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Time to rethink performance-related pay

Zahid Hasnain's picture

Public management is a curious mix of uncertainty and dogma. Uncertainty — about how to structure public sector organizations, about how to link the budget to performance, about how to motivate employees — is quite appropriate given the weak theoretical basis and the even weaker empirics, and thus the frequent changes of direction on these topics are hardly surprising. What is perhaps more surprising is the dogmatic belief in certain policy prescriptions at any given point in time. It seems that what we believe in changes rapidly; but our certainty about the fashion of the day runs deep.

Take the case of performance-related pay (PRP). The current dogma of public administration specialists, in academia and policy circles, is to reject PRP. This opposition however, bumps up against the awkward reality that a growing number of countries are introducing PRP and a growing body of rigorous research on PRP for teachers and medical staff is showing that, under specific conditions, outcomes can indeed be very positive.

Public administration experts draw their certainty from largely sociological studies that have focused on PRP in OECD countries and which show little association with improved public sector performance, and in fact often very negative results (see OECD 2005, Cardona 2007, Behn 2004). The literature highlights the many problems of implementing PRP and the perverse outcomes that it can generate — the difficulty in determining who should make the decision on PRP, the potential negative impact on motivation of those who don’t get the bonus and the jealousies it fosters, the difficulties in determining the optimal size of the performance bonus, and the more fundamental problems of how to measure performance in a complex bureaucracy. Given these problems, it is not surprising why many managers distribute performance bonuses equally among staff, thus defeating their purpose. The bottom line then is that civil services are ill equipped to make PRP work and that, instead of PRP, policy-makers should focus on introducing a performance-oriented culture in the civil service by better linking longer term staff careers to performance. However, it is unclear from the literature as to why the civil service would be better at designing performance-based promotion arrangements if it cannot get the design of performance-based pay right. In particular, given that the space for promotions is so limited, and that pay is compressed, how would a better performance appraisal system on its own motivate staff?

By contrast, policy-makers in many OECD and middle income countries are, today, equally robustly convinced of the merits of PRP. Maybe they are more concerned about the signaling device to the public that PRP provides ("we're really getting a grip on these lazy civil servants"), or maybe they know more about ground realities than the researchers and see that PRP has real but intangible benefits such as fostering more positive collaboration between staff and their supervisors (see Marsden 2009). 

More research is doubtless needed. One comprehensive retrospective by Perry et al (2008) of 57 studies over the past three decades concluded that we will not get a clear picture until we move beyond simple assessments of employee attitudes and perceptions. Lessons emerging from the education and health research, which is more grounded in economics and is more empirically rigorous, including a small but growing body of “gold standard” randomized controlled trials (RCTs) of performance-related pay for teachers and health workers, is also much more mixed in its conclusions. For example, Esther Duflo and collaborators found that linking teacher pay to attendance reduced teacher absenteeism by 21% in the control group. A study by Muralidharan and Sundararaman (2011) in Adhara Pradesh, India found that both individual and group bonuses for teachers had a positive impact on student achievement, as measured by standardized tests. Lavy (2009) found positive effects of both group and individual incentives for high school teachers on student achievement in Israel. By contrast, Glewwe, Ilias, and Kremer (2010), found that while students in treatment schools initially had higher test scores these gains disappeared after one year. Recent studies in the US have also failed to find an impact of PRP on student learning outcomes.

To sum up, this mixed evidence gives every reason for an open-minded, case by case, assessment of what is likely to work, backed up by a strong research agenda to figure out precisely what design features of PRP can work under what conditions, what are the mechanisms by which they work, and what features of the local institutional and political context are important. Rather than rejecting it off-hand, or welcoming it in every case, let’s start helping countries selectively design PRP schemes that could work and let’s do it in a way in which we can measure the results. 

Photo Credit: flickr user kolix
 

Comments

Submitted by Hugh Grant on

I welcome the emphasis in the title of the draft report on providing support for improving the results of public sector institutions.My comments below reflect my view that the next phase of public sector management development should focus on helping public sector institutions achieve significant and measurable improvement in services to countries’ citizens and organisations.

The comments are based on experience of working on projects funded by the World Bank and others on reform of public sector pay systems as an important element of public administration reform. The emphasis of such reforms has been on achieving greater transparency, equal pay for equal work, and efficient pay administration; and establishing a realistic, affordable relationship between the public sector wagebill and GDP, etc. So the focus has typically been on:

1. Technical redesign of the pay and grading system through job classification, design of pay ranges, increasing the pay differential between lowest grade jobs and managers, and improved pay management systems. (Not always welcomed by beneficiaries, e.g. because greater transparency can remove some benefits.)

2. Functional reviews to clarify roles and responsibilities, remove duplication of roles and work, eliminate some jobs, and improve efficiency. (Not always welcomed by beneficiaries, e.g. because it can reduce the size and perceived value of institutions.)

3. Pay freezes and staff reductions to reduce the public sector wage bill, often mandated by IMF or specified as a required prior action for World Bank loans. (Often not welcomed by beneficiaries!)

Although as noted these reforms are not always welcomed or “owned” by beneficiaries, nevertheless progress has been made in implementing new systems and improving pay management within the civil service and other public sector bodies.

By contrast, an important area where there has been limited success is performance management and performance appraisal. In the Balkans and in former communist countries, for example, performance appraisal has been used in the past as a means of identifying and punishing poor performance rather than improving performance. There is a general mistrust by staff of performance appraisal and little sense of ownership of the system by managers. Related to this little attention has been given to (1) developing the concept and practice of good management of people and delegation of responsibility, and (2) systematic training of staff to improve skills and performance based on an objective analysis of training needs (rather than sporadic donor led training as is often the case at present).

In addition, there is limited understanding of the broader concept of “performance management” (including performance appraisal) as a means of systematically developing the skills of managers and staff, improving performance and service to citizens, achieving greater productivity, and realising government policy objectives.

Linked to this, there is no clear view on whether performance related pay is appropriate. Like Zahid Hasnain, I am aware of SIGMA’s lack of support for the concept but I believe this may be based on the failure of such systems in high pay OECD countries, e.g. in the UK where senior staff bonuses have been said sometimes to demotivate staff who do not receive bonuses rather than motivate all staff to strive for better performance. (However the Hutton report of March 2011 on fair pay in the UK public sector has raised this topic again and indicated its potential relevance, and not only at senior levels.) In countries where low public sector pay is the norm, performance related pay may be more relevant and useful than in OECD countries – this is a concept that should be tested more thoroughly. (Some work was done in Bulgaria on this a few years ago but I do not know if that work was sustained and benefits achieved.)

In my experience, other significant gaps are:

1. Little has been done to convey the concept of service standards and continuous improvement in service quality. (I have seen recent examples of training on this in the Balkans but doubt if there has been much follow-up to realise potential benefits for citizens and organisations.)

2. There is a need for governments to develop better management information systems, e.g. identify and monitor performance indicators linked to improving service standards in key areas. (I have seen some limited examples in Armenia and Albania but have not found such systems in common use.)

3. It is not easy for countries to obtain comprehensive benchmarking data on practice and results in comparable countries. (I have seen much duplication of effort by consultants, donors and beneficiaries to try to obtain objective and comparable data on good practice and achieved results in other transition countries.)

The above leads me to the view that the next phase of support to public sector management should emphasise performance and results, with better management of people focused on specific and measurable improvement in services to citizens and organisations.

To this end, some specific areas where I think World Bank support to countries could be valuable are:

1. Development of the concept and practice of good management of people and resources.

2. Development and implementation of effective performance management (including performance appraisal), linking group and individual objectives to achievement of government objectives.

3. Development of performance indicators and service standards as a means of targeting and monitoring improved performance (and providing feedback to citizens on this).

4. Systematic training of staff in the public sector based on objective analysis of training needs.

5. Collection and dissemination of benchmarking data from comparable other countries, to help countries identify achievable improvement targets and service standards and measure progress towards achievement of those targets and standards.

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