PERFORMANCE-RELATED PAY POLICIES FOR GOVERNMENT EMPLOYEES: MAIN TRENDS IN OECD MEMBER COUNTRIES 7 October, 2004 HRM Working Party Meeting Dorothée Landel OECD Public Governance and Territorial Development Directorate (GOV)

1.Performance-related pay in the wider management context : key findings 2.Major trends in performance-related pay policies 3.Implementation difficulties 4.Impact of PRP 5.Lessons learned

 Most OECD member countries report having an extended formal performance appraisal system for employee  Attempt to link individual objectives and performance to institutional ones  Continuous extension of PRP policies in the past decade: two thirds of OECD member countries have to some extent introduced PRP for government employees 1.Performance-related pay in the wider management context : key findings An overview of the current state of play in performance management

Figure 1. Relationship between HR delegation and the link between performance appraisal and pay in OECD member countries Source: OECD, High degree of HR delegation Low degree of HR delegation 1. PRP in the wider management context (continued) Relationship between delegation and link between performance appraisal and pay in OECD member countries

Reasons for introducing performance-related pay 1. PRP in the wider management context (continued) The types of objectives vary across countries:  Nordic countries  personnel development aspects  Westminster countries  motivational aspect  France & Italy  accountability of top civil servants

2. Major trends in PRP policies across OECD countries in the past 10 years  PRP schemes have been formally extended to all categories of staff  Long-running standardised PRP schemes have evolved into more decentralised ones  Increase in the use of collective or group performance schemes, at the team/unit or organisational level Overview

Performance appraisal: criteria for assessing performance 2. Key trends in PRP policies (continued) Performance appraisal based on :

Trends in performance appraisal systems: a dialogue rather than a control tool  Performance appraisals tend to rely more on dialogue with line management than on strictly quantifiable indicators  Performance rating systems : less standardised, formalised & detailed than ten years ago  Trend towards a 360-degree feedback systemHowever:  Quota systems for ratings are becoming more widespread  In practice, they tend to counteract the trend towards less formality 2. Major trends in PRP policies (continued)

Size and form of performance payments  The size of performance payments is rather small : On average:  less than 10% of the base salary at the employee level  around 20% of the base salary at the managerial level  Bonuses are tending to supplement and even replace merit increments  Bonuses used in France, Italy, Spain and the United States (SES)  Combination bonuses & merit increments in Canada, Finland, Germany, Korea, New Zealand, Switzerland  Bonuses in general higher than merit increments 2. Major trends in PRP policies (continued)

3. Implementation difficulties  Difficulty in assessing performance in the public sector due to the lack of quantifiable indicators  Objectives tend to be too numerous, unchallenging, unrealistic, not updated…  Difficulty in differentiating the average performance of government employees  Problems with detailed and highly formalised performance rating

3. Implementation difficulties (continued) Lack of dialogue with line management Lack of valid performance appraisal process Managerial and contextual problems Lack of managerial delegation The four missing components: Lack of transparency

Constraints: time, cost and human factor  Resistance from unions, staff and middle management  Financial costs of PRP are often underestimated  PRP not adequately funded  Under-estimation of time and work needed to implement PRP  Lack of preparation from line management 3. Implementation difficulties (continued)

4. Impact of PRP : Key findings OVERALL:  PRP has a limited impact on staff motivation  Other types of incentives are more influential HOWEVER: It is through its derived effects that PRP has been found to have an effect on individual & collective performance – and not through the ‘motivation’ channel  It is through its derived effects that PRP has been found to have an effect on individual & collective performance – and not through the ‘motivation’ channel

4. Impact of PRP : Key findings (continued) PRP : an incentive to fully endorse a goal setting approach PRP allows a clarification of job descriptions and tasks Potential positive effects on recruitment Some evidence of the beneficial effects of team rewards PRP An opportunity for an organisational culture shift Introduce more flexible working methods Reform or reinforce the ICT policy Focus on training policies Encourage team working, through collective bonuses A lever for change in the organisation of work PRP : a window of opportunity for the introduction of wider organisational changes

4. Impact of PRP : Key findings (continued) PRP Motivational incentive Derived effects Organisational and management changes, new working methods and tools Performance Low impact Positive effects in the right managerial conditions

The design of PRP is a trade off 5. Main lessons learned  Take into account the background culture of each individual organisation/country : no ‘best’ solution  Team/unit PRP systems for employees should seriously be considered  Associate staff/unions in the design of the PRP scheme  Size and form of performance payments  Clear anticipation of the time, cost and work that the introduction and monitoring of the system requires Implementation problems need to be well anticipated

The performance appraisal process is at the heart of the whole system It should :  be based on well identified job objectives (small number, both realistic and challenging)  establish a link between individual and organisational objectives  be based on a simple performance rating framework, with no detailed differentiation in the ratings  be based on dialogue with line management  be transparent and rely on well established procedural justice mechanisms  feedback on the appraisal should be well reported and explained 5. Main lessons learned (continued)

PRP needs to be understood in the wider management framework Performance pay goes hand in hand with delegation of human resources management  Performance pay goes hand in hand with delegation of human resources management The significance and impact of PRP should not be overestimated  The significance and impact of PRP should not be overestimated - Need for a broad approach to better performance management as against a narrow preoccupation with performance-related pay PRP should be applied in an environment that maintains and supports a trust-based work relationship  PRP should be applied in an environment that maintains and supports a trust-based work relationship PRP should be used as a stimulus and a lever for the introduction of wider management and organisational change  PRP should be used as a stimulus and a lever for the introduction of wider management and organisational change. The objectives of PRP should be set accordingly. 5. Main lessons learned (continued)