absorbable, and nonpensionable

Incorporated into monthly salary

35 % in company bill ESC3

Bonus 55% of the staff Performance- related pay, individual (% of total achievement x variable target, score 120), 5% quality indicators and 15% group results.

End of the year 10% in employee earnings

35

- Table B.4 continued –

Discretionary Pay Supplement

37% staff Individual performance and hiring, discretionary consolidated and absorbable

monthly nd ESC4

Bonus 20 employees in 2005 No formal system on variable pay , performing commercial function, in 2007 beginn a scheme of profit-related pay. Discretionary , non consolidated and non pensionable

Annual nd

Discretionary Pay Supplement (2005)

2.047 employees in the Financial Services Advisor Programme. 10% of Employees, objective in 2010 25%.

Linked to bonus target and professional development program (5 stages regulated in specific company agreement) reflecting competencies, results, knowledge. Non consolidated and non pensionable

Annual nd ESS1

Bonus (2001)

Branch network 32% employees

Performance Related Pay, Bonus Target and degree of challenges achievement. Quantitative business 60% and quantitative 20% (personal) and 20% markets/managers and branch managers, BSC. Negotiated in company agreement the basic provision and form, decentralized approach. Non consolidated and non pensionable

Annual

nd

Merit pay (1990)

All employees Voluntary individual pay supplement, level of representation related to function performance. Consolidate, non pensionable, absorbable

Monthly pro-rated payments

up to 40% of earnings; 20-35% wage bill.

ESS2

Bonus (1990) Commercial teams only

Discretionary. 90% business results and 10% individual appraisal . Non-consolidated/ non pensionable.

Annual wage bill 7.03%, earnings 18.09% .

36