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A model for linking pay to performance

Dec. 2, 2012 - 01:27PM   |  
By HOWARD RISHER   |   Comments

Every once in awhile, ideas come together and trigger an ‘Aha!’ moment. The first was a recently released Brookings Institution study, “Do Performance Reforms Change How Federal Managers Manage?” The second was the paper prepared for recent meetings at the National Academy of Public Administration, “Creating a Performance-Driven Federal Government.” Government has tried over roughly 20 years to create what is sometimes referred to as a performance culture.

The papers caught my attention because of the contrast with the way successful companies manage performance. Rutgers professor Charles Fay and I discussed corporate performance management practices in a 2007 report for the IBM Center for the Business of Government, “Managing for Better Performance: Enhancing Federal Performance Management Practices.”

A section of that report focused on the findings from a broad-based corporate survey conducted by McKinsey & Co. and the London School of Economics. The survey identified 18 management practices common in highly successful companies.

Virtually all of them focus, directly or indirectly, on how performance is managed. Notable by its absence from both the Brookings and NAPA papers is the idea that executives and managers should be accountable for performance. Companies reinforce accountability throughout the year in discussions, as well as with financial and nonfinancial rewards.

The business media occasionally have articles on the way meetings to discuss performance transpire in leading corporations. At the senior levels, the meetings are led by the CEO. No one attends unprepared; executives who fail to meet goals are questioned closely; an executive’s career prospects can rise or fall in a single meeting. In many companies, those meetings are monthly.

One of my memories from the corporate world is the continual dissemination of performance data. Every department has its own key indicators. Performance is compared with previous periods, with competitors, with other offices. There is ongoing pressure to improve performance. The focus on performance cascades to every level.

The importance of performance is reinforced with rewards, both financial and nonfinancial. Cash incentives are prevalent at virtually every level. Significantly, those plans commonly reward team or group performance. That’s also true in health care.

Executive incentives started years ago as profit sharing, and the underlying philosophy is, in a nutshell, “We’re all in this together.” All executives and managers benefit when their company is successful. At lower levels, team performance is rewarded for achieving operational goals.

Recently, I drafted a report on pay for performance for the Organization for Economic Cooperation and Development. It was an incredibly interesting opportunity to study the practices in the 34 member countries. Only five countries have not adopted a pay-for-performance policy: Belgium, Greece, Mexico, Poland and Turkey.

Canada’s executive incentive system stands out as a model for the U.S. to consider. Government executives are eligible for three separately calculated cash payments: one based on the achievement of individual or team performance objectives; the second, introduced in 2011, based on the achievement of “corporate commitment” department or agency goals; and the third awardable only for exceptional achievements accorded the highest rating. Last year, only 8.9 percent of those eligible received the exceptional achievement bonus.

Currently, the maximum award, combining the three components, at the highest executive level is 39 percent of base salary, and at the lowest executive level, the maximum is 15 percent.

The corporate commitment is an idea that caught my attention. For 2011-12, the commitment involves improving the productivity, efficiency and effectiveness of operations and service delivery. Eligible executives are rewarded as a group or team for improving performance.

Canada obviously believes government executives should be accountable for improving agency performance. As an idea for the Senior Executive Service, it might make sense initially to define minimal or threshold performance levels, and require agencies to reach at least those levels of performance before SES bonuses can be paid. In other words, agencies would have to perform at least at the threshold level or no one would be eligible for an award.

There are certainly critics of cash rewards.

Yes, there can be unintended consequences, but inevitably, that is a result of poor planning — and prospective awards significantly larger than those in government. A far worse practice is rewarding or implicitly accepting poor performance.

Creating a performance-driven government is not a measurement or data problem; the McKinsey study highlights the practices that recognize and reward the actions and teamwork that contribute to organization success. Everything accomplished by government is attributable to someone’s work efforts. Rewarding successful performance has been central to our cultural heritage.

Howard Risher is a consultant and writer on federal pay and performance issues. He was the managing consultant for the studies leading to the 1990 Federal Employees Pay Comparability Act and is the author of “Planning Wage and Salary Programs.”

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