On Gaining Acceptance for Performance Pay in Government

Effective incentives strengthen engagement by rewarding employee contributions.

In stating its concern with the proposed 1.9 percent salary increase, the Office of Management and Budget recently argued that “Across-the-board pay increases have long-term fixed costs, yet fail to address existing pay disparities, or target mission critical recruitment and retention goals.” Equally important, general increases do not contribute to agency performance.

OMB reiterated its request for a $1 billion interagency workforce fund to pay for performance pilot programs. This is not to argue for or against salary increases but no other employer would agree to increase operating costs based on the unfathomable gap analysis produced by the Federal Salary Council.  

To borrow from a comment President Obama once made, some jobs are underpaid, some are overpaid—but government does not know the facts.  As I argued recently, the Bureau of Labor Statistics surveys were not planned to report competitive pay levels.

One of the stated goals in the president’s management agenda is to “Increase the link between pay and performance, and regularly reward high performers.”  That followed from President Trump’s January state of the union address, in which he called on Congress “to empower every Cabinet Secretary with the authority to reward good workers and to remove federal employees who undermine the public trust or fail the American people.”

The administration’s plan is to identify leading practices for the use of incentives to reward employees and recruit and retain top talent. This is not a new idea.  However, the track record is mixed. There have been a number of successful demonstration projects. But there is also the failed National Security Personnel System along with more specific problems in agencies like the Securities and Exchange Commission.

Performance Pay Sends a Message

Pay for performance takes several forms in the business world. Recognizing and rewarding high performers is consistent with U.S. cultural values; no successful business leader would consider reverting to any other policy. The two basic reward practices, merit salary increases and cash incentives, involve very different considerations for planning and management. In business both are integral elements of the typical pay package.

Merit pay is an accepted public sector practice in several states and municipalities as well. It’s been used by public employers as far back as the 1970s. I discussed Tennessee’s successful implementation in a recent column. Cash incentives, in contrast, have only rarely been adopted in government.

The thread running through all performance pay policies is the message communicating what management values. By far the dominant practice is to base rewards on goal achievement. Tennessee invested heavily in training for goal-based management. In business, progress in achieving goals is reinforced daily in internal communications. Managers meet frequently to discuss progress. Everyone understands that achieving goals is important to their organization’s success.  

Considered out of context, performance pay is a simple idea—financial rewards linked to employee performance are supposed to motivate employees to achieve desired results. It’s the donkey and carrot argument.

But research suggests it’s not that simple.

Employees Want to be Valued

In the right work environment, employees do not need extrinsic incentives. The key is a compelling purpose that is shared by co-workers. Government can and often does inspire continued commitment but it’s not automatic. The power of an organization’s purpose to inspire high levels of commitment has been confirmed in research studies.  

That’s consistent with the reputations of agencies where employees are motivated by their organization’s purpose. The National Institutes of Health, NASA and the Marine Corps are recognized as high-performing organizations driven by employees’ commitment to the mission.

There are clearly many agencies, and units within agencies, where contentious relationships between management and the rank and file hurt performance. Understanding the state of manager/employee relationships will be central to planning and managing a system governing merit salary increases.

Trust is a core issue. Providing employees with regular feedback on performance throughout the year is critical, and far more important in building trust than the dreaded annual reviews.

Research shows that negative feedback is more likely to be accepted when it is balanced and employees feel valued. When feedback is dominated by criticism, employees feel disrespected or blamed unfairly and they tend to withdraw, deny or resist the positive responses leaders expect.

Tennessee’s investment in training recognized the importance of having effective managers and supervisors. All the evidence suggests that federal agencies are not ready to link salary increases to appraisal ratings.

Leading Practices

One of the administration’s priority goals is to identify leading practices for the use of performance incentives to reward high-performing employees and recruit and retain top talent.

The leading practices have not changed appreciably for years, although one change that stands out is the growing prevalence of group or team incentives.

In other sectors, management incentive plans are prevalent. These plans have been based on the same model for decades—payouts are linked to the achievement of company and individual goals. Typically, all executives, managers and senior specialists participate.

Similar plans for lower level employees, based on achieving team or group goals, would be an important change. Several years ago I worked with a unit of the General Services Administration to plan what is sometimes referred as “goal sharing.” While it was considered successful, with management changes and reorganizations it was eventually terminated.

In part the plan’s success was attributable to the heavy involvement of employees.  Small teams were involved throughout—they owned the plan. With guidance, employees are fully capable of planning effective incentives.

Individual incentives, however, are rare outside of sales.  

The private sector experience suggests several lessons learned for government:

  • Affected employees should be involved in planning all reward practices. It’s a proven strategy.
  • Mutual trust is essential; new practices have to be seen as fair and credible.
  • At the end of each year, participants should have opportunities to suggest needed changes.
  • The performance criteria have to be specific to jobs and reflect local operational considerations.  
  • Participants need to agree that goals are within their control and reasonable.
  • Metrics are important; subjective appraisals may not be accepted.

Effective incentives strengthen engagement by rewarding employee contributions; ineffective plans, especially when problems are ignored, trigger active disengagement and deteriorating performance.