There has been increased interest in systems of pay determination. Various forms of merit pay seem to have desirable policy implications by increasing labour market efficiency. They can provide workers with an incentive to supply greater effort, to invest more in training, and to make the right mobility decisions. In Discussion Paper No. 1097, Research Fellow Alison Booth and Research Associate Jeff Frank use the British Household Panel Survey to investigate when seniority is rewarded by automatic incremental scales.

Scales are seen as an alternative to individual merit pay, but 1991 data show that traditional automatic incremental scales remain commonplace. They are common not only in the public sector where 72 per cent of men and 80 per cent of women are covered by such scales, but also in the private sector. Of men in full-time permanent employment in the private sector, 43 per cent are paid according to these scales; the figure for women is 45 per cent. For private sector men in a workplace with a recognised union, the figure rises to 52 per cent (63 per cent for women). Such scales are likely to be used when individual productivity is hard to measure, when firms provide all workers with similar levels of training and when workers have sufficient bargaining power to gain insurance against mismeasurement in the allocation of merit pay. The data provide support for these hypotheses.

Coverage by Incremental Scales
Alison L Booth and Jeff Frank

Discussion Paper No. 1097, December 1994 (HR)