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The Chartered Institute of Personnel and Development (CIPD) has recommended wider use of performance-related pay in the public sector while Personnel Today’s “Austerity Panel” has rejected this as a technique for improving productivity.

Yet when the government has used performance-related pay and bonuses as an incentive for public sector workers, it has faced criticism. Writers at the Tax Payers Alliance appear to consider public sector workers unworthy of reward for performance!

Personnel Today quoted Graham White, HR Director of Westminster Council and Roger Seifert, Professor of Industrial Relations and HR management at Wolverhampton Business School as contradicting the CIPD’s suggestions – highlighting the difficulties and distorting impact of performance pay.

So what evidence is there on successful use of performance pay in the public sector?

Research from the Centre for Economic Performance on performance pay in the UK Civil Service in 1992 found general support in principle for pay being linked to performance. In practice however, there was widescale disaffection, in staff and managers alike, with the actual impact on performance appraisal systems. There were also serious concerns expressed about the controls applied to performance assessments as a result of linking them to reward. Most respondents considered there had been negative impacts on morale with little real impact on effort, effectiveness or performance.

In a 2007 study, the Office of Manpower Economics found there was evidence that public sector workers did respond to financial incentives though both the responses and incentives were small. It also found evidence of gaming the systems and raised doubts about the benefits for societal outcomes.

The Economic Policy Institute suggests the use of performance related reward is relatively uncommon in the private sector. In 2009, a study of practice on performance pay in the United States found -

1. Pay tied directly to explicit measures of employee or group output was surprisingly rare in the private sector – in 2005 only 6% of private sector workers were awarded regular output-based payments. The incidence was even lower among professionals.
2. “Non production” bonuses, which are less explicitly tied to worker productivity, were common and use was growing though they represented only a small share of earnings – from 2% to 3% of overall pay. The most common of these were “End of Year” and “Holiday” bonuses followed by “Referral” bonuses.
3. The incidence and growth of bonus pay was disproportionately concentrated in the finance, insurance, and real estate industries with male and non-unionized workers being much more likely to receive performance-based pay.

This study highlighted a general drift to performance pay linked to less secure career prospects as well as highlighting the complexity of applying performance pay in environments where multi-dimensional measures of success apply – equally when pure numeric goals and more judgemental approaches are used.

In the book detailing the study of practice, “Teachers, Performance Pay and Accountability“, Adams, Heywood and Rothstein make an important observation about policy-setting -

“most policy makers who now promote performance incentives and accountability …. seem mostly oblivious to the extensive literature in economics and management theory documenting the inevitable corruption of quantitative indicators and the perverse consequences of performance incentives that rely on such indicators …. ignorant of this literature, many proponents of performance incentives [cannot] engage in careful deliberation about whether, in particular cases, the benefits are worth the price”

The CIPD has long advocated the use of performance-related reward in the private sector to motivate employees to improve performance and it should be no surprise they consider this should translate well to the public sector.

Even as advocate of performance-related pay, the CIPD accepts it is more important to establish effective arrangements for defining, measuring, appraising and managing performance. Only with all these things in place can performance pay work effectively. Quite often it is failings in the design or implementation of these arrangements that undermines performance pay …. even where people consider it looks right in principle.

If all these things are in place and working well an organisation should consider carefully whether performance related pay would fit their organisational environment and culture. Where a link between assessed performance and reward could act as a significant motivator for employees, a sensible implementation plan can then be developed and put into action.