Sample
“Performance-related pay is an efficient and fair method of compensating public sector employees.” Do you agree or disagree with the preceding statement? Explain your reasoning.
In a sector of employment that is driven by markets, it is relatively easy to understand why pay may be used to motivate better performances. This is because the market is driven by supply and demand and, ‘other things equal,’ the more that is produced at the most efficient productive cost, the more that can be supplied and sold, assuming that unit production costs are kept at competitive levels (McConnell and Brue 2008). More is sold, greater profits are made, and employees may share a part of these profits, either as individuals in terms of sales made, or as teams. The inherent logic is simple and easy to grasp. However, for a number of reasons including asymmetric interests, some professions and some sectors which operate in the private sector, such as nursing or even healthcare generally, are usually not given, nor motivated by, performance-related pay. This is because the pursuit of goal-driven outcomes may have a negative effect, for example, on the quality of care provided, or on the primary focus of the job.
This leads to a consideration of the nature of public sector employments and why they are necessary in a well-functioning economy and society. One reason can come under a broad heading called market failure. This is where governments must supply public goods through taxation because it is unlikely that any individual would be willing to pay for things that everyone will enjoy, for example, street lighting and public parks. Another area is where there may be natural monopolies, for example utilities, and the government must protect consumers either by regulation or by providing the service themselves.
Apart from market failures, governments of nation states have responsibilities to provide security and protection for their citizens in the form of law enforcement agencies, a judiciary, and armed forces. Furthermore, many governments also have programs promoting greater social equality and income harmonization, thus a wide variety of healthcare and social services are commonly supplied, particularly in advanced nations such as the United States. Alongside these efforts, there exists in most countries a national system of education, which means that teachers as well as other education professionals become public sector employees.
For these and more detailed reasons that will be further discussed, this essay will argue that most, if not all, public sector employments, are not only ill-suited to performance-related pay, but that the effects of introducing such systems would be counter-productive, or even dangerous in some areas.
de Bruijn (2002, p. 3) makes a number of points relevant to the discussion above. For example, he notes that it has become common for the management techniques from the private sector to have “penetrated” public organizations of late. The logic for such actions includes the fact that there are increasing concerns about tax payers obtaining value for their payments and that, fundamentally, goods and services are being produced, so therefore their performance can be appraised. If it can be appraised and therefore evaluated, so it can be rewarded by enhanced salaries attached to these measured performances.
However, asks de Bruijn (2002, pp 3-4), if we attempt to measure the performance of, say, a judge, how do we set the appropriate yardsticks for evaluation? Is it the number of judgments passed, or even the severity or lightness of the sentences? How can we evaluate the performance of police officers? By the number of crimes that are cleared up? But how can we place relative value on the crimes? How many motoring offence tickets are equal to one murder?
If we can measure the performance of teachers, we can give performance-related payments, but how are such performances measured? By the number of students who graduate each year? But what about all of the socio-economic and other confounding factors which having nothing whatever to do with the actual performance of the individual? Perhaps we could monitor their performance in the classroom, but that would be based on normative and subjective judgments, therefore that would also be confounded.
Of course, while some areas of public service such as the police force, teaching, health and the judiciary may have potentially wide conflicts of interest if performance-related pay is introduced, there may be some areas of the public sector where such schemes work extremely well. Binderkrantz and Christensen (2011, p. 31) discuss this possibility and posit that public management reform, influenced by principle-agent theory, has led to civil service reforms which “strongly favor” performance-related pay. Therefore, these authors find the grounds and relevant justification to test whether such proposals have any empirical basis, namely to ascertain whether performance does actually improve when performance-related pay is in force.
Therefore, they took the opportunity to utilize the facts that the Danish Civil Service introduced performance-related pay, and that performance as well as pay data was available.
Indeed, the point is made that the issues surrounding public sector employment and performance-related payments has “attracted strong interest among scholars and practitioners” (Binderkrantz and Christensen 2011, p. 32), and it is noted that areas of research have considered, for example, front-line personnel as well as management. While representativeness with respect to this being a single country study is worthy of a mention, there are no fundamental reasons to believe that civil servants would behave in opposites ways in Denmark to civil servants in other advanced nations.
The study by Binderkrantz and Christensen (2011, p. 32) thus focused on agency heads who were paid performance-related payments upon completion of specified goals and targets. In sum, following a comprehensive statistical method utilizing comprehensive available data, “Our results indicate no such relationship, neither for
bonuses paid to executives nor their full salary,” (Binderkrantz and Christensen 2011, p. 50). Indeed the lack of a positive relationship is further compounded when it is noted that “executives who entered the pay-for-performance scheme early are better paid than their more hesitant colleagues,” (Binderkrantz and Christensen 2011, p. 50), which suggests that performance-related payments, within this research scenario at least, were a waste of money. Some further vindication of this empirically-based view comes from Marsden and Richardson (1992, p 1), who note that whereas performance-related pay was introduced into the British Inland Revenue (Taxes) department in 1988, and that most employees supported it, the authors found that “any positive motivational effects of Performance Pay have been, at most, very modest among Revenue staff.” Marsden and Richardson (1992, p 1) go further by suggesting not only that there is “clear evidence of de-motivation among staff,” but that the net effects may even have been negative.
Having noted some of the pitfalls, even dangers, associated with performance-related pay for public sector employees, it is perhaps relevant to briefly consider some rationalization and evaluation of performance measurement in public sectors. Burgess and Metcalf (1999, pp 2-3) conducted a study across the public and private sectors of Great Britain and found that performance-related payments were far less common in the public than in the private sectors. Within this, however, they noted the intuitively logical notion that generally across both sectors, performance-related pay was utilized when the measurement of output was easy and ‘merit’ pay when performance was difficult (although merit payments, which means payments based on subjective appraisal, were also under-represented in the public sector).
This essay clearly stated (see introduction) that it would disagree with a suggestion that performance-related pay was an efficient and fair method of compensating employees in most, if not all, occupations. It considered the potential conflicts of interests that may arise between personal financial incentives and the duty of serving the best interests of the public in a wide range of professions, which included law enforcement agencies, the judiciary, health and social services and teaching. The points were made that not only may such incentive schemes have a negative impact on the provision of services but could, in terms of the security and well-being of citizens, even hold some dangers. Even wider occupations, which may have had more symmetry with the notion of performance-related pay, were shown from a number of empirical studies to have created no notable benefits and one paper (see Marsden and Richardson 1992) went so far as to suggest a negative impact on performance in revenue collecting agencies. The only possible benefits, it was suggested, may come from merit payments, but even here the ‘efficiency’ aspects would require a wider analysis due to the subjective nature of appraisal schemes.
References
Binderkrantz A. S. & Christensen J. G. (2011), Agency Performance and Executive Pay in Government: An Empirical Test, Journal of Public Administration Research and Theory, Inc.
Burgess S. & Metcalf P. (1999), The Use of Incentive Schemes in the Public and Private Sectors: Evidence from British Establishments, CMPO Working Paper Series No. 00/15
de Bruijn H. (2002), Managing Performance in the Public Sector, Routledge, London & New York
Marsden D. & Richardson R. (1992), Motivation and Performance Related Pay in the Public Sector: A Case Study of the Inland Revenue, Centre for Economic Performance, London School of Economics, Discussion Paper No.75
McConnell C. R. & Brue S. L. (2008) Economics: Principles, Problems and Policies, McGraw Hill
CMPO Working Paper Series No. 00/15