by Nick Wailes & Russell D. Lansbury

I. The types of flexibility introduced:
. . C. Pay determination procedures and systems

3. Pay linked to performance including financial participation and gain sharing and special bonus schemes

Despite the apparent benefits that are associated with payment systems which link levels of pay to performance, such as gain sharing, financial participation and bonus schemes, the introduction of these mechanisms through collective bargaining has been limited in Australia. The focus on linking pay increases to performance as a justification for the decentralization of wage determination makes this limited adoption even more surprising.

In a review of developments in enterprise agreements, a report by the Australian Centre for Industrial Relations Research and Training (ACIRRT) makes the following observations:

In total 16 per cent of agreements base future wage rises on productivity increases and 11 per cent of agreements have performance pay provisions. Gain sharing is only present in 4 per cent of agreements on our database. In many cases agreements grant increases in recognition of past improvements in performance. In this sense many wage increases in agreements follow and do not necessarily lead to productivity improvements (ACIRRT, 1994, No. 4: 10).

The following are two examples of productivity-based pay arrangements that have appeared in recent enterprise agreements. The first is from a food and beverage manufacturing industry agreement, and is an example of a gain sharing arrangement, and the second is a profit sharing arrangement from a manufacturing agreement.

Gain sharing Arrangement

(3) a bonus based on productivity gains to be calculated on the basis of a 50 per cent share to employees and a 50 per cent share to the company no later than six months after the operative date of this agreement. Such bonus shall be calculated on the basis of a productivity matrix agreed between the parties;

(4) a further bonus on productivity gains to be calculated on the basis of a 50 per cent share to employees and a 50 per cent share to the company no later than 12 months after the operative date of this agreement. Such bonus shall be calculated on the basis of a productivity matrix agreed between the parties;

(5) a further bonus on productivity gains to be calculated on the basis of a 50 per cent share to employees and a 50 per cent share to the company no later than 18 months after the operative date of this agreement. Such bonus shall be calculated on the basis of a productivity matrix agreed between the parties;

(6) the productivity bonus payments prescribed by sub clauses 3, 4 and 5 shall on average form the basis of part of the increase for any future enterprise agreements;

(7) where agreed between the parties, other identified and proven increases that are not covered by the productivity matrix as per sub clause 3 shall be incorporated into the productivity bonus as per sub clauses 3, 4 and 5;

(8) productivity gains made as a result of Capital Expenditure by the employer shall be excluded from the productivity bonus (ACIRRT, 1995, No. 6: 9-10).

Profit sharing arrangement

... In 1993 the company introduced a profit sharing scheme. It is agreed that the profit share scheme should continue with minor modifications for the life of the agreements.

-- Profit share is based on the percentage (see table below) for the consolidated company profits, i.e. Melbourne, Sydney and New Zealand;

-- share each is calculated by dividing the profit share by the number of employees in the group;

-- new employees [are] eligible from the first full pay week of employment;

-- employees that resign will be paid pro rata payment to the last completed full month;

-- profit share are paid in two instalments: Christmas, 40 per cent (i.e. 15 per cent from the prior year and 25 per cent of annualized profit this current year) and 30 June;

-- unpaid leave taken are deducted from profit share calculation;

-- profit share can be transferred to superannuation top up his/her superannuation at the employees' discretion;

-- employees who resign in the second half of the financial year, i.e. to June will be paid their financial entitlements in June. The balance of 15 per cent that has been deferred to December will not be paid;

-- the profit share formula is for this agreement only.

Conditions:

1. Maximum percentage for profit share by the company is 12.5 per cent.

2. Profit share commences when profit level reaches 4.45 to turnover (ACIRRT,1995, No. 6: 10-11).

As these two examples demonstrate, gain sharing and profit sharing arrangements can be complicated and require the existence of sophisticated procedures for calculating bonuses. For this reason, it would be expected that such schemes would be limited to certain types of enterprises. There is no economy-wide data on the adoption of schemes of this nature (although the publication of data from the 1995 AWIRS survey should rectify this gap). However the limited extent of adoption of these instruments in enterprise agreements may understate their application across the economy as a whole. Such schemes may be introduced through company procedures and by managerial prerogative independent of the collective bargaining system.

Nevertheless, the limited extent of the adoption of these schemes in enterprise agreements suggests that the majority of Australian employers are pursuing a profitability-based strategy rather than a productivity-based strategy in enterprise-based negotiations (Boreman et al., 1996).