Welp MagazineTheory suggests that performance pay (PP) can align employees’ interests with those of the employer and attract high‐ability workers and incentivise effort but that it may be less effective in the public sector. However, empirical evidence on its incidence and effects is largely confined to the private sector.
What is Pay for Performance in the Public Sector?
The government has provided public sector workers such as teachers, health professionals and police officers with greater autonomy to manage their own pay and performance. The rationale behind PP is that it can raise performance and productivity and help enable more effective public services, reduce costs and improve the quality of government.
A main justification for the use of PP in the public sector is that the government wishes to hold senior staff responsible for their actions and performance in a post‐bureaucratic era, which they believe would empower public sector workers as they become more entrepreneurial.
These are national schemes across public sector bodies and most local government schemes have limited autonomy.
Autonomous pay in the public sector
Employees in the public sector are being given more autonomy to set their own pay. This is being done under the assumption that it will improve recruitment and performance by paying the best recruits to stay rather than having them poached by the private sector.
An argument also exists, which is based on the view that funds are better spent on improving public servant’s performance than on their personal remuneration.
Many schemes are based on performance indicators such as cost control, service quality or customer satisfaction. This means that higher rewards are given to staff who perform well by achieving goals set in these specific areas.
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Key criticisms of Pay for Performance in the Public Sector
The main criticism levelled at PP is the risk of wrongful dismissal. The government could breach ‘fair dismissal’ legislation if terminating the employment of someone who is capable of doing the job. If compensation is awarded by an employment tribunal it will be at the tribunal’s discretion and public sector bodies are not able to take the risk of being confronted with huge financial bills to compensate workers. The government therefore must ensure that potential employers have an accurate picture of a candidate’s competence and it must be reasonable.
Some schemes operate by setting targets for staff to achieve before then being paid their performance award. This means that employees could be earning less than they would if they were in the private sector and should they not achieve the performance targets they will not be paid the performance award.
Performance pay and private sector employers
The concept of pay for performance in the private sector has been around for a hundred years and has evolved and developed.
The pay for performance theory in the private sector has had numerous modifications over the years as pay for performance systems have come in and out of fashion.
There have been criticisms and plaudits for the concept since its inception.
Theory suggests that PP can align staff’s interests with that of the employer and attract higher skills workers and incentivise effort in the same way that monetary incentives can. However, empirical evidence is largely confined to the private sector.
It has the potential to derail the process of change, to increase work pressure and challenge key managerial assumptions.
Pay for performance in the public sector is still at a very infant stage and it is still being developed and refined. The main criticism of this type of system is that it may be less effective in the public sector as public sector workers are unlikely to be motivated by money. It is likely that this is the reason why there is a hierarchy of most likely to be created in different sectors with the public sector at the bottom. An opportunity cost exists where workers have high‐earning potential in the private sector that the public sector will struggle in competing with. Senior managers in the public sector cannot be held to the same standards as their peers in the private sector, which is an important consideration in relation to performance management.
The case for pay for performance in the public sector
Several reasons exist as to why PP should be used in the public sector such as:
Better remuneration packages to attract high‐calibre staff. The private sector can pay higher salaries and higher bonuses for high performance, which the public sector cannot match. This is known as the ‘reservation wage’ or ‘going rate’ for a specific job in a specific industry and so it is very difficult for the public sector to compete with this level of pay. Paying higher salaries could allow the public sector to pay higher wages than their private sector counterparts and offer higher performance based bonuses.
The private sector can pay higher salaries and higher bonuses for high performance, which the public sector cannot match. This is known as the ‘reservation wage’ or ‘going rate’ for a specific job in a specific industry and so it is very difficult for the public sector to compete with this level of pay. Paying higher salaries could allow the public sector to pay higher wages than their private sector counterparts and offer higher performance based bonuses. The introduction of the Private Finance Initiative (PFI) is a good example of how government is trying to create a partnership with business in delivering services. PFI is a public-private partnership arrangement to build public infrastructure projects. Money from private companies is used to generate private capital. This is now considered by government as a successful model with examples of projects such as the major hospital building projects. The financial risk for the private sector partner is transferred to the public sector. This has created a new set of problems and some schemes have not worked as the private sector partner has not taken the financial risks or voluntarily managed their service supply. The government has since introduced new legislation to deal with them.
PFI is a public-private partnership arrangement to build public infrastructure projects. Money from private companies is used to generate private capital. This is now considered by government as a successful model with examples of projects such as the major hospital building projects. The financial risk for the private sector partner is transferred to the public sector. This has created a new set of problems and some schemes have not worked as the private sector partner has not taken the financial risks or voluntarily managed their service supply. The government has since introduced new legislation to deal with them. Performance pay allows public sector managers to complement processes and systems. Pay for performance systems rely on a solid structure of effective monitoring systems to control staff.
Pay for performance systems rely on a solid structure of effective monitoring systems to control staff. Performance based pay for the public sector can demonstrate the government’s commitment to reform and investment in public services as the private sector is unlikely to co‐exist with the public sector in the future.
