Pay-for-performance (P4P) has been a hot topic among public and private managers for years. The concept is popular because it embraces the ethos of rewarding hard work. Furthermore, the “new normal” for the public sector is to do more with less and P4P seems like one strategy to accomplish that. For private sector firms, pay-for-performance is a common practice used by an estimated 89 percent of companies.There are pros and cons to pay-for-performance. On the upside, P4P symbolizes accountability and is one way that the public sector has sought to emulate private sector practices. Not that all private sector practices are worth copying. On the downside, P4P can be difficult to effectively execute. If your local government is considering pay-for-performance, here are five lessons gleaned from an MPA service-learning project for a large North Carolina local government organization.
Lesson 1: Get Performance Appraisal Right
Pay-for-performance only works when performance appraisals effectively distinguish between levels of performance. An effective performance appraisal has four components:
- Mutual performance expectations. One way to clarify expectations is participatory goal-setting, meaning that both supervisors and employees work together to create performance standards that the employee will work to meet;
- S.M.A.R.T. and challenging performance goals/standards. Specific, Measurable, Attainable, Relevant, and Time-bound goals are necessary to set clear expectations for employees to meet. Mutually developed goals/standards should not only be S.M.A.R.T., but should also appropriately challenge employees as a way to motivate them;
- Ongoing communication with employees about performance. This communication involves observing employee performance, taking written notes, and being willing to coach employees about performance issues as they arise, not just during the annual review. Doing so helps supervisors more accurately assess employees’ overall performances at year’s end;
- A ratings scheme that adequately distinguishes between low, average, and high-performers. This is imperative if an organization wants to ensure that high-performers are not given a lower rating than they deserve and managers are not unduly lenient on low performers. For instance, the organization we studied had only three possible performance ratings: exceeds expectations, meets expectations, and does not meet expectations. The organization is now considering five performance scores to more adequately distinguish between employee performance.
Lesson 2: Initial and Ongoing Training is Key
Training helps supervisors understand performance appraisal and pay-for-performance processes. It can also help supervisors overcome common biases that can produce errors in appraisal processes. Studies show that effective training should:
- Identify appraisal biases and how they can be conquered;
- Explains the organizational purposes of performance appraisal and pay-for-performance;
- Give supervisors practice at writing performance standards and delivering in-person appraisals.
Managers cannot devote all of their time solely to performance appraisals. Even if they could, managers, like all humans, are affected by cognitive biases and errors. Training is the key to making performance appraisals, and thus P4P, more objective and fair.
Lesson 3: Consistency is Key
Local governments provide a wide array of services, making it challenging to design a single pay-for-performance system for all departments. While pay-for-performance can be tailored to different work environments, certain elements should be consistently applied as a matter of fairness. For example, in the local government we studied, fleet maintenance had uniform performance standards developed at the management level. By contrast, the parks and recreation department used participatory goal-setting (as set out in the local government’s P4P policy) because its work was less routinized.
Another area of inconsistency across this local government was the timing of employee appraisals. Due to various seasonal demands, some departments deviated from the 12-month appraisal period defined in the local government’s P4P policy. While managerial flexibility can be good, it sometimes makes rule implementation seem arbitrary. So avoid overtly deviating from written policy and, when inconsistency is necessary, be aware of the tradeoffs.
Lesson 4: Pay Isn’t the Only Motivator
Pay-for-performance assumes that only money motivates. But research suggests that public employees may not be as motivated by monetary rewards: they may be more intrinsically motivated. So we suggest that P4P systems incorporate both monetary and non-monetary rewards. Examples of non-monetary rewards include greater responsibility; professional development, such as training or job shadowing; and peer and supervisor recognition programs. But make no mistake: pay-for-performance involves money, and needs to include enough of it to make the rewards matter to employees. These non-monetary rewards should complement, not replace monetary rewards.
Lesson 5: You Cannot Phone It In
Pay-for-performance requires an investment of significant time, effort, and money: to train supervisors; for supervisors to observe and record employee performance; for supervisors to coach employees and deliver appraisals; for the HR department to analyze performance ratings data; and for the organization to consistently allocate adequate rewards in their budget. So if the game plan is to let your pay-for-performance run on autopilot, think twice: good organizational processes require care and proactive maintenance, and pay-for-performance is no exception.
Bottom Line
Remember that research on the capacity of pay-for-performance to motivate employees and improve performance is mixed. Go in with eyes wide open and a commitment to making the system work. Hopefully these five lessons help local government take a step in that direction.