Remuneration and IR

An important characteristic of the modern relationship between those who generate added value in a business is that, particularly in large companies, those running the business are not necessarily its owners. They, like ordinary workers, are hired labour too. Moreover, a growing difference too is in the status of hired labour – as this corresponds less and less to the classical conception of the full-time permanent worker.

These two phenomena are partly due to the sheer size of capital required to operate a modern corporation, partly because of the increasing productivity and also partly due to the flexibility offered by modern communication systems. Service jobs can be performed remotely and inputs made by people with different skill sets. A modern corporation is therefore less of a fixed community of goal-orientated employees and much more a legal entity with its own systems, brands and supply chains commanding resources from wherever they can be economically obtained to generate a return for shareholders.

Although the term “wage” is still commonly used it is increasingly being outmoded by the move towards monthly-based remuneration or the flux of contractual/zero hours arrangements. The new “wage earners” are now the substantial population of contract workers remunerated relative to projects undertaken or hired purely by the hour on a self-employed basis. Even business owners may be quasi-employees because they operate licencing or franchising arrangements that leave them closely controlled by a remote entity.

Pay determination has always been a contentious issue and dependent on the precise perspective of the party seeking to influence it. The advent of the factory system in the nineteenth century led to mass production and the narrow division of labour. Out of this came conceptions of first, ‘capital vs labour’ and then ‘contributing resources – divided into capital, material and human’. It was not, however, until around 1940 that Edward N Hay introduced his job evaluation-based guide chart methods and a decade later that Elliott Jaques recognised that workers at different levels of a company operated to different time horizons (time span of discretion). Finally, it was believed the need to work out affordability of labour and distribute the resulting pool through pay negotiations, or other arbitrary means, was no longer necessary.

Although in most countries around the world the importance of trade unions is in heavy decline, those unions that remain have transformed through mergers and changes in the nature of their membership. Now white collar workers make up the majority of union membership and women members are often at represented in equal numbers to men, or even outnumber the male membership. Many unions, particularly in Scandinavia, have broadened their functions to become broadly based social, life-style and welfare bodies and the emergence of new forms of representation such as works councils has blurred the edges of the union-management relationship. Militant unions such as the CGT in France or RMT in the UK remain, but they have lost much public confidence or credibility.

One of the biggest issues facing HR managers is how to deal with new types of independent contractor and avoid challenges for perceived misclassification. Getting it wrong can result in claims for unpaid holidays and other benefits, together with demands from authorities for underpayments in tax and social security.

The minimum wage
(Click here to download the minimum wage table in PDF)
Although it is sometimes claimed that New Zealand’s ‘Industrial Conditions and Arbitration Act 1894’ established the first national minimum wage the first attempt to set common rates of pay came with England’s Statute of Labourers 1351. This sought to control pay levels after one third of all able-bodied workers were killed by the “Black death”.

Today a great many countries around the world have established a statutory minimum wage rate – usually expressed by the hour or month. The level at which this is set varies a great deal and in some countries, it only exists to act as a basis for setting welfare or pension payments. Economists and social welfare experts often set an equitable rate as being 40% of the country’s median wage. Achieving this is, however, a highly inflationary process as by raising the minimum the median is also increased – and it will take some time before the two are in equilibrium.

Some countries also set other safety net income figures such as the subsistence rate or “poverty line” which is the income needed to sustain a very basic standard of living for a household. In the UK there has also emerged a concept of the “living wage” which is the level required for a decent standard of living.

As automation replaces an increasing number of jobs then pay will become a less effective primary method to distribute value added within a population. Therefore, there have been isolated experiments in developing a basic social wage for each resident whether or not they are employed. Some welfare systems, such as that in France, also provide an unemployment rate which is well above the poverty line, particularly in the first months of unemployment. The purpose of redundancy compensation is also to require an employer to assist those losing their jobs for no fault of their own to have a pay cushion as they seek further work.

Structure of Remuneration
In any economy, what people are paid remains primarily dependent on affordability, living costs and the power of particular groups to claim a pay premium. The starting point for determining total labour costs will therefore be GDP per head. Some companies will fall short of this average and others outperform the rest – but per capita wealth generation will create a strong centre of gravity when setting pay levels. In many less well developed economies commodity and house prices also remain low and therefore achieving the essentials requires less spending power than in more advanced economies. In many ways, this is a circular argument with low pay levels keeping prices low. A great deal depends on how much of the value added is creamed off by governments in tax and business owners in profit – and capital for reinvestment.

A group, or individual’s, ability to command a pay premium depends on a great many factors. Supply and demand for labour per se will have a considerable impact. If labour is in short supply, then pay levels will rise. But the key differentiator will be in the possession of marketable skills. This creates a silent bidding war in the labour market and those with the skills soon learn who is the highest bidder. Another factor for groups is the threat of withdrawing labour. Unions can often marshal much power through this threat without ever needing to exercise it. The legal right to strike only gives further weight to any claims and the result is that in many economies, such as the USA, unionised employees can command higher pay rates than those not subject to collective bargaining.

A practice more common at the beginning of the industrial revolution than today is the establishment of ‘pay on account’. The entrepreneur will not know what they cannot afford for a considerable period and therefore employees are hired at a low basic rate, but have the opportunity to secure large bonus/profit share payments at year end. In more predictable, established and stable businesses this approach can remain, but with basic pay much closer to the industry median.

Where little day-to-day control of employee activities is possible, but a company wishes to retain a potentially strong command over an individual – especially to prevent them from working for rival enterprises – a number of commission-based earning systems have been used. National minimum wage laws will, however, still require a low basic pay rate to apply.

Back in 2007 FedEE developed its own easy-to-use integrated job evaluation and pricing system (JEAPS). This first evaluates a job on the basis of factors such as educational requirements, experience, responsibility, time span of discretion, span of control, company sector and size, physical and managerial risks and then applies the results of the evaluation to national pay markets in 47 countries and territories in Europe. The pay market data is regularly updated and it is planned to extend the coverage of JEAPS to a number of further countries around the world.