Federal Employees News Digest

White House presses for pay-for-performance—but expert criticizes outline of plan

The Trump administration, through its Office of Management and Budget, recently proposed pay-for-performance incentives for federal employees—floating the idea of starting with distributions in the neighborhood of $1 billion a year to higher-performing feds. OMB indicated that the incentive pay would be budget-neutral, and specifically could be paid for by equally reducing routine General Schedule step increases in pay totaling $10 billion over the next decade. To many, doling out incentives to higher-performing employees makes sense—as is common in many parts of the private sector. But for public-sector employees, who work for organizations that don’t—and can’t—make higher profits each year, and instead produce for the common good, efforts at such incentive systems run into problems. Indeed, two such large-scale federal efforts in the first decade of the millennium failed and ultimately shut down. This week, Nathan Abse talks to James L. Perry, a professor emeritus of public administration at the University of Indiana and recognized expert on government and civil service reform.

Q&A with James L. Perry

What do you think about the White House proposal to pursue pay-for-performance in the federal government? Is this a wise aim, given recent-past failures, in your opinion? 

Perry: If the $1 billion per year that OMB officials proposed [in news stories in March] to use for such a program were distributed for performance pay—if that money then becomes a substitute for the usual step increases in pay—then I suspect that, if implemented, that will be received, and perceived, by employees as picking their pockets. It won’t be received well. Step increases may be seen by many people as automatic, and “unmerited,” but, think about it, usually if it takes an employee 20 years to go through 10 or 20 step increases, or what have you, then actually they are a becoming a better employee and more capable and knowledgeable as an employee. They are becoming, over time, a bigger asset for the federal government. In this way, there is pay-for-performance already there. It’s just not meted out in the way that contingent pay is meted out in the private sector. In short, I think that if a billion dollars per year becomes not added to, but a substitute for, step increases, this would end up being de-motivating and reducing morale overall in the federal workforce.

In recent times, under the George W. Bush administration’s abortive efforts with pay-for-performance at Defense and Homeland Security, were soon seen by unions and many employees as unfair. Why, and why do so many such plans go wrong, in the end? Opponents—especially unions—say they lead to spoils and favoritism, rather real top flight work?

Perry: I’m not sure I buy the union critique, wholesale, but elements of it are true. I think that’s sometimes a broadside unions throw at all pay-for-performance ideas. Having said that, I think the public sector is different in some very real, very important ways than the private sector. A key one is that in the public sector, compensation is far more transparent than in the private sector. In some ways, the private sector’s [performance pay] depends on a lack of transparency. People can’t unpeel the onion, to see what their colleagues are being paid. Now, when you try to add a lack of transparency to a public system, this is not how it normally works, and that has two effects. First, it puts those who develop pay-for-performance systems on the spot—they’re being watched as soon as they create and oversee these systems that are soon providing more money to some people. Second, it makes it much more obvious that what they’ve created [a significant incentive pay scheme] must be justified, in a far more rigorous way than are needed in the private sector—because in the private sector, you don’t know what’s going on with others, among other big differences.

Can you tell our readers some of the other public-sector differences you have in mind?

Perry: Well, two of the other major differences in the public sector include, first, budget constraints. By this I mean there are no “profits,” and so with the kind of pay-for-performance proposed here, managers are just saying, “Hey, we are taking a billion dollars away from the usual step increase budget, which employees understand, and instead putting that same billion dollars into pay-for-performance for people who we decide are better achievers.” Right there, this change assumes, and broadcasts to everyone, that existing step increases are just not valid, are not appropriate. And it says to everyone that, to date, employees are just getting their step increases based on seniority only—nothing to do with actual competence within the organization. Not a great idea. And you know, that message may not even be true, in many cases. The point is, if the government makes this move it will be seen as a broadside against step increases—it will say that they are a bad idea. That won’t help employee morale, and step increases probably aren’t baseless, as this move would communicate. 

You are alluding to the idea that existing step increases, while imperfect, already accomplish much of what pay-for-performance aims to—could you discuss?

Perry: Yes, so there already is some logic here. There was a study by some World Bank researchers that compared pay-for-performance to so-called pay-for-knowledge compensation systems. Step increases are, in fact, a kind of pay-for-knowledge system—a kind of classic bureaucratic pay system. What that study found, basically, is that people who come with pro-social motives to public sector jobs are probably just as motivated by pay-for-knowledge dynamics in their pay systems as they are for pay-for-performance systems. So, there may be no need here. And, additionally, the pay-for-knowledge systems are cheaper to manage.

That’s an interesting line of reasoning—and to your mind, it offers pretty good evidence against pay-for-performance? 

Perry: So, what I am saying is that we have various, sometimes contrary evidence here, but for the most part all of what I see is pointed in this one direction. We have the fact that civil service pay-for-performance systems, as we have seen over the years, usually fail. On the positive side, also have evidence that the current, classic structure of the general schedule is not all that bad for the purposes we have in the public sector. So, from my point of view, the system may need to be tweaked, perhaps—yes, but, from the evidence I see, maybe not in the direction of the logic of pay-for-performance.

Well, the fact is the AP reported, in March, that OMB wants to redistribute $10 billion of step increase pay as new, performance-based bonuses. That’s this administration’s direction, right?

Perry: Well, it sounds like a proposed fix of a dollar-for-dollar “budget-neutral” solution. And, I would say, all budget-neutral solutions in the form of merit pay or pay-for-performance ultimately fail. Why? Because if you are a leader, if you are management, you’re saying, “We want to motivate people, with these incentives.” And yet you’re also saying we’re only going to motivate people 10 percent or x percent more than we do now. But are you actually adding incentive? That’s another reason why it will fail, because as a budget-neutral solution, it’s ultimately the same amount of money overall, over time. There’s no real pay-for-performance there, really. Somebody loses. And your people catch on to this, very quickly. It’s a zero sum.

But officials at OMB have been clear in saying that the current GS-system is outmoded—you are instead saying that and the step increases are not outmoded?

Perry: Look, I agree with some at OMB who think some aspects of step increases, with no other system in play, might be outmoded. But I think pay-for-performance, the kind they seem to be talking about, is just going all over again in the wrong direction. Couldn’t you spend that $1 billion better? I think you could. One possible way would be to pay people at the top—maybe the top three layers of the civil service—more money. I think you might recruit better managers, and get better people to come early in their career to stay for a while. There is some research that suggests this. And I understood this from feedback, studying merit pay systems decades ago. Another option that’s key is promotion. The fact is, basically a promotion is—and provides—an employee with a needed pay increase. So, do you want to fiddle with people’s pay every year, in a pay-for-performance thing? Or do you want to look into whether a person has advanced the mission of their organization in a broad and effective way, as a result of their work, say, every few years? And promote them? You could do that better. You could promote them significantly, from a GS-level to a higher GS-level. This way, I think, you might retain the best and the brightest, who would be enhanced by doing things this way, instead.

Are people in government just motivated differently than people in the private sector? 

Perry: We know that people who are motivated mostly by money, generally, are not going to go into the public sector. Why not? Because if they are mostly motivated by money, then if they are good managers they can make much more money in the private sector. Instead of a hundred or couple hundred thousand dollars at the high end in government, if they really strive in the private sector they can make several times that amount. So, why if you are driven by money would you go into the federal civil service? It’s just not the way things work, in practice.

Fine, but this idea you just advocated—that government should pay top managers much more, possibly I think at the expense of line employees—that would be unfair, and upset the unions, and it would lead to a sense of not being properly compensated and lower morale, right?

Perry: Possibly, yes. But there may be ways of managing around some of that, so you could do this. First, you must realize that, in terms of compensation, the U.S. has a much flatter compensation system than many countries. Maybe because of our more egalitarian culture, at least in parts of our economy or in the public sector, truncating the distance between the bottom and top of the pay scale is something we do. But there are other countries, with different cultures, that have strikingly different civil service pay scales. Some examples I point to include Singapore and Hong Kong. In their civil services, you find as much as a 50-to-one ratio, from the top pay to the bottom. Some of this is a longstanding result of the former colonial system—these were British colonies, where you needed to incentivize your colonial managers, and some of it has endured. In the U.S., yes, it is very different. But in our private sector, we have like a 500-to-one ratio between the top executives and lower-level workers. In our federal government, we’ve never deviated much from, say, in the neighborhood of a 10-to-one ratio. I think we could stand some adjustment, possibly.

If our system is so “flat” in the public system, are there ways federal employers work around that to get and keep some top performers?

Perry: Yes. I think we need to think more carefully about the [existing] structure of public-sector salaries. New York University’s Paul Light has written about how the pay in our federal government is so bad that in order to keep good people managers often have to move people up through the steps very quickly. That way they reach a higher pay ceiling fast, and at least consider staying. Later still, the only way to get people more money is to keep promoting them. So, you see, we have a number of dysfunctional aspects to our federal pay system. But I would say we need to think hard before leaping into “reforms” based on old, and very flawed, thinking. Rather we should be looking at what research tells us what would be some positive design features that might really work to correct these problems.

You carve a middle road here: You clearly do not endorse OMB’s current ideas on pay-for-performance, but you also do not support total resistance to change in the GS-system, right?

Perry: That’s right. Another point I made in some work I co-authored is that it is much harder to come up with a workable pay-for-performance system for people at the top of the hierarchy than for people at the bottom. You do run into problems at the bottom too, of course. But—and this is important—what I think went wrong with [a decade ago] at NSPS—the National Security Personnel System—at Defense and MaxHR at DHS was that these pay-for-performance plans were rolled out with inadequate thought and planning as to the details. These systems rightly got pushback from the unions right away. They said, “Hey, look, you can’t make pay systems perfect, overnight—and we have had previous bad experience with pay-for-performance systems in the federal government, and you ought to know better!” The unions attacked these efforts, I think legitimately. And, it’s important to remember that the biggest problems with these kinds of systems were not about their implementation, but were design-related, theory-related. These systems just were not necessarily going to motivate people better. Still, here we are once again, and politicians are saying let’s do what looks like the same kind of pay-for-performance. But in the end we will see they don’t know what they are talking about.

Historically, NSPS—the National Security Personnel System—was the last giant effort at pay-for-performance, right? Hated by unions, it didn’t seem to work and got scrubbed by Congress.

Perry: I think there were multiple reasons for the failure of NSPS and MaxHR. Part of it was lack of consultation with the affected parties. Another was a really lacking design. But don’t leave this out: When you look at these kinds of systems, they take five or more years, even by design, to start to work. So, you have to ask, how many agencies have high quality performance appraisal systems, right now? I’m referring to any kind of way to objectively measure individual employee, or unit, performance—any such system people believe in? The answer is: very few. In the end, government agencies can’t rely on a system of pay that relies—often, practically overnight—on some kind of measurement of performance, when they don’t really have one that their employees, or anyone, can really believe in!

Can you comment some of the worst cases, of agencies in real turmoil, where performance evaluation, if imposed now, could be especially a problem?

Perry: Well, we have some agencies, like EPA, where there are now maybe at least three layers of mistrust. I’m speaking figuratively, but think about it. You have an administrator whose motives are mistrusted by the employees. Then you have concerns all around about whether the managers intend to follow normal, customary policies and aims. And then you might have even deeper concerns about the administrator’s overall objectives—there’s a suspicion that there’s a wish there to take apart all of the normal rules. All of these factors, plus I think you already have people jumping ship, at this point, which is unfortunate. I think these factors have more impact on performance than any performance pay scheme is going to have.

Given the current difficult environment in parts of our civil service—as you note, as at the EPA—is there anything government can do, apart from restructuring pay, to improve morale and productivity?

Perry: We know that one of the most effective motivators is for management to engage in a real conversation about what the work is at an agency, with the people who are doing it—with the employees. For instance, if mission is important—which is the case in the minds of most federal employees—then the core question to them is, “What is the mission of this agency and how does that translate through the work that I do?” Having management get into this discussion, with a focus on the mission and helping them to achieve their part of the mission, is going to be far more influential in keeping employees engaged and motivating them, and getting them to do the right thing, than tinkering with bonuses every year through an elaborate administrative structure to try to make, supposedly “objective,” decisions about rewards or incentive pay, which is very hard to accomplish in the public sector, as I explained a moment ago.

Incentive pay schemes failed in recent administrations. So, who benefits from their false starts? Private consultants paid to design them? Politicians in an ideological or political theater? 

Perry: Who benefits from all this? I am not quite sure. One side of it, remember, are those with a genuine belief in these kinds of reward systems, you know? But, we had a Booz Allen report last year, one that offered just general statements about how the civil service needs to be reformed, needs different rewards and the like. There was another document, let’s see, by NAPA—the National Academy of Public Administration, of which I am a fellow. The organization has come up with another panel, to try to determine details on how to improve performance, a kind of three-legged stool of something like mission, principals and accountability. That sort of thing. But, to me, the fact is that these all have ended up diverting people in their agencies from focusing on the actual mission. That’s what I see.

Reader comments

Fri, Jun 8, 2018 Steve Southeast

Would love to see pay for performance but like most anything government related, self serving Managers and Executives game systems, falsify information, and take care of themselves and friends. The same would happen with this, truly high performing people would get nothing and will leave like they do today.

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