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Pay for Performance: Is it Good for Public Administration?

Being the inaugural column for PA TIMES online, I want to take the opportunity to briefly describe my rationale for undertaking this endeavor. My observations and perspectives stem from experience as a public administrator, with occasional forays into academia, and a belief that practitioners and scholars of public administration tend to talk past each other—if they talk at all. This is unfortunate since the field is beset with challenges and a dose of reality in terms of rigorous analysis can lead to optimal decision-making. Today’s column will look at one area of public sector human resource management — pay for performance — where academic research points to caution while policymakers ignore the advice. Perhaps we can spark a robust discussion between academics and practitioners and advance the art and science of public administration.


Pay for Performance: Has it Became the New Norm?

One enduring and controversial issue is the importation of a private sector compensation tool — pay for performance (PFP) — linking employee performance to some aspect of employee compensation to government personnel. The premise is based both on the theories of motivation as well as accepted conventional wisdom. Maslow’s theory of hierarchical needs states that incentives motivate employee needs, while the more complex expectancy theory of motivation argues that once employees learn that certain actions lead to certain rewards they will work towards those rewards. Conventional wisdom argues that “star” employee performers should be better rewarded than employees who are either marginal or mere satisfactory performers. Proponents also contend that managers need to be able to differentiate between such employees, and pay for performance is the preferred method to distinguish superior performers. Traditional public sector pay structures with step increases primarily based on seniority are, on the other hand, outdated, costly and a waste of scarce resources, especially during these challenging economic times, claim PFP supporters. So, has PFP lived up to expectations?


Implementing Pay for Performance at the Federal Level: Try and Try Again…and Again

Merit Pay Systems. The Civil Service Reform Act of 1978 (CSRA) is generally credited with reintroducing the concept of performance pay in public administration. The CSRA created the Merit Pay System (MPS) where a portion of the federal GS 13-15 employee’s salary would be tied to performance by placing them into a General Merit (GM) designation. (Discussion of PFP for the Senior Executive Service is omitted due to space limitations). Funding the GM performance awards came from taking one half of the comparability pay and placing into a pool for use by departments and agencies while employees in the rest of the GS received full comparability pay. This decision led to a zero sum game. Other issues plagued implementation:

  • Decision by the Comptroller General reduced the size of performance awards resulting in smaller payouts than received by GS employees
  • Manipulation by managers to focus benefits on the highest rated
  • Distrust by GM about the transparency of the awards.

A Government Accountability Office (GAO) study found that 75 percent of covered employees were no more motivated than their GS counterparts. In 1984 Congress abolished the MPS.

Performance Management and Recognition System. One might think that this experience chastened policymakers to take a go slow approach to implementing another pay for performance system. Not so. A new more centralized Performance Management and Recognition System (PMRS), was created with the following features:

  • Employees rated “Outstanding” – receive the GS comparability pay plus an additional 3 percent
  • Employees rated “Fully Successful” – receive the GS comparability pay plus an additional 1 percent
  • Employees rated “Below Fully Successful” – receive the GS comparability pay plus an additional 0.5 percent
  • Employees rated “Unsatisfactory” – receive the GS comparability pay

Federal employees were no more enamored with PMRS than the previous GM plan. Widespread dissatisfaction existed over the instrument used to assess performance achievements, the link between performance efforts and payouts and the fairness of the system. Congress terminated PMRS in 1993, and federal agencies were given the flexibility to create their own systems, subject to polices promulgated by the Office of Personnel Management (OPM).

National Security Personnel System. After 9/11, President George W. Bush sought to remove employees of the Department of Defense (DoD) from the CSRA into a newly created personnel system, the National Security Personnel System (NSPS) for DoD. The initiative was breathtaking in its scope:

  • Move over 700,000 employees into the NSPS
  • Replace GS 1-15 into three broad pay bands
  • Create Pay pools of 50 -300 employees
  • Establish a five level rating system, employees would receive performance shares which would determine the size of the awards from the pay pools.

Ignoring the lessons of previous efforts, the merit pay for NSPS was also a zero sum game. Funding was comprised of the aggregate of step increases and cost of living adjustments given under the previous GS plans, lumped into a common (and finite) fund.

A GAO study in 2008 found widespread employee dissatisfaction with the pay pool system and a belief that it had a negative impact on employee motivation and morale. As described by Barbara Haga (and others) in a 2010 Public Personnel Review article titled “System Failure: Dismantling Performance Pay in the Department of Defense’s National Security Personnel System,” DoD employees found NSPS as a “retrograde initiative” and filed multiple lawsuits to slow or halt its implementation. (NSPS also modified traditional employee due process and collective bargaining rights). Continuing employee opposition and adverse judicial rulings coupled with changes in political control of Congress and the White House led to the abandonment of the NSPS in 2009 and a transfer of some 200,000 employees back into the traditional GS pay grid.

Experience of the Government Accountability Office. The GAO has reviewed and critiqued a number of federal pay for performance implementations. Nevertheless, its own implementation of performance pay in 2003 was less than successful. It caused employees to seek union and Congressional help and led to charges of disparate treatment of African American staffers. Staff at GAO also objected to the use of one time bonuses and a lack of consistency among the raters. Congress dismantled the system in 2008. Barbara Haga in the article cited above concluded that, “The introduction of performance pay at the Government Accountability Office offers a telling example of how an externally imposed non-negotiated radical change in a personnel system may create dysfunctional reactions that disable the innovation.”


State and Local Governments: A Beacon of Hope?

At least 20 states and more than 50 percent of local governments are believed to have some form of performance pay. Have they managed to overcome the problems cited above? The literature does not give us any cause to boast. James Perry (and others) in a 2009 Public Administration Review article titled “Back to the Future-Performance-Related Pay, Empirical Research, and the Perils of Persistence,” conducted an analysis of 57 studies dealing with PFP which included local government implementations. They found that performance related pay systems do not deliver what they promised. In a similar vein, James Bowman in a 2010 Review of Public Personnel Administration article titled “The Success of Failure: The Paradox of Performance Based Pay,” looked at a number of jurisdictions, including state and local governments. His findings are no more sanguine, stating that the “performance of pay for performance programs …is…disappointing,” and often result in counterproductive consequences.


Commonly Identified Causes for PFP Implementation Failures

  • Lack of adequate funding
  • Failure to discriminate among levels of performance
  • Perceived inequities in performance awards
  • Conflict between raters and those being evaluated
  • Lack of employee confidence in performance evaluation techniques
  • Excessive time demands on managers performing appraisals
  • Employee distrust of manager’s motives
  • Lack of compliance by managers
  • Infrequent timing of award payments
  • Bureaucratic resistance to adopting private sector tool
  • Underlying foundation is not valid—public employees are not necessarily motivated by economic factors
  • Failure to engage in the heavy lifting of preparing the organization for changes in compensation.

This list is by no means exhaustive and does not discuss an underlying, but important concern — the problems with the fairness of the appraisal process and the instrument used. (It would take another column to discuss common appraisal errors.)


Potential Solutions and Concluding Comments

Despite the less than auspicious findings of the researchers, PFP is not about to fade away at the federal or local government level. Barbara Haga, in the article cited above, mentions that both DoD and the White House publicly support performance pay and have pledged to incorporate it in future civil service redesign efforts. Similarly, both James Perry and James Bowman conclude that despite documented shortcomings, PFP has become a permanent part of the political and public administration landscape. What can be done, therefore, to change the narrative from the “does not meet expectations” to “meets” or even “exceeds” performance criteria? In addition to avoiding the pitfalls listed above, the literature suggests some common themes:

  • Broaden incentives beyond financial rewards
  • Loosen bureaucratic controls as part of broader reform effort
  • Focus on teams and not just individuals
  • Clearly define performance expectations
  • Employees need to be part of planning and implementation process
  • Raters need to be thoroughly trained and be consistent
  • Implement only when contextual factors such as two way trust, a validated performance instrument and professional relationships exist at the workplace
  • Adequately fund the program — research suggests that those who are motivated by money will need 10-15 percent pay awards to change behavior.

Especially intriguing is the last bullet that PFP awards be in the 10-15 percent range. Is this doable in the current political and financial environment? The list also implies that PFP should only be implemented after a thorough analysis of workplace culture. Employee engagement and buy-in as well as an understood and accepted link between performance and rewards should be part of the planning process. Are these suggestions helpful or do they make the implementation even more time consuming and onerous? We want to hear from you. If there are jurisdictions with a successful PFP system please forward any information to the email address below. Perhaps it can be the topic of a future column.


Author: Joseph Adler is a member of ASPA and is a NAPA Fellow. He is the Director of the Office of Human Resources for Montgomery County, Maryland. He has held a number of senior public administration positions in state and local governments in Maryland. The views and comments expressed in this article are solely the author’s and do not represent any policy positions of Montgomery County, Maryland. He can be reached at: [email protected]


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