Pay-for-Performance is a method of employee motivation meant to improve performance in the United States federal government by offering incentives such as salary increases, bonuses, and benefits. It is a similar concept to Merit Pay for public teachers and it follows basic models from Performance-related Pay in the private sector. According to recent studies, however, there are key differences in how pay-for-performance models influence federal employees in public service roles.Perry, James, Annie Hondeghem, and Lois Recascino Wise. "Revisiting the Motivational Bases of Public Service: Twenty Years of Research and an Agenda for the Future." Public Administration Review, 2010: p. 681-690 James Perry is one scholar who has conducted such studies. His research reveals that public servants tend to be more intrinsically motivated, and thus, are prone to have a negative reaction to monetary incentives. There is still debate, however, on what exactly makes the public sector different.
History Pay-for-performance programs first began in the private sector. As consultants, academic experts, and employee advocate groups analyzed merit pay systems' success in private businesses, they recommended expanding this method into the public sector.Milkovich and Alexandra K. Wigdor. Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, D.C.: National Academy Press, 1991: p.13 One vital omission in the process of implementation, however, is that the policy makers failed to consider that the stakeholders in the private sector differ from those in the public sector.
The first trial run of a pay-for-performance system came in the late 1970s. In 1978, U.S. President Jimmy Carter introduced the broad outlines of the Civil Service Reform Act in his State of the Union message. It was the first time a U.S. president had ever included civil service reform among his major legislative proposals.
The Civil Service Reform Act of 1978 created the Office of Personnel Management, to oversee the human resource management of the federal government, and the Merit Systems Protection Board, to regulate the merit system and prevent any abuse. The major provisions in the act included, but were not limited to, performance appraisals for all employees, merit pay on a variety of levels (but focusing on managerial levels), and modifications for dealing with poor performers.Milkovich and Alexandra K. Wigdor. Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, D.C.: National Academy Press, 1991: p. 20-22 This merit pay system was a break in the long tradition of automatic salary increases based on length of service. Under the new act, employees only got half of their traditional automatic salary increase. The remaining non-automatic portion was divided up according to performance rating. A key part of this system was that it was revenue neutral—this meant that when some employees benefited under the new system, others would of necessity be receive less than in the previous system.
The greatest benefits of the Act were that it clarified job expectations and defined goals and objectives. The clearest shortcoming was that it failed to establish a "demonstrable relationship between pay and performance."Milkovich and Alexandra K. Wigdor. Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, D.C.: National Academy Press, 1991: pg.27 This failure had a number of causes—most notably a lack of adequate funding. Managers who performed satisfactorily often found themselves receiving less pay than their non-managerial counterparts because the non-managerial employees were still under the previous pay system. Some complained that this merit system seemed arbitrary and many employees did not perceive it as a fair assessment of performance and effort. Furthermore, the public became upset when they saw certain senior executives in the government receiving large paychecks. It became apparent that the Act was not an effective means of civic service reform.
When Ronald Reagan was elected in 1982, he significantly reduced the size and cost of many portions of government, thereby greatly limiting the Civil Service Reform Act. Satisfying the need for new legislation, the Performance Management and Recognition System (PMRS) was enacted on November 8, 1984. Most notably, the PMRS provided a greater level of evaluation accuracy and imposed minimum and maximum levels of pay increase to limit disparity among merit pay employees. PMRS also created Performance Standard Review Boards for each department and required that at least half of the board be members who were under the merit pay system. This requirement ensured that at least some board members had a vested interest in dealing with potential problems and concerns.Milkovich and Alexandra K. Wigdor. Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, D.C.: National Academy Press, 1991: pp. 28-28
Although it was considered a significant improvement over its predecessor, PMRS only lasted from 1984 to 1991. The demise of PMRS was caused by poor discrimination among performance levels, inadequate performance findings, and little demonstrable evidence that the system improved performance. Over 50 percent of the employees felt like the size of the rewards was inadequate, and more than 75 percent of the managers stated that their performance evaluations provided little guidance for development purposes, mentioning that "insufficient funds [had] resulted in meaningless performance awards."Milkovich and Alexandra K. Wigdor. Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, D.C.: National Academy Press, 1991: p. 30
Since the PMRS was abandoned, various proposals have surfaced and even a few agencies have tried variations of pay-for-performance systems. The Department of Defense and the Department of Homeland Security have both developed systems, but they were annulled when President Barack Obama signed the National Defense Authorization Act on October 28, 2009. There has yet to be a new pay-for-performance system implemented on a nationwide scale for the United States Federal Government.
Research When these federal pay for performance systems failed, many were surprised because it had worked so well within the private sector. Much of this failure was attributed to the fact that most of the research on pay for performance had been done in the private rather than public sector.Perry, James, Trent A. Engbergs, and So Yun Jun. "Back to the Future? Performance-Related Pay, Empirical Research, and the Perils of Persistence." Theory to Practice, 2009: p. 47 These perplexing and inconsistent results between the private and public sectors led academia to question why pay-for-performance programs in the public sector were not as effective. Research revealed that two main factors contributed to poor public sector motivation and performance: (1) the public sector has unique budgeting restrictions that make it difficult to effectively implement such a program, and (2) the type of motivation that affects employees in the federal public sector is different from the motivators that work for employees of private business firms.
Unique characteristics of the public sector A limited and restricted budget is one of the biggest factors that have prevented the public sector from successfully implementing a pay for performance program. As noted by Antoinette Weibel, the private sector simply has more money and will always be more fluid with cash than any public sector organization. Profit motive will always matter in the private sector because a business organization's function is to maximize profits.Weibel, Antoinette, Katja Rost, and Margit Osterloh. "Pay for Performance in the Public Sector—Benefits and (Hidden) Costs". Journal of Public Administration Research and Theory, 2009
Since public organizations operate on tax revenue, they are expected to act responsibly for that stewardship of resources. Public institutions also operate in nonmarket conditions and are subject to unique rules and expectations. This makes budgeting for incentives very difficult because unlike private sector businesses, public organizations cannot arrange their incentives around the company profit. By their very nature of receiving funds instead of generating them, public organizations can never have the same freedom that private organizations have in providing incentives in the work force.Perry, James, Trent A. Engbergs, and So Yun Jun. "Back to the Future? Performance-Related Pay, Empirical Research, and the Perils of Persistence". Theory to Practice, 2009: p. 46
As important as the budget differences are to the issue of pay for performance, the difference in how federal and private sector employees respond to motivators is even more crucial. Weibel has demonstrated that public servants tend to gravitate more to intrinsic motivation, but two key researchers, Edward L. Deci and Robert Eisenburger, have disagreed as to whether extrinsic motivation is harmful to intrinsically motivated individuals. Deci designed a study that involved college students who were given an "interesting" activity to perform. Some of those students were provided tangible rewards (e.g. money) as an extrinsic motivation and were observed by researchers to see how they reacted. From these studies, Deci argued that some activities provide their own inherent reward, so motivation for such activities is not dependent on external rewards. Deci goes even further to show that when extrinsic rewards are placed on these activities, it is detrimental to performance because it puts a market price on something they already value internally.Deci, Edward L. "Effects of Externally Mediated Rewards on Intrinsic Motivation". Journal of Personality and Social Psychology 18:1, 1971: pp. 105-115.
Eisenberger designed a study meant to refute Deci's claim. His results reported that "perceived competence partially mediated the positive relationship found between performance-contingent reward and intrinsic motivation."Eisenberger, Robert W.; Pierce, David; and Cameron J., Judy: "Effects of Reward on Intrinsic Motivation Negative, Neutral, and Positive: Comment on Deci, Koestner, and Ryan (1999)". Psychological Bulletin. 125, no. 6: 678 In other words, the detrimental effects of providing tangible rewards, discussed in the Deci studies, occurred under highly restricted, easily avoidable conditions.
Although a push for providing extrinsic motivation is still politically popular, research continues to lean toward the understanding of Deci and Perry—that the public sector is fundamentally different from the private sector. Since those who work for government or non-profit organizations are more likely to be in the mindset of serving others, they tend to be motivated more intrinsically. They perform tasks because of loyalty or an internalized sense of duty, and/or enjoyment. Giving employees a performance-contingent monetary incentive to do something they already enjoy can decrease his/her motivation to do it as the person is then likely to view its action as externally driven rather than as internally appealing.Weibel, Antoinette, Katja Rost, and Margit Osterloh. "Pay for Performance in the Public Sector—Benefits and (Hidden) Costs.” Journal of Public Administration Research and Theory, 2009: pp. 387-412