Is the ERA holding organisations back from progressive remuneration?

Why are our employment contracts still focused on hours worked?

BY Jodi Walters 30 Sep 2022

There’s a lot written about how much the world of work has changed since the global workforce adapted to the effects of the pandemic. Even as we put the pandemic behind us, aspects of the workforce continue to evolve around us - but one fundamental part of work that hasn’t evolved is employee remuneration being based on hours worked.

“The modern employment agreement is based on the industrial revolution which is based on the 40-hour work week, you clock in, you clock out, you get paid for those hours,” HR leader Stephanie Love told HRD.

But as the workforce changes so has what employees provide in terms of work. As workers, we now provide knowledge, skills, experience, creativity, and innovation but measuring that and remunerating accordingly is a very tricky thing because it’s so intangible.

Even employees fighting to have more work life balance are fighting with hours-based arguments like the 4-day work week, or #workschoolhours. We just can’t seem to get our heads around output or performance-based remuneration?

What is output based remuneration?

Output based remuneration is based on an employees’ output, not the number of hours worked. For instance, if there were two employees given the same task and one of the employees completed their tasks in 8 hours and the other in 4, they would still receive the same amount of money for their effort.

“Thanks to the pandemic, output-based work has already started happening,” said Love. “Because people have been working from home and they haven't had presenteeism, they haven't had anyone looking to see what they're doing and how they're spending their time, it's forced employees to get clear on what outcomes are expected, what deadlines are expected, and they’re already operating in that kind of way.”

What are the advantages of output or performance-based remuneration

Businesses use a defined framework to set goals which can lead to increased productivity and performance.
Employees are acutely aware that their performance has a direct connection to their paycheck they are more likely to have increased productivity.
Most outcome-based workers can work from anywhere leading to reduced operational costs for the organisation.
Performance-based culture leads to increased employee engagement boosts morale
Encourages healthy competition.
Improved employee trust and loyalty
Organisations are able to distinguish high performers from low performers

Things to look out for with output-based remuneration

Financial rewards become a priority over development and growth
Employees in general are untrusting of merit plans which can increase secrecy and lead to inequity.
Can promote favouritism from leaders

What’s stopping organisations from approaching remuneration in a more output based way?

“At the moment, New Zealand legislation doesn’t lend itself to outcomes-based working unless you’re an independent contractor,” explained Love. “It would also be tricky to work out entitlements in terms of sick leave and annual leave as well.”

Currently New Zealand employment contracts must stipulate agreed hours of work. Section 65(2) Employment Relations Act 2000 (ERA) specifies what an individual employment agreement must include. This includes any agreed hours of work per section 67C ERA or, if no hours of work are agreed, an indication of the arrangements relating to the times the employee is to work (s65(2)(a)(iv) ERA).