Labour-Management Relations and Incentives

INTRODUCTION

Labour-management relations as a topic did not receive great attention in the literature about the socialist economic system. However, in my opinion, in order to understand the working of the socialist economic system, primarily of the traditional system and its shortcomings, it is important to become familiar with labour­management relations, as they existed under socialism.

Management-labour relations were not exactly the same in the three countries. What I discuss here is, rather, a model, to which the Czechoslovak reality was the closest. The differences reflected the pre­war differences in relations.

In this short chapter I am first going to discuss the position of a top manager in the traditional system compared to the position of a top manager in a capitalist corporation, and how the former changed under reforms. I will also discuss how the position of managers influenced the economy. In addition, I will devote attention to the position of workers.

THE POSITION OF A TOP MANAGER UNDER THE TRADITIONAL SYSTEM

East European countries (unlike Western countries, where an authoritarian regime exists in factories) had relaxed relationships in their factories.¹ This may seem surprising, considering the dictatorial nature of the political system. Maybe just because of the nature of the system and the fact that the workers were its mainstay, the workplace was given to them as a place where they could let off steam, as a substitute for criticising the regime. In a Western corporation, mainly in the USA, the top management and, within it, the chief executive as the representative of the owners, has considerable power vis-a-vis the employees: the chief executive can fire and hire to a great degree at will, primarily in non-unionised firms.² In the USA until recently managers could shut down factories from one day to the next without giving workers advance notice.

The position of the top manager in the West is this strong because his well-being does not depend on the goodwill of the ordinary employees; if the corporation he manages performs well, his position is safe. Not only this, but he also may be offered a better-paid executive job in a larger, more prestigious corporation. His own interest is also closely linked with the interest of the corporation because his earnings depend mostly on its profitability. The value of the package of stocks which he receives as part of his earnings depends, too, on the performance of the corporation. As a result, the interests of management and employees may be in conflict: employees are interested in higher wages; however, the higher the wages, the lower the profit, if all other conditions remain the same. Thus, wage increases may be in conflict with managers’ interests. If this is the case, managers will resist wage increases and, in their fight with trade-unions, they can count on the support of shareholders.

The situation in enterprises of former socialist countries was quite different. To begin with, the position of the top manager was much weaker than in a capitalist corporation. Formally, the top manager was entitled to make all the decisions which were left to an enterprise. After all, the socialist countries accepted the idea of one-man management for enterprises.³ Since the centre made decisions about what to produce, for whom to produce and, to a great degree, how to produce, the top manager’s decision-making was quite limited compared to the power of a top manager in a capitalist corporation. This is not to say that a socialist top manager had no influence on the extent of plan targets and their mix.

The decision-making of top managers was also limited to some extent by the right of control given to the CP organisation in enterprises, which formally meant that the organisation could ask for information about the performance of the enterprise and suggest ways to improve it. It had no right to impose its will on the top manager; it could, however, report its dissatisfaction to higher CP bodies which could, if they saw fit, follow up the complaint with the superiors of the enterprise. Many top managers resented this meddling of the CP organisation in what they regarded as their affairs. The situation was compounded by the fact that the local Party organisation, which steered the enterprise organisation, also had the right of control.

A smart top manager tried to avoid conflicts with the CP organisation. If the advice of the CP turned out to be wrong, he could put the blame on the Party organisation. If the opposite situation occurred, he might be praised for listening to the advice of the ‘people’. In the matter of appointments, which fell within the jurisdiction of top managers, the CP organisation had the right of veto.

As shown, managerial authority was restricted not only by the superior bodies, but also by the Party organisation. Later it will be shown that trade-unions also imposed certain restrictions on the authority of a top manager.

The question may be posed: to what extent were the interests of the top manager of a socialist enterprise linked to the interests of the economy and to the interests of the enterprise entrusted to his management? After all, the top manager’s function was primarily to protect the interests of the economy, or, more precisely, those of the state, the owner.

The financial situation of a top manager was linked - as already mentioned - to the performance of the enterprise he managed. If the enterprise fulfilled the plan targets, he got bonuses and his earnings increased. Since the bonuses in the case of a top manager were quite high compared to his salary, and the latter was very modest compared to salaries in the West, and not very high compared to average wages in the East, he was, of course, very interested in the good performance of the enterprise like his colleague in the West. Apart from pecuniary interests, there were other considerations which encouraged a top manager to do a good job - increase in social status, a chance to be given a higher assignment, etc.

There were, however, other factors which pushed top managers’ interest in a different direction. The success of a socialist manager also depended on the goodwill of the employees and, of course, of the CP enterprise organisation and the trade-union organisation, as already mentioned. If he was not able to establish a proper rapport with the groups mentioned and if, as a result, the relationship was marked by conflicts, he sooner or later failed in his position. The authorities were interested in having peace in enterprises and a top manager who was unable to prevent conflicts was an uncalled-for burden.

The relationship between the top manager and his subordinates depended to a great degree on the extent to which the manager was able to protect the employees’ interests v⅛-d-v⅛ the authorities. A good manager, in the eyes of ordinary workers, was one who was able to squeeze from the authorities an easily fulfilable plan with the allocation of sufficient inputs, including labour, and an increase in the wage bill which would guarantee an increase in the real wage without the need of much greater intensity of labour. If the employees felt that their manager was not successful in protecting their interests because he was indifferent or because he wanted to balance the interests of the workers and the economy, or if they suspected that he did not have the needed skills (political and professional) for bargaining with the authorities, his popularity necessarily declined.

THE EFFECTS OF THE WEAK POSITION OF THE MANAGER⁴

From the foregoing it is clear that the top manager, as the representative of the owner, the state, was in no position to defend the interests of the owner properly. He was not even in a position always to defend effectively the interests of the enterprise if these clashed.with the interests of the employees. Considering the interest of the top manager, one should not forget that it lay not so much in profit - as is the case with his colleague in the West - as in earnings primarily. Usually the incentive system for top managers under the traditional system was linked to several indicators and profit was directly or indirectly only one of them. Managers were usually interested in an increase in workers’ wages because this produced contentment in enterprises, but mainly since this could also be translated into an increase in their salaries through higher bonuses. In addition, they were guided by short-term interests like other employees, mainly in the first phase of socialism, when there was a tendency not to leave managers in their positions for long. Thus, managers were not only pushed by pressure from employees to accept the workers’ worries as their own, but their pecuniary interest in earnings increases brought them closer to workers’ interests.

The weak position of managers vis-a-vis workers was further undermined by the labour code, full employment policy and labour shortages. In a capitalist corporation, mainly in the USA, workers usually cannot afford to defy their superiors (managers or super­visors),⁵ since substitute jobs are not readily available.

While a capitalist corporation is marked to a great degree by an adversarial relationship between top management and employees, the relations in a socialist enterprise were by no means antagonistic; they were rather a mixture of different elements - support, identification and sometimes adversariness - which, put together, resulted in the weakness of the managers. Considering these relations from a human­relations viewpoint - in particular the fact that in socialist enterprises the kind of authoritarian regime which is characteristic of capitalist corporations, mainly in the USA, did not exist - one might argue that they were a welcome phenomenon. I would add: provided that they were not at the expense of economic efficiency. And this assumed that workers internalised a type of consciousness which would make them immune to the natural inclination of people to take advantage of what is in their interest, even if it hurts the collective interest. The behaviour of workers did not reach the level of consciousness needed and therefore the prevalent labour-management relations did not promote economic efficiency; on the contrary, they hampered it. The top manager, due to his weakness, had difficulty enforcing discipline (making employees work hard, fully utilising work time, and paying attention to quality), enforcing the rule that wage differentials must reflect performance, and distributing bonuses according to merit. In brief, the weak position of top managers undermined the effectiveness of incentives.

THE POSITION OF WORKERS

It would be wrong to draw the conclusion from the foregoing that individual workers in a socialist enterprise had a powerful position.

Only their position as a collective was strong vis-a-vis managers when compared with that of workers in the USA. Otherwise their position exhibited many weaknesses. Up to the middle of the 1960s the freedom of choice of job was limited in two ways. On the one hand, workers could not quit their jobs without the consent of management and trade­unions. There were several exceptions to this rule. One was a move to another city because of a change in family status. Health problems were also a good reason. Finally, a worker could quit, if he was willing to work for some time in an industry where great labour shortages existed because of difficult working conditions there (mining). On the other hand, there was forced placement into jobs in industrial branches for which it was difficult to recruit labour even by incentives. This usually did not mean that authorities allocated a certain job; it meant only that the candidate had to accept a job in the assigned branch of industry.⁶

Forced placement was also applied to businessmen, whose business was shut down, to employees of institutions which were regarded as typically capitalist (brokerage houses, the stock market) and to political opponents, etc. In 1951 Czechoslovakia, which probably had the worst record in forced placement, transferred 77 000 white­collar workers to manual jobs. Needless to say, this was a political move: to get rid of workers who were assumed to be politically unreliable and to create job openings for reliable ‘cadres’, mainly factory workers. This, combined with the 1948-9 cleansing of the universities of a great number of students⁷ because of their class origin or because of their negative attitude to the regime, antagonised a large section of the population against the CP.

In addition, there was an administrative allocation of most university graduates to jobs for a certain period of time (usually three years) (Cech, 1959, pp. 82-7; O⅛dzki, 1974, pp. 226-7). The rationale for this action was to make sure that all the graduates would have jobs and that the countryside would have physicians, lawyers, teachers. One can argue whether or not this action was a violation of human rights. The next action which is going to be mentioned was certainly in the interest of the application of human rights. I have in mind the placement of disabled people who, without the help of the authorities, had little chance of finding a job and keeping it.

On the other hand, workers had job security. A manager had to have a very good reason for dismissing a worker. Workers could be dismissed only with the approval of the enterprise trade-union organisation. If the dismissal was for political reasons, not a very frequent case, which meant that the Party organisation was involved, the approval by the trade-union was automatic. If the dismissal was for disciplinary reasons, the trade-union usually carried out its own questioning before approval was given. It was, however, reluctant to approve dismissal for economic reasons. And even if the manager had a good cause for dismissal, he had to think twice, since a substitute was often difficult to obtain.

If workers became redundant in one enterprise department because of enterprise reorganisation, they could expect the management to place them in another department, after retraining them, if necessary, in order for them to be able to perform the new job. If the enterprise could not place them in its own departments, it helped the dismissed workers to find new jobs. Because there were labour shortages, this was usually not much of a problem.

Up to the middle of the 1960s unemployment benefits did not exist; this fact had to help demonstrate that socialist countries had full employment. But after the suppression of the uprising in Hungary unemployment benefits were introduced for a short period of time in order to cope with unemployment (R6zsa and Farkasinszky, 1970).

Workers were dependent on their enterprises, mostly on the secretary of the Party organisation, if they wanted a passport to visit their relatives abroad, a loan or an apartment in enterprise housing.

Trade unions existed in all socialist countries. But their main task was not to defend the material interest of workers. When the authorities determined the plan for the standard of living, mainly for the development of wages, the trade-union leadership was consulted. But the trade-unions were in no position to challenge the decision of the CP concerning wages. Once the CP leadership approved the standard of living plan, the trade-union leadership was expected to defend it. And it usually did so because the CP decided who would be in leading positions within the trade union. Not only this, the enterprise Party organisation determined who would be at the head of the enterprise trade union.

Strikes were illegal for fear that they might undermine the stability of the regime. The ideologues argued that workers striking against a workers* government could only harm themselves. Nevertheless there were some strikes in the 1950s, besides the riots in Poland and in the aftermath of the suppression of the Hungarian uprising. In Czechoslo­vakia the 1953 money reform, which deprived many people of their savings, provoked demonstrations and strikes in some localities and enterprises. Needless to say, the organisers of the strikes were punished.

With the political relaxation the authorities in some countries took the position that strikes, as long as they were approved by the national leadership of the trade unions, were legal. This was not a substantive change in the attitude to strikes; it was rather a clever manoeuvre based on the knowledge that the trade-unions would not dare give permission to strike. Still there were many strikes, mainly in Poland in the 1980s.

It has already been mentioned in the preceding chapter that socialist countries were not able to avoid great losses of work time and that lack of discipline and absenteeism were the main reasons for this phenomenon. Of course, these reasons themselves were triggered by others which can be regarded as the fundamental causes of the negatives mentioned.

After the seizure of political power by the communists, many people were forced to change their jobs and accept a job which they did not like because of its lower social status or level of pay. One could not expect these people to work with enthusiasm. Moreover for many years, up to the second half of the 1950s, real wages were declining and, on top of this, there were consumer goods shortages (in one country more than in the others). The widespread application of piece-rates, as a quasi-socialist payment form, without due regard to the nature of the work to be performed, had a negative effect on quality of products. Low labour discipline also had its origin in the tremendous organisational problems which arose as a result of the huge influx of people into the labour force.

The governments tried to solve these problems with non-economic methods. In 1950 the Polish government enacted a draconian law - in the spirit of Stalin’s methods - which envisioned prison sentences and a reduction in wages for absenteeism over a certain number of days (Jφdruszczak, 1972, pp. 166-7). A similar law was adopted by Hungary (Schonwald, 1980, pp. 129-31). The Czechoslovak authorities had second thoughts about Stalin’s measures. Finally, in 1953 they decided to act, but in the meantime Stalin had died and the bill was abandoned. In the first years after Stalin’s death the countries went through an economic followed by a political crisis, a period in which Stalinist methods increasingly lost appeal among the communist elites under the pressure of the crisis.

Had the CPs devoted much more attention to incentives than they did, perhaps the situation could have been improved. However, in the first years of their rule they relied too heavily on some revolutionary fervour. No doubt, primarily in Czechoslovakia, a large proportion of the population welcomed the new regime and was willing to bear some sacrifices for a short time. But when the industrialisation drive brought hard times and far-reaching restrictions on freedoms, the enthusiasm for the new regime started to weaken, even among its followers.

When the political and economic situation was consolidated after the 1956 upheavals, no great change occurred in the behaviour of workers. In the meantime a new factor appeared on the economic scene - labour shortages, resulting mainly from the industrialisation policy combined with the full employment policy. In a situation when it was easy to find a job, many workers abused the system by continuing in the old pattern of behaviour, not utilising the work time fully,⁸ not working hard and not paying proper attention to the quality of the work delivered. They found justification for their behaviour in two circumstances: first they believed that their remuneration was below what they deserved; many were undoubtedly correct.⁹ (See Chapter 3.) Second, they found justification in the often negligent implementation of the managerial staffs duties: for example, it happened quite frequently that some workers could not work for hours because documents and equipment needed for their work were not prepared on time or because the machines were not properly repaired.

It has already been indicated that the managers’ authority was not strong enough to cope with labour discipline violations. Many managers were indifferent considering the potential costs of conflict with workers. The problem was that managers could not fully rely on government help in enforcing labour discipline. The undemocratic nature of the system was an obstacle to it. The Communist leaders were afraid to make unpopular provisions which might improve the situation for fear of antagonising workers who were regarded as the mainstay of the regime. In many cases the managerial indifference resulted from the wrong belief that a conflict-less environment might work to the benefit of all. Finally, the incentives and disincentives introduced to cope with the problems mentioned were not strong enough.

Up to now I have discussed the position of individual workers generally. In reality, the position of white-collar workers (disregarding here white-collar workers in leading positions, mainly in the Party and state apparatus, who enjoyed privileged positions) was much weaker than that of blue-collar workers. The latter, primarily those employed in heavy industry, were regarded as the mainstay of the regime, and they were therefore treated with circumspection and caution. In addition, blue-collar workers could speak their minds (provided what they said was not politically very incorrect) without having to be afraid that something would happen to them, as long as they did not aspire to some white-collar job or a better job in their field. On the other hand, white-collar workers were much more vulnerable: from time to time there were actions aimed at reducing the administrative apparatus, and therefore the threat of dismissal loomed over the heads of some. The weaker political position of white-collar workers was one of the main reasons why they were generally poorly treated when it came to wage adjustments.

In sum it can be said that the individual workers' position in a socialist enterprise compared to the position of workers in a capitalist corporation was a mixed bag. On the one hand, they were dependent on the enterprise (including the Party organisation) in matters in which an American worker is independent, but on the other hand, they had extensive job security which a North American worker can only envy.¹⁰ In my opinion Kornai’s (1992) statement that ‘all workers in a [socialist] firm are largely at the mercy of their bosses’ (p. 222) is not precise, to say the least.

LABOUR-MANAGEMENT RELATIONS UNDER ECONOMIC REFORMS

The reforms of the 1960s in Hungary and Czechoslovakia, which meant an expansion of the decision-making power of enterprises, meant at the same time a substantial strengthening of the position of top managers. They could make many decisions which before were the domain of the superior authorities. (For more sec Chapter 7.) The position of top managers also improved because increasingly the nominations to such posts were dependent on the training and experience of the candidates. Top managers, mainly up to the 1960s, were selected primarily on the basis of political criteria: political reliability was given precedence over professional competence. Later, when more stress was put on professional competence, it was still only the people who were included in the nomenclature who could be considered for high positions in the economy, including enterprises. (In the 1980s in Hungary and Poland, with the passage of the years, belonging to the nomenclature was less and less linked to membership in the Party.) As a result of this ‘cadre’ policy, which was applied throughout the economy, many incompetent people occupied positions of responsibility, and many apt and talented people were pushed aside. This contributed, on the one hand, to the mismanagement of the economy and, on the other, to the dissatisfaction and bitterness of those who were rejected. Political criteria were still a viewpoint in the nomination process with the introduction of economic reforms, but by no means the only one. And this lent top managers greater authority and respect.

The increased role of managers in determining the wage bill and bonus fund, combined with a greater role for profit in determining bonuses, weakened the solidarity between managers and workers mentioned above (see p. 62).

In Hungary a conflict even developed between managers and workers - about the distribution of bonuses - which had an effect on wages.”

In 1982 in Poland and 1985 in Hungary self-management was introduced in most enterprises. In those enterprises where it worked the top manager had to share power with the self-management bodies. (For more, see Chapters 7 and 9.)

The enterprise Party organisation (or more precisely its secretary) was still around, but its meddling in enterprise affairs was increasingly reduced. It still remained, however, a nuisance for management just because of its existence in enterprises.

Forced placement in jobs was eliminated. But some traces of it still remained. In Hungary, for example, in the second half of the 1960s it was still possible to place someone into a job if he quit his job twice in one year without proper notice or before the notice expired (Horvath, 1970). Placement of university graduates was also gradually aban­doned.

The reforms of the 1960s, mainly the Hungarian, were based on the idea that full employment must be sustained. In Hungary various measures were undertaken to stave off possible unemployment. In Czechoslovakia a law on unemployment benefits was enacted as a cautionary measure (Kudrna, 1967). Fears of unemployment turned out to be unsubstantiated; labour shortages continued to exist. Full employment existed in all three countries until the collapse of the socialist system, though from the middle of the 1980s in Hungary and Poland measures were undertaken to revamp the concept of full employment, to make it compatible with labour market rules. The government was to be responsible for the implementation of full employment, whereas enterprises were supposed to treat employment from the viewpoint of economic efficiency. In Czechoslovakia there was no movement in the direction mentioned.

The behaviour of workers with regard to work ethic did not change much. Various incentives and disincentives were tried to bring about a change, but without noticeable effect. The spread of the private sector in the 1980s in Hungary and Poland did not improve the work ethic in state enterprises. Many people, primarily in Hungary, held two and in some cases three jobs. Of course, they could not work with the same intensity in two or three jobs and therefore they neglected the job which was the most secure and that was the job in the state sector. In one of his works Szelenyi mentioned that people went to work in the state jobs as the serfs used to go to work on the land of the feudal lord. It is certainly an exaggerated comparison, but it has a grain of truth in it considering the productivity of work in different jobs.

CONCLUDING REMARKS

From the foregoing it is clear that labour-management relations were not of the kind needed for the promotion of economic efficiency. The management authority was undercut by the economic mechanism which largely relegated managers to the position of executors of the central planners’ wishes. On top of this, managers were too dependent on the good will of the territorial and enterprise Party organisation, enterprise trade-union organisation and workers. This in itself made it difficult to enforce the labour discipline required to achieve efficient performance and quality products. In addition the incentive system did not encourage managers to struggle for higher economic efficiency.

Even when the authority of managers was increased as a result of major economic reforms, labour-management relations did not substantially change. The role of the Party and trade-unions, though reduced, was still very important in enterprise activities. The CPs took the position that enterprise management should be under a certain control. In the first years of the regime the control was justified by, among other things, the shortage of experienced managers. Later, when ‘redness’ was of much less significance in selecting managers, the argument for control was more political. The real reason why the Party did not want to give up control over enterprise economic activity was because this meant giving up power and influence over the economy.

Labour-management relations could not fulfil their function as a promoter of economic efficiency, partly because of the full-employ­ment policy which contributed to labour shortages. Workers were not under pressure to work hard; they knew that even if they lost their jobs others would be available. They were so certain of this that even the lack of unemployment benefits did not frighten them. This is not to say that it was a mistake to pursue a full-employment policy. In my opinion, it was a mistake not to combine the full-employment policy with measures aimed at making sure that full employment would not be misused. First, labour shortages should and could have been avoided, and this would have encouraged many workers to appreciate the jobs they had. It should be borne in mind that labour shortages were combined with overemployment in many enterprises. In addition a great number of workers were engaged in auxiliary jobs which could have been replaced by labour-saving equipment. In other words, labour shortages were not an unavoidable result of the economic mechanism (for more see pp. 46-7). Second, more effective incentives and disincentives were needed to encourage workers to work hard and do quality work.

Last, but not least, it was a mistake not to honour the old socialist credo about industrial democracy after the seizure of political power. It was necessary to give workers a say in the management of enterprises and to require in return a certain amount of responsibility for the performance of enterprises. The powers of the self-management bodies could have been restricted in the beginning, mainly with regard to the determination of wages, and expanded in the course of time on the basis of the experience gained in the meantime. If workers had had the feeling that the nationalised enterprises really belonged to the nation and to them, they would, it could be assumed, have reciprocated with responsible behaviour, particularly if they had also been exposed to the measures mentioned.

The communist leaders in the small countries following the policy of the USSR were not willing to allow any elements of self-management. In Czechoslovakia, the workers’ councils, a kind of self-management body, which had existed in nationalised enterprises since 1945 and which were mostly led by communists, were liquidated soon after the communist takeover (Osers, 1977). The later introduction of self­management bodies under pressure from the reformers was already too late. This was partly due to the fact that a large proportion of workers had already become used to a certain style of behaviour.

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