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July 7, 2003

Public Sector Takes its Cue from the Private Sector

Merit pay (or pay for performance) programs, once the province of private sector businesses, are spreading throughout the public sector. A 2001 IPMA-HR public sector survey found that 45% of its respondents had a variable pay plan. Of that 45%, 80% reported using pay for performance.

Numerous public school systems are currently grappling with the finer points of merit pay. Pay for performance systems are in place in Orlando, FL, Tarrant County, TX, and Lancaster County, PA, to name a few.

As compensation in the public and private sectors becomes more closely aligned, we look at the development of merit pay programs in the federal government and public school systems.

FEDERAL MERIT PAY

In May 2003, the House of Representatives passed a high-profile pay for performance measure proposed by the Bush administration. Passed as an amendment to the fiscal 2004 Defense authorization, it cuts the cost-of-living salary increase of civil service employees to 2%. The remainder of the customary wage hike is available as a $500 million fund to be used for permanent, performance-based raises for high-performing employees. Administration officials are hopeful that the fund, which applies to all federal agencies, will help with recruitment and retention efforts.

Many lawmakers, however, were critical of the proposed system. In April, they expressed concerns at a joint House and Senate hearing that base pay was too low and performance evaluation systems too troubled for the measure to be effective. “I almost feel like we’re putting the cart before the horse,” said Jo Ann Davis, R-VA, chairwoman of the House Government Reform Subcommittee on the Civil Service, Census and Agency Organization. The measures were issued in the hopes that establishing the fund will encourage the overhaul of existing performance evaluation systems.

A telling poll conducted by federal consultants at FPMI in 2002 revealed the conflict at the heart of criticisms of federal pay for performance programs. While 80% of the roughly 1,000 respondents indicated that the federal government needs to improve its pay for performance system, only 35% wanted to allow their managers more latitude in making pay determinations. A striking lack of consensus on how to implement the necessary changes was also revealed.

As merit pay programs are slowly adopted across the public sector, the opinions revealed by this poll can be seen as pandemic. Most employees are dissatisfied with the performance appraisal systems that emerge, and few believe that their managers are capable of overcoming cronyism and developing a system that works.

The White House has echoed this lack of faith in the fiscal 2004 budget, accusing federal agencies of giving 85% of their senior executives “the highest possible performance rating—an assertion that virtually everyone in Washington is way above average.” Other surveys of federal employees have revealed widespread dissatisfaction with the way federal managers deal with poor performers.

These critiques may be seen as the growing pains of public sector merit-based compensation programs. Often the subjects of intense scrutiny and debate, these programs are seen as necessary to align pay with performance and reward employees for their value to their organizations. As federal agencies seek the proper measures for performance appraisal, seasoned HR vets may recall an era when pay-for-performance plans were just as contentious in the private sector.

MERIT PAY IN PUBLIC SCHOOLS

Meanwhile, public schools seeking to adopt merit pay plans are quickly realizing that developing goals to successfully motivate teachers is a daunting task. Teachers’ unions have made their position clear: no teacher is to be measured by test scores alone. Claims that home life, learning disorders, and other circumstances beyond the control of teachers have profound effects on test scores form the core argument against a quantitative method of performance evaluation.

The work of University of Tennessee statistician William Sanders, however, provides a creative blueprint for the quantitative measurement of public sector performance. His methods chart the progress of students against their own scores from the previous year in an attempt to measure the effectiveness of each teacher. Known as the Tennessee Value-Added Assessment System, it challenges the claim that good teaching is impossible to define. It has, of course, been highly controversial.

Subjective measures also have their problems. In a public school, where one principal may supervise twenty to thirty teachers, the time commitment required to thoroughly evaluate an entire teaching staff may be prohibitive. Many schools are already criticized for under-supervising their teachers, and their administrative budgets leave them little room for improvement. There is potential for further mimicry of the private sector, as some schools involve supervisors, co-workers, and students’ parents in a 360-degree review.

Confidentiality poses another problem. Qualitative merit pay systems work best when evaluations and raises are kept confidential. No one knows what his or her coworkers make, and dissension is managed. In a public-sector environment, where pay is a matter of public record, how are endless debates about raises and evaluations to be avoided?

Budgetary restrictions, in many cases, nip this problem in the bud. When merit-based raises increase pay by a mere one percent, employees are unlikely to protest too much. However, this begs the question: If public sector pay for performance is merely a way of saying “thank you” to strong performers, is it worth the effort?

MOTIVATION

As public and private sector compensation methods become more closely aligned, telling questions are raised about what motivates public sector employees. Is the difference in motivational makeup between a state employee and Joe Businessman so great that efforts to institute private sector compensation systems are doomed?

Public sector employees are expected to work in order to serve the community, motivated more by service, challenge, and recognition than monetary reward. Some opponents of merit pay in the public sector argue that these factors make efforts to adopt the compensation systems of the business world futile, as they won’t improve performance. Proponents counter that the loyalty of the public sector employee should not be taken for granted. Many see merit pay as a potential solution, giving high-performing employees the recognition they crave.

The tailoring of any merit-based compensation system is a painstaking process with a long incubation period. As many believe it to be a necessary struggle, the criticisms of those in the public sector will have to be answered as they are in the private sector: in time.

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ISSN Number 1549-0467