Problems in pay for performance systems April 9, 2009
Posted by Paul Duignan in : Accountability, Attribution, Measurement, Outcomes models, Outcomes systems architecture, Outcomes theory, Reporting systems, Using the approach , trackbackSorry, I stopped blogging there for a day or two due to a computer problem, and I will also not be blogging over the Easter Break, but will be back daily blogging after that. Today I’m looking at problems in a pay for performance system. From the point of view of outcomes theory, pay for performance systems are just another example of an outcomes system. Outcomes systems are any system which attempts to identify, measure, attribute and hold people, organizations or programs to account. A U.S. GAO report [2] on one such system is interesting reading (for those with a taste for obscure government reports). It reviews the National Security Personnel System which has just been put on hold by the Obama administration and they may axe it [1]. The problems identified in the GAO report include:
- Doubts about the accuracy of the employee ratings. Obviously, it’s crucial for stakeholders to have confidence in the accuracy of such ratings.
- Various technical and other problems with the way the ratings and performance pay were assigned.
- Negative impact on motivation and morale. If you focus the whole reward structure for a task around financial incentives, it is obvious that financial incentives will come to dominate the reward structure. Unsurprisingly, some employees found other motivation in their work in the civil service and believed that this approach was too simplistic.
- It became a test of how well employees could fill out the paper work for the system. Employees who were more technically-focused, and less skilled in dealing with creating a positive impression through the written documentation required by the performance management system, felt that they were being discriminated against.
These are common problems with such systems. Some of them can be fixed relatively easily. For instance one problem was that the performance system paper work had to be done at the end of the financial year and employees therefore had the choice of either doing their actual work (it was a very busy time of the year for them) or reducing the amount of work they did and concentrating on their performance management paperwork! Some problems are harder to fix because they are intrinsic in the system. These are problems such as the negative impact on morale and motivation by reducing everything to a financial incentive.
Consistent with outcomes theory, those thinking about introducing such systems should not start from the position that it is going to be possible to introduce a pay for performance system which actually adds value. Of course, this is exactly the opposite position that most planners will come to such tasks from. They will have been instructed from higher-up to put in place such a system. The place to start in thinking about such systems is to look at the benefits and costs of their implementation and be prepared to accept that in a number of cases, while they seem like an intrinsically good idea (who could argue with the concept of pay for performance in the abstract), in practice they may not be worth it and should not be implemented.
From a technical point of view, one aspect of the GAO report I was interested in was their discussion of the issue of linking employee objective to their agency’s strategic goals and mission. It was discussed, but not extensively in the GAO report, but it is central to the whole logic of a pay for performance system. If such a system does not link what is being rewarded to the overall mission of the organization, then in what sense is it pay for performance, exactly what performance is being paid for? (Underlying this is an issue about the distinction between validity and reliability which I might blog about soon).
The report said that ‘first steps’ were being taken in regard to this issue within the system (GAO, 2008, p.18). From an outcomes theory point of view, dealing with this issue needs to be at the heart of any performance management system and one would have hoped that more than first steps had been taken by the time the system had been running for some years. Of course, I can understand why they were only ‘taking first steps’ because dealing with this questions seems at first sight to be complex. However, it really needs to be addressed before such a program is implemented, not after it has been implemented.
Looking at it from an outcomes theory point of view, this problem is no different from the problem faced in any outcomes system of any type and it needs to be dealt with in a sufficiently sophisticated and robust way if it is not going to cause problems further down the track. The key issue is, how should the links between what an employee is meant to be trying to do and what an agency is trying to do be represented and how should the issues of measurement, attribution and accountability be dealt with. Dealing with these types of issues is what outcomes theory is all about. First we need to conceptualize the problem. To do this we can use the concept of the five building-blocks which underlie any outcomes system. Secondly, we need a way to represent the linkages and the issues around measurement and attribution and outcomes theory suggests that a good way of doing this is to use a visualized outcomes model.
I don’t know of instances where outcomes theory has yet been used to help set up a pay for performance system. But if you did come to the conclusion that such a system was likely to be worthwhile in a particular case, then a good way of working would be to just see the situation as any other contracting situation and to apply the suggestions from outcomes theory as to how to do that. These are set out in an article on contracting for outcomes.
If anyone does want to discuss whether this approach could be applied to a pay for performance system, get in touch.
Paul Duignan, PhD
Outcomes and Evaluation Blog (OutcomesBlog.org)
[1] Davidson, J. (Tuesday 17 March, 2009) Controversial Pay-for-Performance Program Put on Hold. The Washington Post. (p. D03).
[2] GAO (2008) Human Capital: DOD needs to improve implementation of and address employee concerns about its National Security Personnel System. September 2008 (GAO-08-773)
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[...] they may be very reliable, but not particularly valid). This seems to have been a problem with the pay-for-performance system I discussed in my last blog, it was measuring things and rating people alright. But there were some who thought that what it [...]