Performance-Related Pay

“Creating well-motivated employees who work vigorously on behalf of the public is a priority for all governments. In their quest for a diligent workforce, it is said that governments draw on a pro-social, other-directed set of attitudes conventionally labeled “public service motivation” (PSM). The concept of PSM is used broadly to describe attitudes that embody a positive evaluation of human beings and a concern for the well being of others (Rainey and Steinbauer 1999; Perry and Hondeghem 2008; Rainey 1982).

Doubts about the effectiveness of performance-related pay in the public sector

Atkinson et al. write:

“Once the exclusive preserve of the private sector, PFP has come to the Canadian public sector in a variety of forms, all premised on the idea that senior executives are a heterogeneous group whose performance should be reflected in compensation. Interest in PFP stems from a belief that, whatever other motivations they may have, most people are influenced by financial rewards and will exert more effort if there are rewards associated with enhanced performance. Underlying this belief is a view of organizations (and, specifically, governmental organizations) as a network or chain of low-trust principal-agent relationships in which agents possess objectives different from principals. The theory is that where principals cannot observe or evaluate agents’ behaviour because of information asymmetries (Langbein 2010), the linking of pay to performance (or pay to output) can result in better outcomes for the principal (Dixit 2002).

“Is the public sector an appropriate context for PFP schemes? There are several reasons to be doubtful. First, Dixit (2002) and others (Moe 1984; Miller 2005) argue that, compared to the private sector, employees in government agencies and bureaucracies face multiple principals – including citizens, immediate superiors, politicians and central agencies – all with legitimate expectations. Multiple principals means agents are evaluated from many vantage points. Not all principals are created equal, of course, and PFP arrangements remind agents about where their “real” interests lay. They cannot, however, extinguish multiple loyalties, particularly among those who exhibit PSM.

“Second, agents often perform multiple tasks, some easier to monitor than others. This reality creates risk for principals because agents have an incentive to tend to those tasks that may be visible but relatively unimportant to the principal. Agents are at risk as well. When performance turns not just on efficiency, but also on quality and equity criteria, agents end up pursuing several goals simultaneously without a single “bottom line” (Ferlie et al. 1996). This problem is frequently compounded by projects undertaken by multiple agents working in teams (Burgess and Ratto 2003:287-90). The result is a high-risk evaluation environment where it can be difficult to persuade agents that principals are capable of applying PFP appropriately or fairly (Bregn 2008).

“… Even more compelling is the argument that introducing extrinsic rewards based on contractual obligations is ineffectual and counterproductive. When a portion of a public servant’s effort is voluntary, high-powered incentives, such as PFP, can crowd out PSM (Frey and Jergen 2001) and forfeit the good will that sustains extraordinary effort (Francois 2000). A performance contract may encourage executives to recalibrate their efforts since their value is now defined in purely market terms (Kreps 1997; Burgess and Ratto 2003). In the same vein, PFP can also create adverse selection problems. Performance pay selects for those who like to be paid for short-term, measurable outputs since, as Langbein puts it, “pay for performance is really paying for what is measured as performance” (2010:12). It is not surprising that surveys of research on the effectiveness of PFP schemes typically find they can have deleterious effects on individual and group performance (Francois 2000; Weibel, Rost and Osterloh 2010).”

Topic, subject and Atlas course

Francois, Patrick. 2000. ” ‘Public service motivation’ as an argument for government provision.” Journal of Public Economics 78: 275-299.

Frey, Bruno S., and Reto Jergen. 2001. “Motivation crowding theories.” Journal of Economic Surveys 15 (5): 589-611.

Kreps, David M. 1997. “Intrinsic motivations and extrinsic incentives.” The American Economic Review 87 (2) May: 359-64.

Miller, Gary J. 2005. “The political evolution of principal-agent models.” Annual Review of Political Science 8 (1) March: 203-25.

Moe, Terry M. 2005. “Power and Political Institutions.” Perspectives on Politics 3 (2) June: 215-233.

Perry, James L., and Annie Hondeghem. 2008. “Editors Introduction.” In Motivation in Public Management: The Call of Public Service, edited by James L. Perry, and Annie Hogdenhem. Oxford: Oxford University Press.

Weibel, Antoinette, Katja Rost, and Margit Osterloh. 2010. “Pay for performance in the public sector: Benefits and (hidden) costs.” Journal of Public Administration Research and Theory 20 (2) April: 387-412.