Performance related pay in public services: theory and evidence - PowerPoint PPT Presentation

Centre for Market and Public Organisation Performance ‐ related pay in public services: theory and evidence Simon Burgess

• Public services are a sizeable part of UK output and deliver key outcomes. • Efficiency and responsiveness are essential. • Performance pay is common in private sector – about half of workplaces have some form of performance pay. • Why not in the public sector? • Performance pay is a powerful tool, but … it is a powerful tool. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 2

• Theory – Why have PRP? – Why not? – What’s special about the public sector? • Design issues in PRP schemes • Evidence – Education – Health care – Public servants • Summary PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 3

Theory 1: Why have PRP? • Core issue: cannot pay people for the effort they put in because we can’t observe it • So instead pay for output, proxy for effort • PRP does two things: – Motivates, incentivises effort – Selects, attracts higher performing workers • Aligns incentives for worker with those of the organisation • Work out the optimal ‘gearing’ of the PRP – Trade ‐ off between incentives and income risk – Other factors PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 4

Theory 2: Issues and problems • Optimal PRP rate may be very low. • Multiple tasks • Multiple tasks and differential measurement • Inter ‐ temporal aspects – ratchet effects – career concerns • Intrinsic motivation • De ‐ professionalistion • Design issues – design is hard to get right and poor design can have adverse unintended consequences PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 5

Theory 3: What’s special about the public sector? • PRP much less common in public sector: optimal rate is low, or union power? • Measurement issues – Common occupations – Different occupations • Working in teams, collaboration not rivalry • Intrinsic motivation • Multiple principals • No single factor appears special, but the combination is unique once we add: • Fuzzier goals at organisation level PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 6

Design Issues • Linear (per ‐ unit) or threshold? • Individual or team? • Objective or subjective? • Relative or absolute performance? Tournament? • Monetary reward? Or resources for clients? • Who for? Workers? Bosses? Clients? • Framing and the use of loss aversion PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 7

Evidence • For a policy discussion we need the answer to a causal question: – If we introduce PRP, how will productivity change? • Evidential requirements for causality are hard. • There is little robust evidence on the impact of performance pay in the public sector – even though this sector employs as many people as manufacturing does. • Interested in the main outcome, and potential unwanted side ‐ effects • Consider: education, health care and public service. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 8

Evidence 1: Education • International evidence is mixed: – Some studies show positive effects (eg Lavy) – Others show no effects (eg Fryer) – Often strong effects in developing countries – On balance, positive but a lot of variation • Differences in design may be important • Little evidence of gaming or undesirable effects • Study for England: – significant effect of the scheme, about half a GCSE grade per pupil – despite poorly designed scheme. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 9

Evidence 2: Health care • Systematic reviews find different effects but little evidence in favour of performance pay. • Study of Advancing Quality in NW England (Sutton et al 2012): – Team ‐ based (hospital ‐ level) performance pay; tournament basis; multi ‐ task safeguards. – Rewards not salary but invested in clinical care – Strong data infrastructure and support – Significant fall in mortality – Different strategies to achieve the gains; collaboration not competition. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 10

Evidence 3: Public servants • Again, not a lot of robust causal evidence. Two examples: • Jobcentre Plus – incentive scheme based on team performance, covered five different targets – Incentives had a substantial positive effect in small offices. Peer monitoring overcame free rider problems in small units – No impact of performance pay on quality measures. • HMCE (as was) – Again team ‐ based scheme; teams include the manager. – The incentive structure raised individuals’ tax yield and productivity. – The most successful team allocated more of all its workers’ time to the incentivised tasks, but disproportionately reallocated the time of its efficient workers. – This reallocation was the more important contributor to the overall outcome. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 11

Conclusions • Incentives work – Private sector, public sector; unskilled occupations, skilled manual, professionals. • But be careful! – “On paying for A whilst hoping for B” • Design matters crucially – match scheme to production; content of the incentive; framing – loss aversion; measurement; multi ‐ tasking safeguards; ... • Requires clarity on the organisation’s goals. PIRU/ LSHTM, Feb 2013 www.bris.ac.uk/cmpo 12