Beyond romance and nostalgia: A clear-eyed view of long term career-based incentives in the public sector

As we argued in the previous post, the evidence on performance-related pay (PRP) is limited but generally supportive.   However, the evidence base for, or against, PRP is distinctively weak in relation to core civil service jobs outside of the OECD.   The conclusion of our recent report¹ urges cautious experimentation, breaking out of the evidence-free certainties which have driven so many donor recommendations for reform. 

In some cases a more detailed empirical look will likely show that long term career-based incentives provide a better alternative to the short term motivation provided by PRP.  In complex public sector environments, with complex and occasionally contradictory objectives and multiple principals, there are arguments that incentives for performance should rely on information which is hard to game as it emerges over the longer term.²

The central idea behind long term career benefits is that the worker exerts effort in order to influence the actual or potential employers’ beliefs about her or his talent and that while performance information can be gamed in the short term, over time the “real performance” is more evident.  So, even when employees are paid a fixed wage, they are motivated by the effect that their effort has on future wages.³ The proposition is that it is hard to cheat about effort and ability over the long term. 

If this is the proposition, then it is important to be clear about the cofactors that are likely necessary if this more traditional pay policy is to have some motivational impact.  It does not work because history has given it some magical force.  The likely co-factors are:

• Promotion rounds should provide an opportunity for the worker to signal talent and effort to an employer that is interested in identifying effort;
   
• Even if the outputs are not measurable or attributable to individuals or groups of staff, the employees’ tasks must offer some clarity about where and whether they are succeeding;⁴
   
• Promotions must be competitive if they are to reveal otherwise hidden performance traits⁵ avoiding over-enthusiastic identification of alleged “high flyers” as early promotions can distort the employer’s subsequent perceptions of fast-rising staff, tending to promote them more automatically;⁶ 
   
• Compensation must be structured so that there is a long term upward slope (including pensions and other non-material benefits) as this provides incentives to workers early in their careers to exert effort in order to be promoted or not to be sacked and hence lose the pay-off owing to them later in their tenure, with a corresponding credible threat of non-advancement or dismissal for poor performance.⁷

If the very reasonable conclusion in a given context is not to try PRP and instead attempt to instill, or rehabilitate, a more traditional set of long term career-based pay incentives, then it does require rather more than an appeal to history and visceral opposition to PRP.   These four cofactors might be reasonable places to start.

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1. Hasnain, Z. and N. Manning. 2014. Pay Flexibility and Government Performance. Washington DC: World Bank
2. Burgess, S. and P. Metcalfe (1999). Incentives in Organisations: A Selective Overview of the Literature with Application to the Public Sector. University of Bristol, CMPO and CEPR, Bristol.
3. Holmstrom, B. (1982), 'Managerial Incentive Problems: A Dynamic Perspective', Review of Economic Studies, 1 (169-182).
4. Dewatripont, M., I.Jewitt and J.Tirole (1999a), 'The Economics of Career Concerns, Part 1: Comparing Information Structures', Review of Economic Studies, 66, 183-198. Dewatripont, M., I.Jewitt and J.Tirole (1999b), 'The Economics of Career Concerns, Part 2: Application to Missions and Accountability of Government Agencies', Review of Economic Studies, 66, 199-217.
5. Burgess, S. and P. Metcalfe (1999). Incentives in Organisations: A Selective Overview of the Literature with Application to the Public Sector. University of Bristol, CMPO and CEPR, Bristol.
6. Ketelaar, A., N. Manning and E. Turkisch (2007). Performance Based Arrangements for Senior Civil Servants - OECD Experiences (OECD Governance Working Paper). Paris.
7. Lazear, E. (1989), 'Pay Equality and Industrial Politics', Journal of Political Economy, 97, 561-580. Lazear, E. P. (1981), 'Agency, Earnings Profiles, Productivity and Hours Restrictions', The American Economic Review, 71 (5), 606-620.