A CPM Research Paper on "Does Pay for Performance Work in the Public Sector?" by Roy Cantu, Nyla Flatau, Michele Leftwich

1. University of Texas Pan Am
Certified Public Manager Program
Applied Projects Practicum
Does Pay for Performance
Work in the Public Sector?
November 20, 2009
Group 2
Roy Cantu
Nyla Flatau
Michelle Leftwich

2. Does Pay for Performance Work in the Public Sector?
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Types of Programs Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Factors to Consider in Pay-for-Performance Implementation . . . . . . . . . . . . 6
Public and Private Sector Contrasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Benefits and Challenges in the Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Case Studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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3. Introduction
The purpose of this paper is to evaluate the use and effectiveness of pay-for-
performance programs in the public sector, more particularly city and county
government. The myriad types of incentive programs loosely grouped as pay-for-
performance programs in both the private and public sector will be identified and the
difference between those sectors will be examined and contrasted where they exist. The
issues and assumptions to be considered behind the implementation of a pay-for-
performance program in the public sector will be examined and the benefits and
challenges of such a program will be outlined. The desired outcomes will be compared
with the actual outcomes based on the empirical and educational evidence currently
available. Finally, conclusions will be drawn on the success that can be expected if
implementing a pay-for-performance program in a local government agency.
Types of Programs Used
It is like the wild frontier to find out which pay-for-performance or incentive
programs work well to increase worker productivity, employee morale and efficiency and
effectiveness when you have so many choices offered in the private and public sectors.
Some private companies offer wild, fun vacation destinations for quantitative
performance. Others, like United Airlines, target their employees with a program termed
“Reach for the Skies”, an incentive program for individual employee recognition that
rewards employees with savings certificates and travel certificates. The program is
designed to motivate employees and increase performance. (www.united.com/page/articl/
0,6867,50033,00.html, United Airlines, retrieved October 16, 2009). These have
generally proven successful in individual performances, while other programs have had
3

4. an opposite effect. According to a blogger who focuses on everything Microsoft, the
software giant launched a new program called the “Ship It” award that was supposed to
reward employees through recognition. “The idea was that you would get a big lucite
tombstone the size of a dictionary when your product shipped. This was somehow
supposed to give you an incentive to work because if you didn't do your job--no reward
for you,” said Joel Spolsky, blogger of Joel on Software
(www.joelonsoftware.com/articles/fog0000000070.html, Joel on Software, April 2000,
retrieved October 16, 2009). Employees believed there was no value, whether prestige or
monetary, in a lucite reward to encourage employees to excel. However, the manner in
which the program was presented backfired. The well educated software group felt
management had addressed them like children instead of intellectual, hard working
employees. Often, as in this case, the presentation of the program can be critical for a
program to work. These employees retaliated by blogging their discontent
(www.joelonsoftware.com/articles/fog0000000070.html, Joel on Software, April 2000,
retrieved October 16, 2009).
One of the most common pay-for-performance programs used in the private
sector is profit-sharing where specific percentages of profits realized above and beyond
target measures are used to reward employees for a job well done. Another program is
gain-sharing which is very similar to profit-sharing. However, gain-sharing is used to
reach specific goals that make employees feel better about their work because they
contribute to the team. Small group incentives are programs used on a temporary basis
for only a select few or teams. These small groups usually get their reward at the end of
4

5. the project or goal. All of these plans are intended to increase worker productivity.
(www.cpt.fsu.edu/pdf/pfp.pdf, retrieved October 16, 2009).
In the public sector there are many different incentive plans or pay for
performance plans to encourage workers to do a better job as well. These can also target
individual or group performance. One type of incentive is a merit-based pay plan which
increases an employee’s base pay upon positive performance appraisals based on the
worker productivity improving by setting standards of performance that must be met in
order to receive the incentive. There are also skill-based plans where employees are
rewarded for their years of service or expertise on the job as a specialist in a certain area.
Certification pay may be received by an individual who has achieved an accredited
certificate for a special skill related to their field of work. Yet another plan is
competency-based plan that focuses on general skills instead of specialized skills. A
lump-sum bonus plan is offered only one time out of the year, not always based on
performance, and does not increase an employee’s base salary going forward. There are
also long-term incentive plans that are generally reserved for executives or administrators
who are evaluated for their long term goals toward an organization’s master or strategic
plan.
The factors that typically contribute to the success or failure of a pay-for-
performance program are generally found in both public and private sector programs and
are the subject of the next section.
5

6. Factors to Consider in Pay-for-Performance Implementation
Based on the research, there are many factors that contribute to the success or
failure of pay for performance in an organization. First, there must be a meaningful
performance evaluation process that is credible and proven to be fair and consistent
throughout the organization at every level. If even one person who is a known slacker
receives a good evaluation for poor performance, the entire program is put in jeopardy.
Second, the employees must understand how their individual contribution fits into
the organizations overall mission regardless of whether the program is operated as an
individual or group incentive type program.
Other factors that will be played out in the employees’ internal evaluation of
program buy-in include whether or not their goals actually are effective, not just if they
produce results. In other words, the accountability of an employee has to shift from
outputs or results, to outcomes or the overall effectiveness of their work. Valid
performance measures must be implemented and understood by employees. These
measures must also be specific, measurable, achievable, and have a definite timeline.
Pay-for-performance programs generally assume that employees work primarily
for money. Given that pay performance rewards the employee with monetary
compensation, if people are not interested in a higher income but are motivated by other
components such as satisfaction from job completion or challenging work, then pay for
performance will have a very small or even negative effect on performance.
(www.hks.harvard.edu/visions/deans_research_seminar/for_the_people_chpt_13.pdf,
6

7. retrieved November 1, 2009) Pay for performance also works best if the employees only
care about absolute pay. If employees evaluate pay based on other comparable
employees’ salary or organization’s profits, then pay for performance will not work well.
The pay system in this case is based on the process and outcomes that are achieved, and
sometimes some employees may perceive that as unfair.
A pay-for-performance program is best implemented on an individual basis and
therefore doesn’t always fit well with today’s team oriented workplace
(www.oecd.org/dataoece/41/20/43412680.pdf, retrieved October 29, 2009). In order to
be successful, the assumptions including how people are motivated, what makes them
work harder, how they wish to be treated or viewed must be identified and scrutinized. If
a workforce’s main motivator isn’t money, pay for performance programs may not be as
effective or even de-motivating to those employees who see intrinsic value in their work.
Team production is not a problem if the employee only cares about the sum of the
individual employees’ efforts and if each can be evaluated separately and has no
relationship with the efforts of others. This isn’t usually the case with the efforts of
others. Pay for performance also works best if it is proven that the output is due to effort
and can be distinguished from output not attributed to luck.
Most employees have multiple tasks, and research has shown that if incentives for
output are used for one task, then others will be neglected. Although some tasks do seem
to be more measurable than others, using the pay-for-performance may cause employees
to reallocate effort in undesirable ways. An example of this is quantity-quality measures.
A worker may pick more lettuce if they are being paid by how many lettuce heads they
receive, and not necessarily ensure that the lettuce is high quality. The worker may
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8. ensure that it is of a high quality only if the pay system incorporates that the product must
be both high quality and high quantity
(www.hks.harvard.edu/visions/deans_research_seminar/for_the_people_chpt_13.pdf,
retrieved November 1, 2009).
A key organizational factor that affects the conditions under which pay for
performance is successful is the degree to which the employees know what to do and who
they are serving. In order for pay for performance to be successful, the employees must
be familiar with the organization’s objectives and goals.
Successful programs offer occasion for real feedback from management to
individuals outlining their progress and identifying improvement opportunities
throughout the year. Employees are held accountable and this is plain for everyone in the
organization to see. This can be accomplished through objective, fact-based performance
evaluation and providing opportunities for constructive feedback to employees regarding
their contribution to the organization and ways to maximize it. It must be seen also that
poor performers are being dealt with and not just pushed through out of avoidance of
managerial responsibility.
The program itself should be measured to see if it is accomplishing what it was
established to do. This requires empirical “before” data to which the results can be
compared to determine if the outcomes are what was intended. The program also
requires continuous training for new and existing managers so they can objectively and
fairly deal with high performers as well as poor performers. Often, a program is put in
place without measuring the existing outcomes and many organizations get busy doing
other things and let the program run on auto-pilot without appropriate additional training
8

9. and employee counseling thereby contributing to its later downfall or lack of financial
support by the top managers.
So, to summarize the factors important in pay-for-performance programs, one of
the most common factors in its failure is the lack of measurable goals or a lack of a clear
connection between the goals and the rewards. Others include performance appraisals
that lead to credibility programs when a known low performer receives passing marks;
lack of adequate rewards or recognition for top performers, faulty assumptions made
about employees due to supervisors’ lack of understanding of the employees function.
Finally, when money is used to reward people discriminately, it often leads to scrutiny by
employees, auditors and even media which can result in revocation of the program
entirely because it is easier than explaining the intention of the program which may be
achieving only moderate success.
There needs to be a clear connection and linkage between organizational goals
and individual performance expectations within an overall performance management
system; top-level management support and employee involvement; a fair and transparent
performance appraisal system applied consistently across the organization; flexibility in
pay classifications; meaningful rewards for good performers; development and training
for poor performers; holding managers accountable for performance-based management.
Public and Private Sector Contrasts
9

10. There appear to be some significant differences between the private and public
sectors which favor the private sector in terms of the success of pay-for-performance
programs.
It has been noted that money must be a primary motivator for the reward to
motivate the subject and that it can even be viewed as de-motivating if the subject is
motivated intrinsically. Generally speaking, public servants are much less likely to value
money than the private sector, but feel that they are part of a larger mission or purpose
from which they derive much of their job satisfaction.
Competitive wages are viewed as critical in the private sector in order to compete
for the best available talent in the market pool. Public sector employees often settle for a
lesser wage than they would make in the marketplace because of stability, benefits and
their intrinsic motivation to serve the public.
Another difference is that output, and outcomes, as measured in the public sector
are more likely to be vaguely defined than in the private sector. This was evident in an
earlier tract on performance management in which participants attempted to quantify and
measure social outcomes of public recreational programs. It is difficult to find hard,
quantifiable data. Even when measurable differences are found they are not always
attributable to the program itself, but influenced by the demographics of the location
where the program is offered, or other factors that cannot be influenced by employees.
Private sector programs can often be quantified in dollars and cents or number of sales,
almost completely within the employees’ sphere of motivation and influence.
Public sector outcomes are more frequently measured in group activities, such as
the outcomes of the Planning Department or the Recreation Department, not Susie
10

11. Planner’s contribution. Therefore, the performance of some employees can be attributed
to luck or tailing on the success of other more productive members of the team. If the
outputs are not clearly attributed to the individual employees’ effort, it is less likely to be
motivating. Private sector individual roles, even in a team setting are often clearly
specified.
A full transition to pay-for-performance programs can take five to seven year to
fully implement and therefore can be difficult to implement in the public sector because it
outlives political terms and often managerial terms when an average City Manager’s
career longevity can be dependent on the political body that hires and fires them. This is
in contrast to managerial decisions made in the private sector not requiring buy-in by the
general public or even other management.
The following abbreviated table outlines the differences between private and
public sector philosophies and practices.
Private Sector Public Sector
Competitiveness is critical Affordability is critical
No external approval required Adjustments subject to vote
Public perception isn’t important Public perception is critical
Market – primary evaluation role Market – limited evaluation role
PFP common element PFP is emerging element in pay
11

12. (www.oregonmetro.gove/files/about/pfpissues0504.pdf, retrieved October 16, 2009, table abbreviated)
Benefits and Challenges
There are many benefits of pay-for-performance when it is appropriately
administered. They include improving the setting of organizational and individual
objectives; improving the monitoring of employee performance; greater emphasis on
planning; improving management evaluation skills and involvement with employees;
improving transparency within the organization (not necessarily outside); and improving
efficiency and effectiveness.
Pay-for-performance provides a mechanism to clarify objectives. It has proved to
be a useful tool for setting priorities and goals and can clarify what results are expected
from the public sector. Pay-for-performance will allow for a public sector to engage in a
strategic plan which includes performance goals and initiatives. These initiatives can
provide more information about the government and the goals and the actual progress and
results in achieving them if it is successfully implemented thereby giving more
transparency to the public it serves.
Pay-for-performance is also a great tool for planning. It helps in the management
of the budget and allows for the organization to move towards outcome focus in policy
design and delivery. This allows for a greater emphasis on long term planning and
normally requires a three to five year strategic plan. This makes it easier to plan the
spending of funds available to achieve the goals.
It can improve management and transparency of the public sector. Pay-for-
performance allows for the managers to plan ahead and be familiar with their
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13. department’s goals and objectives. It keeps them in line with the budget due to the
strategic plan that is tied to the pay-for-performance. It also improves accountability to
the public, and allows them to be familiar with the organization’s goals, objectives and
budget.
Pay-for-performance also affects productivity and efficiency. Effective incentives
provide an opportunity to improve productivity of public sector workers. If
compensation is linked to performance, then the employees will show more effort, which
in turn will lift the quantity and quality of their output. This being said, by promoting
better performance internally, the public sector can use incentives as means of delivering
excellent services to the public. Pay-for-performance can also motivate employees to
pursue professional development opportunities that previously didn’t offer any additional
benefits for the individual. With this, productivity is likely to improve because
employees will work harder and as the staff’s professional development generates further
gains productivity. In the public sector, monetary incentives also project a clear message
about which outcomes are valued. This allows for employees to prioritize tasks correctly
and allocate more time and effort to the tasks which are more valued. With is
prioritizing, efficiency is also being improved. It can lift employee morale, decrease
absenteeism and weed out poor performers.
However, there are also many serious challenges in pay-for-performance in the
public sector which include a lack of specifically measurable outputs, finding the
appropriate way to integrate rewards into the budget which is voted on by a body whose
goals may be on more immediate short-term gains; and the lack of the quality of
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14. information managers use when evaluating employees.
(www.oecd.org/dataoecd/41/20/43412680.pdf, retrieved October 16, 2009)
A significant challenge with pay-for-performance is defining measurable
outcomes. Even with the outputs it can be very difficult to find accurate measures for
some government activities. A public entity carries out a variety of functions such as
brush collection, street maintenance, drainage, finance, fire and police safety, long-term
planning and many others. Pay-for-performance can be easier to apply and measure with
some functions than others. Many problems arise with regard to intangible activities such
as policy advice. It can also be very difficult to measure outcomes that are complex and
involve interaction of many departments and accounting for factors that are unintended
consequences. For instance, police departments are particularly difficult to identify
appropriate performance incentive measures. One study showed that the Los Angeles
Police Department implemented performance measures for crime reduction that actually
undermined officer’s enthusiasm to make arrests which actually led to crime increases
directly attributable to no one officer, but the force as a whole.
(www.ome.uk.com/research.cfm, retrieved October 29, 2009). This is attributed to the
fact that one specific policy of performance cannot be implemented once and for all. A
new crime spree type may result in a shift in public policy and therefore required a mid-
term re-evaluation of performance indicators.
Another challenge is resistance from public servants. Workers resist most forms
of change. Managers as well as employees may resist change to long term budgeting
impacts on the whole government structure. Managers may fear that the information
will be misused to either publicly criticize their programs or cut funding. They may also
14

15. fear being held accountable for results that they have no control over. They may also
resist the change to pay for performance because of the increased demand of interaction
with employees, increasing difficult evaluations, additional reports and planning.
Politicians may also resist the change to pay-for-performance. Pay-for-
performance affects the budget due to planning and outputs. Politicians face many
competing priorities when making decisions on the budget. Some may be concerned with
elections and will prefer to demonstrate to the citizens that they understand and are going
to respond to their needs. Politicians may argue that they work on a short term plan and
require quick results for the citizens needs; therefore, they will not be in support of the
pay for performance which takes multiple years to successfully implement. Constituents
are generally not supportive of competitive wages paid for employees who are being
supported by their tax dollars.
Another problem with pay-for-performance in the public sector is that a high
percentage of public employees are unionized and are familiar with a system that reduces
inequality between the lowest and the highest employees. Union proponents prefer pay
increases across the board, and in special cases an increase due to additional
responsibilities or seniority. Performance pay takes away the pay for an employee that
has more skills or experience than another similarly title employee. In addition, unions
typically oppose “merit pay” unless there are clear criteria for merit and all employees
potentially can earn such pay. Pay-for-performance can easily by characterized as
favoritism by the unions, and oppose what they see as subjective evaluations that serve to
divide employees who must work together
15

16. (www.hks.harvard.edu/visions/deans_research_seminar/for_the_people_chpt_13.pdf,
retrieved November 1, 2009).
Case Studies
A scan of the available data turned up very little long-term empirical data in the
public sector, but for the sake of illustration for various desired outcomes three case
studies are discussed here.
City of Shreveport, Louisiana
Shreveport implemented a pay for performance system in January 1997. The
program was developed though a participative process involving employees, managers,
city council representatives and personnel professionals facilitated by a consultant. The
program emphasizes the relationship between performance and rewards while striking a
balance between permanent and at risk pay components. The system has been well
received by managers, supervisors, workers and elected officials. The city found that a
participative, team based approach proved to be ideal for the design and implementation.
The result of this program is that pay is not more directly linked to both budget
imperatives and personal contribution. Awareness of organizational mission “seems to
be at an all time high”, and attendance, and employee morale seem to support this
(www.oregonmetro.gove/files/about/pfpissues0504.pdf, retrieved October 16, 2009).
City of Coral Springs, Florida
16

17. The city developed pay for performance that would tie into the city’s strategic
plan. The city defined their mission statement and goals, and showed each employee
how the goals and objectives tied to the city strategic plan and their performance goals.
Supervisors evaluate at the end of the year, and these evaluations determine the pay
increase. The process is used for managers at all levels. It has also worked out because
the performance data is used for budgeting by the City Manager who analyzes the data
from each department (www.oregonmetro.gove/files/about/pfpissues0504.pdf, retrieved
October 16, 2009) .
Hamilton County, Ohio, Department of Job and Family Services
The pay-for-performance program was implemented primarily to improve work
performance. The system was implemented without first measuring current performance,
therefore comparisons were made to six other metropolitan county children’s service
agencies. The annual performance reviews measured several outcomes such as incidents
of child abuse and neglect for a three year period. Those receiving higher scores received
additional compensation. The results seemed to support a slight increase in worker
productivity and the evacuation of low performers, except in the mid-range years when
an employee already had too many years invested in the system to have a small monetary
compensation difference force them to leave. It is expected that this trend would level
out as those aging workers retire and all new hires come in on the pay-for-performance
program adopted in 2000 (www.cps.ca.gov/performancepays, retrieved November 1,
2009).
Findings
17

18. These three empirical studies had different intended outcomes for the
implementation of their pay-for-performance program. The City of Shreveport used their
system to improve awareness of the organization’s mission and increase employee
morale at which they appear to have had moderate success. The City of Coral Springs
used the program to tie performance to their strategic plan and help with budgeting. It is
unclear whether or not they considered it successful at all levels, but it was at least to
some degree at the supervisory level. Hamilton County used it to improve work
performance and push out low performers and it seems that it is having that affect, except
in mid-range ineffective workers who are not motivated enough by low scores to leave.
It appears in this case at least that the performance evaluation, or managerial
implementation of it, is insufficient to eliminate poor performers.
The lack of further empirical data to support the long-term results of these
programs tends to indicate a negative outcome, or at least one not worthy of follow-up
documentation supporting the definitive case for pay-for-performance in the public
sector.
Conclusions
Even though there are arguments that pay-for-performance can benefit an
organization, there are many factors that inhibit pay-for-performance programs
particularly in the public sector. These factors include failure to link employee
performance objectives to the organization’s objectives thereby producing weak support
within the organization; invalid performance appraisals that lead directly to program
credibility problems; lack of adequate baseline salaries such that financial rewards will be
18

19. effective; budget cycle barriers; intrinsic motivation of employees so that money may not
be an effective motivator; pay for performance can become an administrative burden; and
finally, pay for performance systems can fail when participants, policy makers, media or
others publicly criticize one or more aspects of the plan, subjecting the entire system to a
level of scrutiny it can’t withstand.
Some strategies identified within the body of this work to proactively address
potential performance failure include ensuring that the agency offers base-pay sufficient
to attract talented, dedicated people; giving people an important mission to accomplish
and creating ways other than financial incentives to tell people they are winners. Again,
these factors are often limited in the public sector, making it difficult to implement a
successful pay-for-performance program.
Pay for performance can succeed in public entities only when the political climate
is right, employees accept it, managers are trained to implement it fairly and consistently
and agencies monitor it regularly.
Pay-for-performance requires the existence of certain conditions to be an effective
system for high motivation and outcomes. These conditions include key assumptions
about the output desired, the people providing the output, and the organizational context
of the workers. These conditions are often not met in the public sector, in part because of
the typical government product, the nature of public goods, the increasing role of
teamwork and cross-agency collaboration, and the social comparisons of the dynamics of
employees in general and public employees in particular.
Even at that, the evidence is mixed on whether or not pay-for-performance works
in the public sector and is even less evident that it provides adequate return on
19

20. investment. Application of pay for performance for public sector activities should be
applied only after careful analysis of the organization’s needs. What is the desired
outcome? Will pay-for-performance work with the organizations’ overall mission or will
it simply serve to de-motivate a large segment of the workforce that may already be
sufficiently motivated intrinsically? Will the long-term support be available to continue
the work in progress? An honest evaluation of the organization should be undertaken to
determine if pay-for-performance is right for it and then a measurement of existing
outcomes should be undertaken so there is baseline quantification against which future
results can be measured so that opponents to the system can be convinced of its success,
or proponents can effectively measure the performance of the pay-for-performance plan
and decide on its effectiveness within their individual organization.
20

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