Academic journal article Public Personnel Management

The Challenge of Making Performance-Based Pay Systems Work in the Public Sector

Academic journal article Public Personnel Management

The Challenge of Making Performance-Based Pay Systems Work in the Public Sector

Article excerpt

The federal government has successfully experimented with a variety of performance-based pay (PBP) systems for more than 30 years, utilizing the demonstration project authority granted to the U.S. Office of Personnel Management (OPM) by the 1978 Civil Service Reform Act. It allows OPM to waive personnel laws and regulations to test innovations in human-resource management. However, the unsuccessful expansion of pay for performance to the largest Federal agency, the Department of Defense (DoD), through the National Security Personnel System (NSPS), has resulted in a renewed debate over the merits of merit pay in the federal government.

The present study examines two major aspects of PBP: theory and research related to PBP, including differences between individual and collective pay schemes; and empirical data from demonstration project evaluations. Attitudes toward merit pay are compared across projects on key concepts and further analyzed using Hofstede's cultural dimension of individualism-collectivism to elucidate the reasons for differences between unionized and nonunion employees. Demographic subgroup differences are also analyzed. Changing from a longevity-based system to one that pays based on performance represents a major culture change for the civil service. Results of successful federal demonstration projects show that it typically takes 3 to 5 years before a majority of employees will support PBP.

While the federal demonstration projects were limited by statute to no more than 5,000 employees each, DoD's NSPS was intended to cover all white-collar DoD employees under one uniform system. NSPS was authorized by the 2004 National Defense Authorization Act (NDAA), implemented in 2006, and repealed by Congress in the 2010 NDAA. About 211,000 nonbargaining unit DoD employees had been convened to NSPS in two so-called spirals or implementation phases, representing 38% of the white-collar DoD workforce of 555,166 by March 2009 when conversion to NSPS was halted. Employees were converted back to the general schedule (GS) system starting in the spring of 2010 and continued transitioning in 2011.

Federal unions vociferously opposed NSPS from the beginning, limiting coverage to nonbargaining unit employees. The official NSPS evaluation report published in 2009 acknowledged a variety of problems with implementation and performance management (SRA International, 2009). A subsequent report by the Defense Business Board noted problems with pay-band structure and pay-pool processes, and lack of transparency in performance ratings and payouts. The report also cited problems that led to the erosion of trust between labor and management going back to the original legislation, which included the labor-management provisions that were never implemented and later overturned by Congress (Review of the NSPS [NSPS Review], 2009). Edward E. Lawler (1971), who has studied pay systems for the past four decades, said that, "No plan can succeed in the face of low trust and poor supervision, no matter how valid it may be from the point of view of mechanics" (Lawler, 1971, p. 163).

Merit Pay Theory

Merit pay systems focus on individual performance and seek to motivate employees to perform at higher levels by tying performance to monetary incentives. The literature on motivation in organizations is replete with theories and concepts that stress different factors in work motivation: intrinsic and extrinsic motivation, needs or expectancies, satisfiers and dissatisfiers, and equity and reinforcers. Although Herzberg (1966) believed that pay is merely a "hygiene factor" or potential dissatisfier, Lawler's (1981) research has shown that performance-contingent pay can be a powerful performance incentive because money can satisfy many different needs.

Expectancy theorists postulate that the belief that one's effort will result in effective performance (Expectancy I) is in itself a motivating factor and is thought to be even more motivating than Expectancy II or the corollary belief that effective performance will lead to certain rewards (Vroom, 1964). …

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