Traditionally wages and pay have been determined through government regulation, minimum wage determination, negotiation with unions, decisions of arbitration or labour courts and the individual contract of employment. The factors or criteria which have influenced pay and pay increases include profit (but generally unrelated to individual or group performance), job evaluation, seniority, cost of living, manpower shortage or surplus, negotiating strength of the parties and skills. Performance measures such as productivity or profit related to the performance of a group have been of less importance in determining pay increases. Though skills have been reflected in pay differentials, pay systems have been seldom geared to the encouragement of skills acquisition and application.
Industrialized countries have built their competitive advantage not around low wages, but around clusters of competitive industries in which high earnings and standards of living have been sustained through improved technology, productivity and quality. Many Asian countries now recognize that high technology, productivity and low earnings cannot be combined and sustained over a long period of time. Many Asian employers are now seeking to sustain their competitiveness through pay increases which are more related to performance measures as a way of absorbing increased labour costs, while at the same time rewarding and motivating employees. Japan, Singapore and Korea, for example, have succeeded in moving to high value-added and technology-based or service activities partly because they had invested in skills development and accepted the fact that higher earnings (in Singapore partly through a flexible pay system) are an essential strategy for entry into the knowledge-based industries of the future. Increases in real earnings have been made possible because investment in education and skills contributed to productivity enhancement which, in turn, created the capacity to absorb higher earnings. In the 1980's Singapore made a deliberate shift to a high wage economy in order to encourage entry into high value-added activities. Productivity increases are necessary to sustain higher earnings; at the same time there cannot be any long term productivity growth without an increase in real wages.
Traditional pay systems for non-executive staff have generally been characterized by standardization across and within sectors (e.g., government, particular industries) and within enterprises. So long as employers were competing mainly in domestic markets which were protected from foreign competition - in some cases leading to monopolies - the effects of standardization on considerations such as performance, recruitment and retention of good staff, etc. were less felt. Indeed, standardization, while being equitable from the point of view of employees, benefited employers as well by reducing competition based on labour costs.
With the gradual opening up of economies to world trade and foreign investment, local employers are now compelled to compete with enterprises with sophisticated technology, more productive ways of providing goods and services, and the advantage of being global players. In many instances these foreign enterprises are able to attract the best local talent on terms and conditions beyond the capacity of many local enterprises to pay. With the acceleration of the process of globalization, accompanied by the movement of former centrally planned economies towards market economies, governments and private enterprises have had to compete in the global market by developing competitive advantages, which are affected by costs and quality. Productivity increase as the measure of performance at the national and enterprise levels, with quality as an intrinsic part of productivity, is becoming the goal of many developing countries as well - now pushed to the forefront by the forces of globalization and the collapse of economic systems which were an alternative to a market economy. Economies which are seeking to progress from low wage cost manufacturing to highly skilled and technology-based production need pay systems which not merely recognize skill differentials (as standard pay systems do), but also provide an incentive to acquire skills and multi skills facilitated by years of careful and correct investment in education and training.
In the area of industrial relations, collective bargaining outside the enterprise is seen by employers as achieving distributive justice in the sense of equality, with outcomes often being based on the bargaining strength of the parties. It is increasingly viewed as contributing little to productivity and performance. The outcomes often leave employers with little or no capacity to make further payments on account of performance under a scheme. The movement towards decentralization of collective bargaining has been the result of the need to address efficiency and performance issues at the enterprise level. It is natural that with decentralization employers would seek ways to introduce performance criteria into wage increases.
The increase in atypical forms of employment (e.g. homework) which cannot consistently or always be supervised, has also influenced the search for alternative forms of pay.
Traditionally increased earnings were secured and performance rewarded partly through promotions.
With limitations on higher positions in the context of organizations becoming less hierarchical in the future, relating part of pay increases to performance would be a way of rewarding performance other than through promotions.
In these circumstances pay systems are increasingly forming a part of human resource management initiatives to achieve enterprise level objectives and strategies, with more attention being paid to how they fit into the overall human resource management policies of enterprises.
These developments have several implications for pay systems. Employers (and some governments) see that pay increases need to be more than matched by productivity increases if competitiveness is to be achieved or maintained. The relationship between pay, productivity, skills and inflation was understood quite early in Asia by Japan as well as the newly industrialized economies. Some other South East Asian countries have also come to appreciate this relationship.
The pressure in the Asian-Pacific region for recognition of performance criteria in pay determination has not come only from employers. In Singapore the government initiated the move to flexible pay. In Malaysia the government drew attention in 1988 to the desirability of introducing a flexible pay system. In Fiji the government has been exploring the feasibility of introducing performance pay into the public service, while encouraging employers to do likewise. The Minimum Wage Board in Papua New Guinea has, since the early 1990s, been required to relate minimum wages to performance criteria in place of indexation. In recent years the wage determination system in Australia has encouraged employers and unions to negotiate a part of wage increases in the context of productivity and productivity-related improvements. The fundamental shift of industrial relations to the enterprise level and the individualization of the employment relationship in New Zealand has provided ample scope for performance-related pay. Therefore it is increasingly recognized that performance and skills criteria need to be injected into pay determination; that it cannot be achieved through centralized or macro-level pay determination; and that changes have to be negotiated at the enterprise level.
In these circumstances a major concern for employers will be to negotiate pay systems which:
• achieve a strategic business objective;
• are flexible in that their variable component could absorb downturns in business and reduce labour costs;
• are oriented towards better performance in terms of productivity, quality, profit, etc;
• are capable of enhancing workers' earnings through improved performance;
• are capable of reducing the incidence of redundancies in times of recession or poor enterprise performance through the flexible component of pay;
• are able to reward good performance without increasing labour costs, and
• are able to attract competent staff.
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