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Punishment, accountability and incentives

May. 23, 2014 - 06:00AM   |  
By HOWARD RISHER   |   Comments
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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Some of the problems surfacing in Veterans Affairs hospitals clearly warrant punishment. That’s way above my pay grade. However, when I hear reporters say executives “are cooking the books” along with statements that bonuses should be repaid, it tells me that something I think I understand, compensation management, contributed to the problems.

This is obviously not the first time Senior Executive Service (SES) bonuses have been questioned in discussions of government and its problems. A thread that runs through the media reports is the belief that the SES system is not what it should be.

Concurrent to the VA problems, though almost trivial by comparison, there was a recent report from the Partnership for Public Service on the decline in innovation. Together these situations serve to highlight a core problem that is all too prevalent in the public sector – executives and employees at all levels are motivated more by the anticipated consequences of failure than by the possible rewards for their achievements.

Industry is very different. The promise of rewards for success is a universal element of the culture. Achievements are celebrated. That’s of course true in sports, entertainment, education – in every endeavor, it seems, except government.

Ideally employees would feel obligated to speak up about important issues – they know where problems exist and often have great ideas for addressing those problems. However, research confirms what every federal employee knows: people are reluctant to acknowledge problems or to try new ideas because they anticipate negative consequences for failure. Federal agencies are by no means unique.

I can speak from the experience of managing the pay programs in two large companies. Failure naturally happens – employees screw up occasionally or fail to perform adequately – but businesses pay far more attention to the star performers. They get the attention and the big rewards. Poor performers are handled quietly; often no one is aware until they are gone.

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Research also shows that rewards are far more effective as a motivator than fear. Fear can make employees work harder but the impact is transitory and quality suffers. In the long run it can be demoralizing and devastating to performance. And fear can prompt people to do things that contradict their values as I suspect it did in the VA.

Accountability and consequences

Accountability is one of those words that’s widely understood but difficult to define. It’s interesting that in business accountability is rarely discussed; it’s taken for granted. Simply stated, business executives are accountable to shareholders for company performance; the promise of financial rewards is the quid pro quo confirming their accountability. In the absence of consequences, it’s an abstract concept – and that seems to be true in government.

The now universal use of group and individual performance goals is an implicit contract stating what each executive is accountable for achieving. Goal setting has been widely used in business for half a century. It’s never questioned.

Executive performance relative to goals is part of the calculations that determine incentive awards. That’s the other half of the contract with executives. Those awards are based commonly on two factors: company performance and executive goal performance. Incentives in business are best understood as a formula linking performance and cash payouts. Plan participants know what they have to accomplish to earn awards.

It’s also important to understand that incentives are an integral component of a cash compensation program. Cash compensation – the total of salary and incentives – is planned using market surveys. The totals are aligned with competitive levels. That approach is textbook.

The way bonus awards are handled in government is very different. Bonuses, by definition, are an extra, paid over and above the salary. They are based on subjective, after-the-fact assessments. I’ve heard stories of employees taking turns.

The problem is compounded when bonuses are based on performance ratings. The fact is that ratings are not credible. To quote from a new Partnership for Public Service report, Embracing Change, “How can you trust a system where 95 percent of the SES are rated as ‘outstanding’ or ‘superior’? Ninety-five percent. You can’t.” That’s from an agency CHCO.

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Another recent report on a survey of members of the Senior Executives Association confirms there is broad dissatisfaction with the performance management process. No one it seems supports it.

That makes it easy to ask, “Why are agencies spending this money?” In the business world, companies look for a return on the investment. Agencies would find it difficult to justify the awards. There is a reason to end bonus payments but only if the practice is replaced with well-designed incentives.

Incentives as part of the solution

The immediate problem is the VA. Executives in every other hospital are accountable for their hospital’s performance. Incentives confirming their accountability are routine. With the increasing importance of integrated health systems, those incentives are becoming more complex and encompass a broader range of specialists. (A few years ago I managed the compensation program in a multi-hospital system.)

The literature on measuring hospital performance is extensive. VA hospitals are not the same as those providing acute care but strategic planning, goal setting and measurement should be straightforward.

Needless to say, measures that can be ‘gamed’ should be avoided. For incentive purposes, each measure should be tested with scenarios covering the range of anticipated results.

The problem then is to define what the executive needs to accomplish to earn an award. In Canada that’s based on a combination of agency goals and individual goals.

Goal setting is not a panacea; there are jobs where it’s difficult to set meaningful goals. But every executive and manager should be able to state what he or she plans to accomplish to contribute to agency performance. That’s central to accountability.

Both Canada and the U.K. have executive incentives where individual goals are involved in calculating awards. It is a better answer than the current approach.

Performance management requires a commitment. There is truly no excuse.

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