Pay for Performance is the Only Choice

Government is approaching a Hobson’s choice. The General Schedule salary system is an anachronism.  The Pay Agent has now twice questioned the methodology used to adjust the ranges. It may be that no one today believes the annual pay gap estimate. The Office of Personnel Management gave up trying to confirm jobs are classified accurately decades ago. Non-competitive salaries are a barrier to hiring talent with essential skills. But the most glaring problem is the impact of automatic step increases. The GS system is an impediment to good government.

Recommendations to replace the GS system go back decades. Government has been transitioning to pay for performance since the passage of the 1978 Civil Service Reform Act. That is the basis for compensating members of the Senior Executive Service. The law also established Merit Pay for supervisors and managers in GS-13 through GS-15, which was replaced in 1984 by the Performance Management and Recognition System. (That program was terminated in 1993). The Civil Service Reform Act also authorized demonstration projects, starting with China Lake, that have consistently elected to rely on pay for performance policies.

The National Academy of Public Administration has issued three reports starting in 1991 recommending replacing the GS system with a pay for performance system (as well as a number of other reports where pay was not the primary focus). The Partnership for Public Service has also recommended the switch.  Both Republican and Democratic administrations have called for such reforms as well.

The bottom line is the GS system needs to be replaced within the foreseeable future. There is no reason to expect a new salary system will be based on a step increase policy. That makes it a Hobson’s choice—take it or leave it, there is no alternative.

The barrier is the experience with the failed National Security Personnel System, which was poorly planned. The pay pool idea was a fatal flaw, it was mandated with too little manager or employee input, and it failed to provide for adequate post hoc oversight mechanisms to address concerns. It should have been terminated sooner. The people involved in the planning had no relevant experience.  

At the same time, there are agencies that have relied on pay for performance policies for years.  One that is not often mentioned today is the Government Accountability Office. There are also states and local government jurisdictions that have relied on pay for performance for a quarter of a century or more.  Colorado and Washington are two of the states. Both state governors are now running for president.

Performance pay has its critics; with few exceptions they are academics. They somehow argue public employees are different and less concerned with the way their pay is managed. However, they and their faculty colleagues, except for those teaching in community colleges, are all paid for performance. The pay differentials reflect the way their performance is viewed by colleagues. The broad band salary program adopted years ago at China Lake was based on the common model for faculty pay programs.

World Bank Study

Research on pay for performance in the business world ended years ago and the practice has been universal for decades. Perhaps the most relevant and no doubt the best study of pay for performance in government was published in 2014 by the World Bank: “Pay Flexibility and Government Performance: A Multicountry Study.” (Pay “flexibility” includes both pay increases and bonus/incentive awards.) The report combines an assessment of 153 academic studies and case studies based on interviews in several possibly surprising countries, including Brazil, Chile, Philippines and Russia. The researchers found pay for performance policies had a positive effect in 93 of the studies. The effects were negative in only 24 studies.

The report’s main conclusions linked to pay policy are:   

• Pay flexibility can improve performance.
• Pay flexibility works most strikingly in changing managerial behavior.
• Improving public sector performance does not need to wait for systematic pay rationalization or pay simplification throughout government.
• Pay flexibility can work with rather than instead of long-term career incentives.
• The strategy and implementation of pay flexibility reforms must take into account the extent of fragmentation and complexity of the existing public sector pay structure in the country.
• Improvements in the quality of employees in a government ministry or agency through the recruitment and retention of more skilled personnel.
• Improvements in employees’ ‘effort.’ (Because measuring effort across diverse jobs is difficult, it was necessary to use proxies concerning the ‘engagement’ of staff or ‘organizational citizenship’—their willingness to provide extra effort to achieve goals.)

Pay for Performance is Not a Silver Bullet

The World bank report concluded with, “Pay flexibility can improve performance, an important finding given the general skepticism in the public administration literature. These reforms are not a silver bullet, and they involve tradeoffs and risks. Poorly designed pay flexibility plans can cause considerable harm by encouraging perverse behavior and unintended consequences, and some task reallocation and gaming behavior should be expected. With proper monitoring, these tradeoffs can be managed.”

That is consistent with my experience. Managers and employees will game the system and that needs to be monitored, but they also perform at higher levels. And yes, if the incentives are linked to the wrong results, it can trigger perverse behavior and unintended consequences, but that can be easily avoided with solid planning. (I have managed the pay programs in two large companies.)

The transition to pay for performance will not be easy. It rides on supervisors who are adequately trained and competent in managing employee performance. They should be rewarded for performance including their effectiveness as supervisors. Switching to pay for performance requires leadership: Everyone has to know the transition is a priority. It also requires a commitment to empower workers and involve them in operational decision making.  

It’s important for several reasons to base financial rewards on verifiable results. That does not mean only quantitative metrics can be used. Metrics rarely capture all that an employee does. In business, goal-based management is close to universal, making results verifiable and fully appropriate for managing rewards.  The state of Tennessee recently switched to pay for performance and all salary increases are based on performance relative to individual goals. Where those decisions are subjective, the awards are far less motivational for two reasons: year-end awards cannot be anticipated and claims of bias or discrimination are probably inevitable.  

Government has two additional problems. First, there is a seemingly high level of distrust and fear that a new system will not pay employees fairly. Second, the unions feed the distrust and oppose pay for performance. If employees do not believe the decisions are fair, a pay for performance system can exacerbate morale problems. Those problems can be avoided by involving employees in the planning. The National Geospatial-Intelligence Agency relied on that approach in planning its highly successful pay program. It’s a common approach in higher education.

Government’s Human Capital Crisis

The National Academy of Public Administration argued in a recent two-part report that government is approaching a crisis: “No Time to Wait: Building a Public Service for the 21st Century.” The Senior Executives Association followed that with, “Are Declines in U.S. Federal Workforce Capabilities Putting Our Government at Risk of Failing?” Human capital management has been on the Government Accountability Office’s high-risk list since 2001. Human capital issues are involved in virtually everything on GAO’s list.

Government is still able to function, that’s clear. However, reports that inadequate staffing is causing operational problems are becoming more frequent. The best analogy is the story of the frog being slowly boiled alive, because he’s too slow to perceive the danger as the temperature rises.  

The brand of government as an employer has been badly damaged and changes are needed to attract well qualified talent. To recruit and retain Millennials, government must improve the quality of supervision, embrace work schedule flexibility, create a positive work experience, and support employee development. And not surprisingly, Millennials expect their pay will be broadly competitive with rewards for high performance. In the current tight labor markets, they have a lot of alternatives where they can “make a difference,” one of the factors surveys show is important to them and where government arguably has an edge.  

But the human capital problems are broader than skills shortages. As stated in Part 2 of the NAPA report:

“Too often, we accept performance far below what the public deserves because finding, training, rewarding, and promoting the right people has simply become too cumbersome. The trust of citizens in government’s ability to deliver has plummeted, and government has fallen farther behind in the quest to lead with new technologies to solve new challenges.

The World Bank study, along with the pay programs in the “best places to work” companies, confirm financial rewards contribute to creating a high performance workplace. To borrow again from the NAPA report, “The core solution . . . is changing from a culture of compliance to a promise of performance.” Switching to pay for performance will be important to achieving that goal.