Editor's Note: This is the second in a two-part series on compensation practices. The first story, which appeared in the August issue of Government Executive, is available here.
he past few years have seen more changes in the way work is organized and managed than in the previous half century or more. From the Total Quality Management philosophy of W. Edwards Deming to Michael Hammer's reengineering ideas to Peter Senge's notion of the "learning organization," there has been steadily growing interest in ideas that empower workers and give them better opportunities to grow and use their full capabilities.
But in recent years there has also been a growing awareness that these initiatives have largely failed to deliver expected improvements in performance. A report published earlier this year, "Enhancing Organizational Performance," by a National Academy of Sciences committee funded by the Army Research Institute, documents the unimpressive track record of management reform efforts. It notes that one study, by the consulting firm McKinsey and Co., found that 67 percent of TQM programs more than 2 years old were shut down for lack of results.
One of the reasons for this lack of success is an unstated assumption that workers would see the value of the change and climb on the bandwagon. The fact is that people naturally resist change. They can be expected to behave in the way that is in their best interests, but they must have a reason to let go of the past.
Research done by Barry Macy of Texas Tech University shows that increases in productivity of 30 percent to 40 percent are fully possible with an integrated work management strategy. Macy has identified a list of more than 60 "action levers" that influence productivity. They range from new technology to self-managed work teams to human resource policies, such as group incentive plans. Organizations have typically focused narrowly on one of these levers at a time, when they should have developed a broader, more integrated strategy.
Macy's research confirms that significant performance gains only come when workers are engaged and have opportunities to grow and use their full capabilities. That requires a plan that wins their support and commitment. Something must give them a reason to embrace change.
That something is often money. Recently announced pay demonstration projects at the Defense and Commerce Departments and the Veterans Benefits Administration reflect the understanding that the federal pay system needs to be modified in the context of larger initiatives to improve performance. The General Schedule pay system was conceived in a very different era and is simply not an incentive for high performance.
Types of Rewards
Pay is only one element in an organization's reward system. Behavioral scientists categorize rewards as either intrinsic (such as job satisfaction) or extrinsic (such as promotional opportunities or pay increases). Both need to be managed to support organization goals.
One of the problems with quality management has been a failure to recognize the power of extrinsic rewards. Deming may have been correct in assuming TQM would be intrinsically satisfying to many workers, and he did try to correct some problems with performance appraisals. But in many ways, even after companies and agencies embarked on TQM initiatives, extrinsic reward systems continued to reinforce old behaviors.
Extrinsic rewards can and should be linked to specific goals or desired behaviors. The Veterans Benefits Administration's pay experiment, in which employees in the agency's New York and Detroit regional offices will receive pay incentives to stimulate improved customer service, reflects this understanding.
When organizations inadvertently neutralize the pay system and do not take advantage of its incentive value-as the federal government has done for decades-they send a message to employees. Pay systems are never neutral; employees always learn what they need to do to receive a pay increase or to be promoted. After the first few years of a career, only the most idealistic workers can afford not to worry about salary increases, promotions and other tangible rewards that come with success. If the rewards are not based on performance, people often spend their energies worrying about other work considerations and commit only the minimum day-to-day effort needed to get by.
Employers today have another incentive to strengthen the tie between pay and performance. In the current economy, it is a rare employer who can afford to grant across-the-board pay increases. Private and public employers alike are working to end a sense of entitlement among their employees. The recent wave of federal job reductions has forced civil servants to understand that their employer now has little choice but to use pay as a lever to try to improve government operations. The question facing federal managers is how to integrate pay practices with other management systems.
New Pay Concepts
There was a time when personnelists (to use a word unique to government) looked for new methods or systems in the same way that people shop for new models in cars. New methods were desired because they were marketed as the new style and because they had more chrome than the old models. Under the hood, however, the engines were unchanged.
Now, though, organizations are doing more than tinkering around the edges. They are moving rapidly to adopt new approaches to the organization and management of work. Self-managed teams, for example, represent a radical departure from the traditional command-and-control management thinking. Personnelists are working with line managers to develop new systems to support this brave new world.
One of the most important criteria is flexibility. The old model for salary management was designed for static organizations, where change was infrequent; the new model has to accommodate frequent change. The old model focused on highly defined jobs in which each employee was required to perform a specific list of tasks. That led to multi-page job descriptions and endless lists of unique job titles.
In the new environment, organizations expect employees will be called on to perform new and different tasks as new challenges crop up. The new answer to paying workers in such organizations is broad banding, also known as pay banding.
Banding is a radical departure from the traditional salary structure embodied in the General Schedule. Some corporations now pay their employees within five or six broad salary bands, which replaced 30 or more salary grades. As employees get better at their jobs, they are granted salary increases and promotions that move them through the bands. Banding makes it impossible for personnelists to maintain the traditional close control over individual employees' pay, so the responsibility for salary management shifts to line managers and supervisors.
One of the earliest employers to adopt the broad-band concept was the U.S. Navy at its China Lake demonstration project, which started in 1978. Now other federal organizations are following suit. The Commerce Department, for example, is switching more than 3,000 employees to a broad-band system that will allow for bigger raises for high-performing employees and bonuses of up to $10,000.
The demand for flexibility also has prompted private-sector employers to move to more generic job titles and job descriptions. For example, employees at the U.S. unit of Mercedes-Benz now have one of two possible job titles: Team Leader or Team Member.
Another new concept in salary management is "competency-based pay." Under this concept, employees are paid for what they capable of doing, not for what is in their job descriptions. Competency-based pay is reflected (although the phrase is not used) in a new demonstration project planned for 50,000 Defense Department acquisition personnel.
The clear intent of competency-based pay is to encourage employees to take responsibility for their individual growth and advancement. The message is, "Your value to the organization depends on what you can do. If you want to earn a salary increase, we expect you to grow in your job. We will help you to understand your strengths and weaknesses, and provide development opportunities, but you have to be responsible for your career progress."
Organizations today need to be concerned about more than individual compensation. They need to figure out how to reward work groups and teams of employees for their accomplishments. Several pay systems have been developed for teams. They typically include a base pay component and a variable pay component tied by formula to team results.
In general, pay-for-performance systems linked to group accomplishments fall under the category of "gain sharing," also known as "goal sharing" and "success sharing." The original gain sharing plan, developed by a union leader in the 1930s, was based on calculating the savings in labor costs generated by improvements in operations and then sharing those gains with workers. Now the phrase is used loosely to refer to any group incentive plan where participants are paid lump-sum awards based on how well an organization or a group performs.
The payouts under these plans are typically low, in the range of 4 percent to 8 percent of salary, but they still can be a meaningful incentive. They are adopted to introduce a shared focus on important performance measures, such as customer satisfaction or quality.
Gain sharing was tested in a demonstration project called Pacer Share at McClellan Air Force Base in California, but the results were mixed. The concept has also been adopted by a small but growing number of local public employers, but most of those plans are too new to evaluate.
Organizations can now choose from a wide range of pay-for-performance concepts in assembling a pay system. In contrast to traditional pay programs, which adopted a one-size-fits-all approach, program designers now must create programs that fit an organization's unique needs. Gain sharing programs, for example, have to be linked to specific performance measures and reflect realistic performance expectations.
PBOs and Beyond
Public-sector organizations are increasingly being granted the freedom to develop their own pay systems. North Carolina and Georgia, for example, are moving in this direction. Texas operates without a central personnel agency, so departments have considerable discretion. In the federal government, the demonstration project authority as well as the Clinton administration's proposal to create performance-based organizations opens this door at least a crack.
The administration's model legislation for creating a performance-based organization recognizes the potential of the reward system to affect performance. The bill's language gives PBOs broad discretion to design leading edge rewards systems that are as aggressive as any in the private sector.
It builds on the 1993 Government Performance and Results Act goal-setting and performance measurement requirements, authorizing the creation of awards programs based on organizational, group, and individual achievements. Bonuses of up to $25,000 could be granted to executives, which would make the program fully competitive with corporate incentive plan payouts.
Replacing the current federal pay system with a series of new ones based on performance improvement is a sensitive and potentially disruptive process that needs to be carefully planned, anticipating the reactions of all the stakeholders. Employees' acceptance of a new system depends their perception of management and its handling of the current program as well as their sense of how they will make out under the new program. The plans for any new program should include a proactive strategy for selling employees on the need for change and the rationale for the new program.
The move to link pay to performance is a business strategy that warrants ongoing top management involvement. Top managers need to start by defining the organization's performance goals and the role employees will be expected to play. For example, if customer satisfaction is a goal, the changes in the pay system need to focus on the things employees can do to better serve customers. The reward system needs to reinforce desired behaviors and competencies. That is the strategy behind the VBA demonstration project.
Federal agencies are entering a whole new world. The demonstration projects and the PBOs have been encouraged to aggressively develop new pay concepts. If this thinking is extended to balance of government, it will be more than a quiet revolution.
Howard Risher, senior fellow at the Wharton School's Center for Human Resources, is co-editor and principal author of New Strategies for Public Pay (Jossey-Bass, 1997). He was the managing consultant to OPM on federal pay reform and served on the NAPA task force on broad banding.