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The Paradox of Performance Pay

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Howard Risher 
October 10, 2019

This is to call attention to a paradox that impedes efforts to improve government performance. In the private sector the past three decades have seen a revolution in the work management paradigm, with the goal of raising performance levels. The day-to-day activities that are thought of as, “Work,” in businesses as well as hospitals are now organized and managed very differently. Technology of course has facilitated the revolution but research confirms that workers in a supportive environment perform at significantly higher levels.

What is still not fully appreciated in the public sector is that people like challenges. They like to test and demonstrate their value. They want to grow in their fields and continue to develop their capabilities. They also like to be associated with successful, “Winning teams.” People have aspirations at all ages. All of that comes together now in the recognition given to employers recognized as the, “Best places to work.”

A practice effectively universal in successful businesses is pay for performance to reward high performing employees. It is consistent with the desire to be recognized for success and with cultural values in a meritocracy. The belief in performance pay is so deeply entrenched in business that research on its effectiveness is today rare. There are to be sure critics but they largely focus on situations where practices generate, “Unwarranted,” income levels.

Interestingly, in professional sports and entertainment the use of financial incentives along with high levels of individual wealth are rarely questioned.

The paradox is that on the one hand researchers in government management have with few exceptions debunked the value of the practice while at the same time there has been growing support for related reward practices going back more than two decades.

One area where governments have widely adopted the practice is healthcare. The Centers for Medicare and Medicaid Services has various pay-for-performance (P4P) initiatives in offices, clinics and hospitals, seeking to improve quality and avoid unnecessary healthcare costs. It’s been reported that more than 40 pay-for-performance programs exist at the state level, including the California Pay for Performance Program, founded in 2001, that rewards physician groups for improved quality performance. In the United Kingdom, the National Health Service began a major pay for performance initiative in 2004, known as the Quality and Outcomes Framework.

Public organizations have initiated additional models linking financial rewards to performance (although the phrase, “Pay for performance,” is not used).

  • One model is the use of Tiered-Evidence Grants, where funding is based on, “The level of evidence of effectiveness for a grantee’s service model.” Here the level of funding is increased with more supporting evidence.
  • A second model is Performance-Contracting with, “Financial incentives or penalties for providers to meet pre-defined performance benchmark targets in social services.” The contracts typically focus on, “The outcomes to be achieved, leaving providers to decide how to meet them.”
  • A third model is a Pay-for-Success Program which ties, “Payments to a provider’s performance in delivering outcomes.” A similar model, “Social impact bonds,” links funding to meeting pre-determined performance goals. The model, “Has attracted bipartisan political attention and the support of various service providers.” (The three models are discussed in Chapter 4: Managing Performance in Government for the Future: Reflection and Vision for Tomorrow’s Leaders, by Mark A. Abramson, Daniel J. Chenok and John M. Kamensky, 2019).

The thread running through each of the models is the promise of financial rewards for the individuals or their organization (with their organization’s success an added reward) if they produce better results.

That is consistent with the textbook model for financial rewards in other sectors.

Reports suggest the effectiveness of the models has been mixed but two points are relevant: where full success has not been realized, the fault or weakness is often ascribed to poorly defined or inappropriate performance measures, and (2) regardless, there is an apparent consensus that linking financial rewards to performance is here to stay.

The key point is the assumption that anticipated rewards—here the rewards are linked to specific organizational results—will motivate improved team/group performance. The practice is based on Vroom’s expectancy theory of motivation. The models have a lot in common with the idea behind profit sharing and goal sharing (an idea exemplified by Denver’s, “Peak Performance” incentive scheme).

More importantly, it is consistent with the widely used practice of linking salary increases to the achievement of individual performance goals. That is the dominant model for managing salary increases for executives, managers and professionals in non-government organizations. Recently, the state of Tennessee has been in the spotlight for its successful transition to goal-based management linked to pay for performance. As reported in a November 2017 article, “Can Other States Tap Tennessee’s Secret Sauce for Government Efficiency?” published on Governing.com, “Seven years ago, Tennessee was seen as a laggard in the field of public administration. Today, it’s a leader.”

Linking individual goals to pay increases or cash awards creates a psychological commitment or contract that has a lot in common with the models using in contracting and with motivation theory.

The paradox originated years ago. The studies showing pay for performance is ineffective focused on what were then poorly conceived appraisal practices, based on non-specific performance factors, and inflated ratings. Poorly trained managers also contributed to the problem. Tennessee shows there is a better alternative that links everyone to agency goals.

Author: Howard Risher PhD writes from a 40-year career in consulting that includes clients from all sectors including the UN and the OECD. He focuses on creating a work experience where employees are engaged and committed to achieving their employer’s goals. He is the author of several books including Primer on Total Compensation in Government, published by the IPMA-HR.

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