The distribution and determination of pay schemes among firms and occupational groups evidence from Denmark

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1 The dstrbuton and determnaton of pay schemes among frms and occupatonal groups evdence from Denmark Presentng author:assocate Professor, Ph.D. Joergen Stamhus Addtonal author: Professor Flemmng Ibsen Organsaton/afflatons & address detals of presentng author: Aalborg Unversty Centre for Labour Market Research (CARMA) Department of Economcs, Poltcs and Publc Admnstraton Fbgerstraede 1 DK-9220 Aalborg Denmark Emal stamhus@epa.aau.dk Organsaton/afflatons & address detals of addtonal author: Aalborg Unversty Centre for Labour Market Research (CARMA) Department of Economcs, Poltcs and Publc Admnstraton Fbgerstraede 1 DK-9220 Aalborg Denmark Emal bsen@epa.aau.dk 1. INTRODUCTION Frms adopton of performance-related pay schemes (PRP) has snce years attracted theoretcal and emprcal attenton, both n the economc theory-orented agency lterature as well as wthn the human resource management tradton. The former approach (see Prendergast, 1999 for an overvew) emphasze that the nterests of workers and employers are not always algned. Therefore pay schemes should be desgned to provde ncentves for workers to operate n the frms nterest. However, many frms avod the use of PRP preferrng smple tme-based pay for the remuneraton of ther employees. Ths apparent paradox has attracted much emprcal scrutny. The man questons n these studes are: Why some frms adopt PRP and others not? There s no doubt that frm specfc factors provde the domnant answer to the queston above. However, the actual form and prevalence of the pay schemes n the specfc countres s often ted to the ndvdual country s labour market model and ther specfc nsttutonal characterstcs (Poutsma and de Njs, 2003; Long and Shelds, 2005). In Denmark, the employer and wage-earner organsatons n the manufacturng ndustry have promoted the wdespread mplementaton of new frm-based pay schemes n the prvate sector, regardng ths as a natural extenson of the decentralsaton of Dansh wage-settng practces. Although the nfluence of unons on the prevalence of dfferent pay schemes remans a debated ssue (Long and Shelds, 2005: 1790) the employment relatons clmate n Denmark could be descrbed as favourably regardng the adopton of PRP. Furthermore, as compettve condtons have ntensfed t should be expected that the adopton of PRP has ncreased (Brown and Heywood, 2002; Poutsma et al., 2003). However, t s unclear to whch extent these developments have resulted n an ncreased prevalence of new pay schemes have n Dansh frms. On ths background we provde some evdence on the dstrbuton of pay schemes among frms and occupatonal groups. However, the man task of ths study s to explore what nfluence the choce of pay system for each occupatonal group. Ths s done by estmatng a logt-model whch compares the ncdence of tme based pay wth PRP for each occupatonal group.

2 The analyses are based on a survey wthn the constructon, manufacturng and servce sectors. The populaton of the survey encompasses a total of frms from these three ndustry sectors. In the followng secton, we provde a dscusson of the expected relatons between pay schemes, sectors and occupatonal groups. Secton 3 dscuss and operatonalse n detal the nfluencng factors. In secton 4 our data s presented. Secton 5 reports on the prevalence of pay schemes n Denmark. In secton 6 we develop and test a model to predct what determnes the ndvdual frms choce of pay scheme n relaton to occupatonal groups. 2. PAY SCHEMES AND OCCUPATIONAL GROUPS Before dscussng the ssue of pay schemes and occupatonal groups, we wll try and clarfy the dstncton between dfferent pay schemes and pay forms, as there seems to be some confuson n the lterature regardng ths. Also, ths wll clarfy the dstnctons adopted n ths study. Pay schemes and forms of payment have developed over tme and wll generally reflect the predomnant means of producton of the day, the chosen technology and the organsaton of the work n addton to a number of nsttutonal condtons n the ndvdual country and the ndvdual sector/branch (Brown and Heywood, 2002). For that reason, t s no mean task to categorse pay schemes and relate them to occupatonal and professonal groups, as there can be great varatons n the choce of pay schemes n the ndvdual branches and frms. On the most general level, pay schemes can be dvded n the followng three categores: Pure tme-based pay Pure performance pay Mxed tme-based- and performance pay In schematc form, dstnctons can be drawn between the respectve pay schemes accordng to the system below: Table 1 Pay schemes and pay forms Pay scheme Pure tme-based pay Level of allocaton Indvdual Basc tme-based pay Qualfcaton supplements Job functon supplements Competency supplements Group-based Basc tme-based pay Group based supplement for qualfcatons, functons and competences Pure performance pay Mxed tme-based and performance pay Indvdual pecework agree- ment, commsson Group pecework agreements Group-based commsson Source: Ibsen and Chrstensen (2001: 147) and own addtons. Basc tme-based pay, Indvdual pecework supplement, bonus, payment by result mert-pay Basc tme-based pay Group-based payment by result Proft sharng In a narrow sense, performance-related pay can be defned as a pay scheme that couples a wage earner s pay drectly to hs/her output. Here, PRP becomes a purely pecework pay system or commsson (Cowlng, 2002: 305). Ths s hardly new, and the PRP renassance conssts of broadenng the PRP concept by developng the concept of performance and the

3 objectves for the performance of the respectve employees. So n a broad sense the PRP concept covers every pay scheme attemptng to couple pay and the achevement of some knd of objectve for the ndvdual, collectve or organsaton-based performance (Brown and Heywood, 2002). In the followng emprcal analyss of the dssemnaton of PRP-systems n the prvate sector n Denmark, the broad defnton of PRP serves as the bass for the emprcal analyss n ths study. 3. FACTORS INFLUENCING THE CHOICE OF PAY SCHEME THEORY AND EMPIRICAL EVIDENCE As stated, ths contrbuton focuses on the relatonshp between pay schemes and dfferent occupatonal groupngs. So from a theoretcal vewpont, what knd of relatonshp between pay and occupatonal group should we expect? We wll provde some prelmnary answers to ths n the followng. The man theoretcal foundaton for the dscusson of the choce of pay scheme s prncpalagency theory, whch focuses on optmal contracts between employees and employers. A key element of agency theory relates to the costlness to management of montorng employee effort, (Lazear, 1986, 2000). The agency-theory also provdes some predctons to why pay schemes may dffer across frms and occupatons. If effort s costly to measure, the employers look to measures of output or performance, and f these are measurable at a reasonable cost, the employers may prefer to te pay to varatons n output or performance. If t s too costly to montor the performance or to measure output varatons, then the employers may prefer tme-based pay and other types of ncentves. Ths study contans data regardng the followng specfc occupatonal groups: Manageral personnel Whte-collar employees, hghest level of qualfcatons Whte-collar employees, md-level qualfcatons Whte-collar employees, lowest level of qualfcatons Employees wth craft-related work Process-/machneoperators As manageral personnel nclude both chef executve offcers and lne managers t s dffcult to treat ths group as a sngle entty. Accordng to the agency theory, lsted above, the remuneraton of top managers should nclude PRP, because ther output/performance can be easly measured, and ths s also supported by emprcal evdence, (Erkson, 2001; Cowlng, 2001). Wth regard to managers below the top-level the presumpton of adopton PRP s also, that PRP s sutable for ths occupatonal groups as long as goals for the manageral level are clear. Regardng whte-collar employees wth md-level to hgh-level qualfcatons the problem of mult-taskng comes nto play. Mult-taskng means that agents carry out multple actvtes and ths s especally promnent for these two occupatonal groups. When mult-taskng s present the adopton of smple performance related compensaton s dffcult (see Holmstrom and Mlgrom, 1991, for further dscusson). Therefore we should fnd tme-based pay to be the most prevalent pay scheme for these groups. A couple of studes (Torrngton, 1993; Kato, 2002) have found that the educatonal composton of a frms workforce affects the choce of pay scheme. More specfcally a hghly educated workforce seems to encourage the use of ndvdual performance based pay. The mentoned studes fnd that hghly educated workers are more nterested n recevng

4 ndvdual rewards. Ths observaton could nfluence the adopton of PRP postvely for whtecollar employees wth md-level to hgh-level qualfcatons. When t comes to salared or whte collar workers at the lowest level, for nstance clercal workers, a vald hypothess would be, that because output s hard to measure, tme-based pay systems are more sutable for these groups, and emprcal evdence for the Dansh labour market also supports ths (Cowlng, 2002). Regardng craft and unsklled workers (processand machne-operators), especally n the constructon and manufacturng, the theory and hypothess should suggest that pay can be ted to output, and PRP systems are therefore most heavly concentrated n these occupatons and sectors. Ths thess s confrmed by some emprcal evdence, (Erkson, 2001, Cowlng, 2002). A modfyng factor, although, s the need by frms to mprove product qualty. Smple PRP schemes make workers focus on quantty rather than qualty (Brown, 1990). Therefore, f product qualty becomes ncreasngly mportant to profts, frms wll be hestant to adopt PRP schemes for producton workers. In the secton above we have already descrbed the fundamental theoretcal reasonng for the utlsaton of dfferent pay schemes for dfferent occupatonal groups. In ths secton we wll n detal dscuss specfc determnants whch can be adopted for testng from our data and develop testable hypotheses n connecton wth each factor. The theoretcal arguments n the precedng secton are prmarly concerned wth the problem of montorng worker effort. In small workplaces montorng s less dffcult than n large. Therefore, the need to provde formal ncentves s less urgent n small frms, who can relay on more nformal methods of montorng. Employers for larger frms face more dffcult montorng envronments and should therefore be nclned to adopt PRP as a formal ncentve scheme. Also, the costs of mplementng PRP are smaller per worker n larger frms. Thus, there should be a postve correlaton between frm sze and the prevalence of PRP. Ths should apply for both producton workers and managers; because when frms grow larger the degree of herarchy grows and nvolves dfferent manageral levels. Several studes, usng data from dfferent countres, have found a sgnfcant correlaton between frm sze and PRP (Brown, 1990; Cowlng, 2001; Tremblay and Chenevert, 2004; Brown and Heywood, 2005). Thus, we expect to fnd the same assocaton n ths study. Even f PRP promotes worker effort, employers wll be cautous to adopt t f product qualty s crucal to proftablty, because PRP can cause workers to focus on quantty over qualty (Brown, 1990). Therefore, we should expect to fnd a reduced prevalence of PRP compared to tme based pay n frms where the qualty aspect of producton s crucal. The emprcal fndngs regardng the mportance of the qualty factor are mxed. Drago and Heywood (1995: 523) fnd a weak negatve relatonshp between PRP and product qualty. Cowlng (2001), on the other hand do not fnd any sgnfcant correlaton. The mxed fndngs are perhaps an ndcaton of a dffculty to capture the effect of the qualty factor precsely. Across each occupatonal group there can be expected to be an nter-ndustry varance n frms adaptaton of pay schemes. One reason s because PRP s more easly used n ndustres producng physcal products as n manufacturng. Secondly, dfferences n compettve pressure n product markets can nduce dfferent pay schemes strateges. For example, PRP are more lkely to be used when compettve pressure s strong because of the need to algn wages wth productvty. Thrdly, Tremblay and Chenevert (2004) menton technology as an nfluencng determnant and fnd a postve correlaton between hgh captal ntensty and performance pay. Fourthly, Marsden et al. (2007) states the composton of the work force and job tasks as an nfluencng factor. For example, the servce sector wll nclude a large number of employees n sales occupatons where PRP are a relevant nstrument of remuneraton. Lastly, n more general terms employment relatons and human resource

5 management strateges can dffer between sectors and consttute an nfluencng determnant (Marsden et al, 2007; Brown and Heywood, 2005). Further sector relevant arguments could be added, but n general we expect to fnd a sgnfcant nfluence from sectoral factors, although t s a pror hard to predct the sgn of the relatonshp. In a study of Brtsh and French frms Marsden et al. (2007) fnd sgnfcant sectoral nfluences on pay practses, but wth dfferentaton between countres. The results show a postve assocaton between the prevalence of PRP and the constructon, dstrbuton and busness servce sectors n France and the fnance sector n Great Brtan varable s postve. In contrast Cowlng (2001), usng survey data from European workers, fnd only very lmted evdence of sector specfc dfferences n the adopton of PRP. As already mentoned above market structure could be consdered an nfluencng factor. Drago and Heywood (1995: 514) menton several studes whch argue that strong product market competton results n the use of PRP as a means to control labour costs. The argument s based on the contenton that monopolstc frms and ndustres have more manageral dscreton regardng wages and labour costs as opposed to frms facng strong competton. So, our presumpton s that we wll fnd an ncreased prevalence of PRP among frms statng hgh compettve pressure. Testng of ths argument s sparse but Drago and Heywood (1995) fnds strong support for the competton hypothess but a later study by Marsden et al. (2007) does not. Marsden et al. (2007: 13) suggests the explanaton that establshments are seekng to adapt ther ncentve pay systems to ther nternal organsatonal choces rather than to ther external envronments. Unons nfluence on the adopton of dfferent pay schemes are a much debated and researched ssue n the lterature. The common assumpton s that unons prefers tme based pay schemes over PRP as tme based pay are better suted to secure a standard unon rate for the job. The standard rate s an mportant tool for unons to moblse members as t consttutes a common am. Also, unons wll fear that PRP wll be subject to management manpulaton (Freeman, 1982) and gve rse to arbtrary wage dfferences. Furthermore, PRP means ndvdualsaton of pay whch undermnes the need for collectve agreements and thus threatens unon membershp and future collectve barganng. On the other hand the presence of unons could foster a good workplace clmate, where ncentves plans can be negotated and accepted by workers, as the presence of unons provde the necessary guarantees that these are reasonable and management can be trusted. The hypothess that unons prefer a standard tme based rate over PRP are supported by emprcal evdence from Brown (1990) wth US data and by Heywood et al. (1997) wth Brtsh data. In contrast, Brown and Heywood (2005) fnd no relatonshp between unon presence and the use of performance apprasal systems n Australan frms. Smlarly, although the coeffcents have the expected negatve sgn, Marsden et al. (2007) fnds no sgnfcant nfluence from unon presence on the adopton of PRP n a study wth data from Brtsh and French frms. Erksson (2001) wth Dansh data fnds no correlaton ether. All n all the emprcal fndngs are mxed. The factors mentoned above are by far exhaustve but as stated they represent the varables that n our data are relevant for testng. We wll present our model, data and methodology n the succeedng sectons. 4. DATA The data formng the background for the analyses n the followng secton conssts of data from a survey n three prvate sectors: ndustry, constructon and servce. The data are

6 collected n order to llustrate the decentralzed pay formaton n Denmark. The analyss of the use of pay schemes n the prvate sector n ths contrbuton therefore only represents an analytcal ntermedate objectve for the applcaton of the data. The questonnare draws upon admssons from key persons n the ndvdual frm (CEO, personnel manager etc.) as regards the ssues analysed n the project. The way the study has covered branches, the sze of the groups etc. are accounted for n the followng. The sectors are defned n terms of branches n accordance wth DB03. DB03 s a Dansh branch nomenclature based on the EU nomenclature. The frst four dgts correspond to NACE rev. 1.1, whle the last two dgts are Dansh sub-dvsons. The branches mentoned below are ncluded n the survey. Industry: DB Servce: DB03 52, 65, 66, Constructon: DB03 45 All frms wth at least 10 employees are ncluded n the populaton The random sample s stratfed wthn each ndvdual branch accordng to the employment for 2004; the selecton percentages are dfferent, dependng on the branch. Ths was done n order to attan three random samples of roughly the same sze. The total number of frms n the sample was 3532 of whch 1974 frms responded to the questonnare, whch gves a response rate of 56 %. Three separate questonnares have been developed for ndustry, servce and constructon, respectvely. These questonnares generally resemble one another, though they contan a few dfferent questons and formulatons. The questonnares were conducted n May-June THE DISTRIBUTION OF PAY SCHEMES IN DANISH FIRMS There are only a few exstng studes of the dssemnaton of pay schemes n Dansh frms. Wth the help of survey data Ibsen and Stamhus (1993) analyse the dssemnaton of pay schemes n the ron and metal ndustry. Ther study, encompassng 309 frms, ndcates that roughly 46 percent of the frms utlse a performance-related pay scheme for the employees n the frm recevng tme-based pay. A study by Erksson (2001) wth survey data from prvate Dansh frms, whch adopts a broad defnton of PRP ncludng team bonuses, ndvdual bonus, payment by stock, stock optons and proft sharng, shows that PRP are present n 63,7 % of all frms for at least one occupatonal group. Ths study documents the dssemnaton of pay schemes from a sample that dffers n respect to the study by Erksson n so far that t ncludes frms wth more than 10 employees, whle Erksson s sample s lmted downwards to frms wth 20 employees and more. Ceters parbus ths means that the results on the use of PRP n the study by Erksson, s upward based, as larger frms utlses PRP more frequently than smaller frms. The dssemnaton of pay schemes s reported n Table 2 below. The results n Table 2 are formed by askng frms whch pay scheme they have adopted for each occupatonal group. Some frms wll adopt the same pay scheme for all occupatons but more frequently frms wll dfferentate between occupatonal groups as dscussed earler. If frms have adopted the specfc pay scheme for at least one group they are ncluded as usng the pay scheme. For example, n manufacturng at least one occupatonal group are subject to pure tme-based pay n % of the frms. Accordngly, % doesn t use the pay scheme for any occupatonal group.

7 Table 2 Pay schemes n the Dansh prvate sector Frms that use the specfc pay scheme for at least one personnel group Percent Pure tmebased Pure performance Mxed No. obs. pay pay Manufacturng Servce Constructon Total prvate sector Although a drect comparson s excluded due to dfferences n the constructon of the respectve samples, the fgures reported n Table 2 ndcates, that the total share of frms usng ether pure PRP or some form of mxed tme- and PRP-based pay scheme s on level wth the result from Erksson (2001) that 63.7 % of the frms uses PRP for at least one group of personnel. At least ths s true f the categores pure performance pay and mxed are summated. A supplementary analyss shows n fact that % of the frms use ether pure or mxed PRP for at least one personnel group. The remanng dfference between the results of the studes s probably mostly due to the mentoned dfferences between the samples. Ths also ndcates that between 1999 where Erksson s study was conducted and 2005 there s no clear tendency to a more wdespread prevalence of the use of PRP among Dansh frms. In concluson from ths secton, there s some evdence that the prevalence of PRP hasn t become more wdespread, at least n the perod from 1999 to 2005 n Denmark. Ths s somewhat surprsngly, as compettve pressure from globalsaton has ncreased and thereby ncreased pressure for frms to make wages algn wth productvty by usng PRP. Also, snce the early nnetes frms have become more aware of the possblty to adopt new work practses, and among these PRP. Furthermore, both labour unons and employer organsatons have been promotng new forms of pay schemes, but apparently the prevalence s lmted by structural forces most apparently the Dansh frm structure wth many small and medum szed enterprses. The nfluence of the actual framng condtons for the choce of pay scheme wll be dscussed later. In the followng secton we wll look nto pay scheme dssemnaton among occupatonal groups. 5. THE DISSEMINATION OF PAY SCHEMES IN THE PRIVATE SECTOR FOR OCCUPATIONAL GROUPS Ths secton presents evdence on the prevalence of dfferent pay schemes for the ndvdual occupatonal groups across the Dansh prvate sector wth dstncton drawn n relaton to men and women. In secton 2 we presented a more detaled dscusson of whch pay schemes appear most relevant for frms to utlse n relaton to the ndvdual occupatonal groups. The followng assumptons can be stated on the background of the dscusson: Pure PRP s most wdespread n ndustry and constructon for the occupatonal groups that are drectly nvolved n producton. In a post-ndustral producton pattern wth emphass on other parameters for success than the number of physcal unts per tme unt, pure PRP cannot be expected to be the predomnant pay scheme for any occupatonal group. Pure tme-based pay wll be more predomnant amongst whte-collar employees than for employees n producton. Salares for the management level personnel wll nclude performance-related elements.

8 Table 3 below ncludes a dstrbuton of the answers from the survey to the queston of whch pay scheme best descrbes the pay scheme used by the frm for the occupatonal group. The dstnctons between the personnel groups have been drawn on the background of the dstnctons made n the Statstcs Denmark occupatonal classfcaton for pay statstcs: DISCOLOEN. DISCOLOEN s a partcular verson of DISCO, whch s the Dansh verson of the Internatonal Labour Offce and the offcal EU nomenclature for occupatonal functons ISCO-88 (Internatonal Standard Classfcaton of Occupatons). The utlsaton of DISCOLOEN renders t possble to compare persons wth the same occupatonal functon regardless of the ndvdual employee s formal ttle and educaton. Table 3 does not provde opportunty to dentfy dfferences between men and women n relaton to whch pay scheme they are workng wth. However, ths result could not be ruled out beforehand, as the segmentaton tendences can manfest themselves n relaton to the dstrbuton of pay schemes between genders. Personnel data, however, are better suted to capturng gender-specfc dfferences, as one must assume that the frms do not operate wth separate pay schemes for men and women wthn the same occupatonal or professonal group. The general mage of the dstrbuton of pay schemes s that pure PRP plays a very mnor role, as only between 2-8 percent of the frms ndcate that they use pure performance pay for the respectve occupatonal and professonal groups; that pure tme-based pay domnates n all personnel groups; but that combnatons are used to a consderable extent. The use of a mxed tme-based and performance-related pay system swngs between percent for the occupatonal groups. Manageral employees (42 %) and employees wth trade-related work (39 %) have the greatest frequency of PRP n some form or another. It s well n accord wth predctons made n agency-theory that the prevalence of PRP should be the hghest for these two groups compared to the other occupatonal groups. Seen n relaton to the assumptons, t s surprsng that pure performance pay forms play such a lmted role for the personnel groups n producton. A maxmum of 5 percent of the frms ndcate that pure PRP best descrbes the pay scheme for ther occupatonal or professonal group. Ths can probably be explaned by the unque characterstcs of the Dansh labour corporate structure (see OECD, 1998). The latter are domnated by small and md-szed frms, where the transportaton expenses per employee when usng PRP can be excessve (Cox, 2005). For the two whte-collar groups wth the lowest levels of qualfcatons, the results ndcate n keepng wth the expectatons that tme-based pay s the predomnant form of payment. Over 70 percent of the frms ndcate ths to be the case for these professonal groups. In the followng secton we wll develop a model to determne some of the frm specfc factors determnng the choce of pay scheme for each occupatonal group.

9 Table 3 How are the pay schemes best descrbed for the ndvdual occupatonal groups n the frm? Percent Men Pure tmebased pay Pure performance pay Mxed tmebased and performance pay N Women Pure tmebased pay Pure performance pay Mxed tmebased and performance pay Manageral personnel Whte-collar employees, hghest level of qualfcatons Whte-collar employees, md-level qualfcatons Whte-collar employees, lowest level of qualfcatons Employees wth craft-related work Process-/machneoperators Other personnel group N

10 6. FIRM LEVEL PREDICTORS OF THE CHOICE OF PAY SCHEME As dscussed n secton 3 the lterature ponts out multple decsve factors n the frms respectve choce of pay scheme. To menton one study, Cowlng (2001, 2002) ncludes fve factors: number of employees, length of employment of the employees, character of the job functon, the sgnfcance of the product qualty, the appearance of producton norms. Amongst these factors, n ths contrbuton we only have the data avalable to nclude the number of employees and the sgnfcance of product qualty, but wll addtonally add a varable to measure the nfluence of the compettve stuaton of the ndvdual frm, as pronounced competton n the frm s product market must be assumed to ncrease the pressure to ensure accordance between pay and productvty, whch speaks for the use of PRP. It s also assumed to be of sgnfcance whch sector the corporate data s drawn from, as the producton forms wll be consderably dfferent, and ths wll have bearng on the choce of pay scheme. Fnally, we test the nfluence of unon presence. On that background, the followng model s presented: PS F E, Qual, Comp, Comp, Sector, Unon, (1) og hm x where og PS s the frm s pay scheme for the respectve personnel groups, E s the number of employees categorsed n four groups, Qual s an objectve for the frm s reportng of the hm x sgnfcance of the qualty of the product for competton, Comp, Comp are the ndvdual frm s reportng of the level of competton on the domestc and export markets, respectvely, Sector s the report of whch sector (ndustry, servce and constructon) the frm belongs to and Unon s an ndcaton of the presence of a local collectve agreement or not. The unon varable s omtted from the manageral staff and the whte collar workers wth hghest qualfcatons estmatons, as the varable aren t relevant here. The model s estmated usng a bnary logstc regresson. Data for the ndvdual frm s choce of pay scheme for the specfc occupatonal group s the questonnare data descrbed n the above n secton 3. The frms pay scheme for the occupatonal group s constructed as a bnomal dependent varable, where tme-based pay s attrbuted the value 1 and pure performance pay and mxed tme-based and performance pay are categorsed wth the value 2. The product qualty varable s from the questonnare, where the frms have been asked to respond to whch sgnfcance t has that the ndvdual frm s servces/products are of top qualty, measured n relaton to the competton. The same s the case for the competton varable, where the companes have been asked to respond to how the compettve condtons for the company can best be descrbed n relaton to the domestc and foregn markets, respectvely. The frms responses to these two questons have been graded wth values 1-4. Fnally, the sector varable has been formed va the branch code n the assocated regstry data for the questonnare. The same s the case for the sze of the frm. Both of the latter varables have been categorsed. The estmated results are presented below n Table 4, wth the standard devatons n parentheses and the levels of sgnfcance marked wth *. The explanatory power n the models, as expressed by the pseudo R 2, s generally weak, as t swngs between 0.02 and Ths s hardly surprsng consderng the heterogeneous character of the companes n queston and thus ther respectve backgrounds for the choce of pay scheme, whch can hardly be accounted for va the employed data and varable. Despte the rather modest total explanatory power, several of the factors ncluded contrbute to explanng the frms choce of pay scheme. As n other contrbutons (Brown, 1990; Cowlng, 2002; Tremblay and Chenevert, 2004; Long and Shelds, 2005), the sector and sze varable are sgnfcant

11 decsve factors for all occupatonal groups. The results generally ndcate that the smaller the frm, the greater the odds that t uses tme-based pay as the pay scheme. In the followng the man results of the estmaton for each occupatonal group wll be dscussed. The estmaton for the management level shows that there are a clear and sgnfcant correlaton between frm sze and the choce of pay scheme. Frms below 500 employees, prefers tme-based pay to PRP for ther managers compared wth the largest frms. Both ownershp structures, montorng costs of managers and transactons costs of adoptng PRP are factors that contrbute to the explanaton of ths result. The sector varable s another strongly sgnfcant varable. Compared to the servce sector, both ndustry and more strongly constructon prefer tme based pay to PRP for ther managers. Ths result holds for all three whte collar worker estmatons. There s only one sgnfcant competton varable. Ths ndcates a postve but weak correlaton between the prevalence of tme based pay scheme and strong competton on the domestc market. Ths result stand n contrast to what was expected, as strong competton n any market should foster the adopton of ncentves to secure proft maxmsaton. We don t fnd evdence on ths for any group of whte collar workers ether. The results for whte collar workers wth the hghest level of qualfcatons are n accordance wth the estmaton for the manageral group except for a margnal sgnfcant qualty varable. The sgn of the estmate are wrong though, accordng to what should be expected. Ths also apples for the other whte collar groups. The estmaton results of whte collar employees wth md-level qualfcatons, shows that the presence of local unon agreements postvely affects the prevalence of tme based pay. Apparently unons favour ths sort of remuneraton practce for ther members. Tme based pay makes t easer for unons to nfluence wage settng more drectly than PRP. Ths could be one explanaton for the estmaton result. The result of the estmaton for employees wth crafts related work shows that the sector varable becomes less sgnfcant. The excepton s for the constructon sector where there s a strong negatve correlaton. Ths was expected as pecework s qute common n ths sector. Another nterestng observaton s that there s some ndcaton of a negatve nfluence of the unon varable on the use of tme based pay. Contrary to the result for whte collar workers wth the hghest qualfcatons, unons seem to facltate the prevalence of PRP. Ths result s contrary to the fndngs n a number of studes e.g. Brown (1990) for US establshments, Long and Shelds (2005) for Australan and Canadan frms, Heywood et al. (1997) for UK frms and even the fndngs n Erksson (2001) wth Dansh data. A possble reason for the dfferent fndngs s that the estmatons at hand documents evdence on dfferent occupatonal group level and not the frm n general. Ths seems to make a crucal dfference f the effects of unonsaton should be determned, not at least because unons adopts dfferent polces wth respect to the optmal choce of pay scheme for ts members. The effect of unon presence s even more pronounced for process and machne operators. The estmate doubles and s hghly sgnfcant. Wth respect to ths group the result can be nterpreted as an ndcaton of local unon agreements as a necessty for the acceptance of PRP payment among workers. Another nterestng result for ths personnel group s that competton seems to matter, especally for export markets, as three out of four estmates are sgnfcant. The sgn s negatve whch means that competton facltates the adopton of PRP. Smlar fndngs can be found n Drago and Heywood (1995) wth Australan establshment data. The sector varable s not sgnfcant for process and machne operators. There s of course bg dfferences n the sze of employment of the group between the three sectors, but ths also apples for employees wth craft related work and the estmate for constructon s sgnfcant here, so ths can t be consdered an exhaustng explanaton for the lack of nfluence.

12 Because the models are constructed from a lmted number of varables chosen from a dataset wth a broader nvestgatve scope, the predctve power of the dfferent models, are weak. The strongest explanatory power s found for managers and the weakest for whtecollar workers wth the lowest level of qualfcaton. In general the estmated models, confrms the sgnfcant effects of frm sze and sector on the choce of pay scheme. For other varables the effects dffer sgnfcantly between occupatonal groups, most sgnfcantly wth regard to the competton and unon varables. We fnd new evdence that competton matters for the choce of pay scheme, especally for blue collar occupatons. We also fnd clear effects of the nfluence of unons whch stand n contrast to other studes. The evdence from Denmark shows on one hand that unons facltate the adopton of PRP for blue collar workers, but on the other hand affects t negatvely for hghly qualfed whte collar employees. These are new and nterestng fndngs supplementng exstng research on the topc.

13 Table 4 Logt estmates of frms adopton of tmebased pay vs. PRP for dfferent occupatonal groups Occupatonal group Varable Management level Whte-collar employees, hghest level of qualfcatons Whte-collar employees, md-level qualfcatons Whte-collar employees, lowest level of qualfcatons Employees wth craftsrelated work Process- /machne operators E (Frm sze) <= *** (0.1904)) 0.970*** (0.1755) 0.749*** (0.1869) 0.341* (0.2050) 0.915*** (0.2050) 0.714*** (0.2125) <= *** (0.1994) 0,760*** (0.1845) 0.745*** (0.1925) (0.2070) 0.759*** (0.2048) ** (0.2051) <=500 0,6248*** (0.1873) 0.391** (0.1674) 0.435** (0.1718) (0.1898) 0.355* (0.1836) (0.1795) >500 Baselne Baselne Baselne Baselne Baselne Baselne Sector Industry 0.578*** (0.1195) 0.823*** (0.1192) 0.653*** (0.1303) (0.8649) (0.2311) (0.2754) Constructon *** (0.4383) 2.836*** ( *** (0.4426) 1.483*** (0.4457) *** (0.2878) (0.4145) Servce Baselne Baselne Baselne Baselne Baselne Baselne CompH (competton domestc market) Strong ** (0.1973) (0.1942) (0.2105) (0.2300) (0.2312) (0.2394) Some (0.2036) (0.1999) (0.2124) (0.2345) (0.2365) ** (0.2453) Poor Baselne Baselne Baselne Baselne Baselne Baselne Occupatonal group Varable Management level CompX (Competton export market) Strong (0.3066) Some Whte-collar employees, hghest level of qualfcatons Whte-collar employees, md-level qualfcatons Whte-collar employees, lowest level of qualfcatons Employees wth craftsrelated work Process- /machne operators (0.3006) (0.3115) (0.3055) (0.3321) ** (0.4658) * ** (0.3153) (0.3104) (0.3199) (0.3144) (0.3383) (0.4748) Poor Baselne Baselne Baselne Baselne Baselne Baselne Qual (Importance of product qualty) To a great degree (0.5468) * (0.6680) (192.2) (214.2) (0.5908) (0.7502) To some degree (0.5546) * (0.6748) (192.2) (214.2) (0. Baselne (0.7564) 5996) Slght degree Baselne Baselne Baselne Baselne Baselne Baselne Unon ( local - - collectve agreements) Yes ** (0.1481) (0.1222) ** (0.1829) *** (0.2038) No - - Baselne Baselne Baselne Baselne Observatons Pseudo R Log lkelhood Level of sgnfcance: ***: pr<0.01,**: pr. 0,05 *: 0.05<pr 0.1 Standard error n parentheses. Note: It should be noted that drect comparson between the columns and estmaton n table 9 s avoded, as the use of one type of pay system for one personnel group could be correlated wth the probablty usng the same system for another personnel group. Wth other words: the error terms across columns could be correlated.

14 6. CONCLUSION Ths study provdes evdence on the prevalence of dfferent pay schemes n the Dansh prvate sector. Because of ncreased compettve pressure, decentralsed wage-settng and promoton of new pay schemes by both employer and employee organsatons, t was expected that the overall prevalence of PRP had ncreased snce the late nnetes, but we fnd no clear evdence of ths when comparng the study at hand wth former Dansh studes. Tme-based pay s stll preferred to varous forms of PRP n most frms. The most obvous explanaton s the Dansh frm structure, consstng to a great extent of small to medum szed enterprses. Wth respect to the prevalence of pay schemes among dfferent occupatonal groups we fnd that frms utlses tme-based pay to a greater extent than PRP for any group. We have tred to provde some explanatory evdence on the frm level predctors of the choce of pay scheme by estmatng a logt model for each occupatonal group. Although, the number of varables are lmted we fnd some nterestng results. As n other studes sze and sector varables are sgnfcant. Ths holds for every occupatonal group. More nterestngly and n contrast to the majorty of exstng studes we fnd evdence that unonsaton contrbutes postvely to the adopton of PRP for employees wth crafts-related work and process and machne operators (unsklled workers). Therefore, unonsaton and local collectve agreements could apparently be seen as provdng employees wth the necessary guarantees that the adopted pay scheme s n ther best nterest. In Denmark, a favourably employment relatons clmate also adds to ths postve effect. In fact, the employer and wage-earner organsatons n the manufacturng ndustry have jontly promoted the wdespread mplementaton of new frm-based pay schemes, regardng ths as a natural extenson of the decentralsaton of Dansh wage-settng practces. A further result worth notng s that the strength of product market competton postvely nfluences the choce of PRP. The estmatons provde some evdence on ths.

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