Pay-for-performance otherwise known as merit pay is a compensation system that attempts to link rewards with the attainment of the goals and objectives of an organization. In recent times, the implementation of the system has increased significantly in the private sector with some advocating for its use in public bureaucracies. Pay-for-performance is providing incentives for specific, defined productivity initiatives, as opposed to bestowing a set salary. At various government bureaucracies, salaries are usually based upon the duties, grade, seniority, and responsibilities of the position, rather than upon the achievements accomplished by the individual. While calls to link performance to pay have become louder in recent times and particularly in the educational sphere of the public sector, pay-for-performance has proved to be a controversial notion even in the context of profit-making organizations. At public bureaucracies, the need for institutional loyalty and ascension through the ranks may prove this form of rewarding performance to be both complex and difficult. However, the criticism that there is a lack of initiative shown at many public institutions has motivated a desire for the establishment of pay-for-performance salary structure in public bureaucracies.
The case against pay-for-performance at private as well as public institutions has always been that it rewards external behaviors, while companies should encourage service motivated by a desire for internal rewards. Pay-for-performance rewards employees who achieve short-term benchmarks, rather than establish a sustained commitment to the organization over time. It can also discourage cooperation between employees, given that the employee that achieves the greatest number of concrete achievements gets the highest level of compensation. Though the use of pay-for-performance may be appropriate in some sales-driven environments, the cardinal goal of public institutions is to render service to the public, not to serve the personal needs of the public servants. Doing good, rather than making money is the essence of public service, and a teacher might shy away at taking on a low-performing class, or employees might try to avoid difficult public issues, for fear of blemishing their records if a pay-for-performance plan is introduced.
In the context of public institutions, encouraging competition can often result in undermining collaboration and teamwork which in today's world can have adverse effects considering the need for the sharing of information and human resources among departments and agencies. In fact, there have been scholarly arguments that the real problem of pay-for-performance is its motivation of employees to focus mainly on those tasks that promise immediate rewards even at the detriment of the organization (Lagace 2003).
Pay-for-performance can theoretically reward innovation and new ideas: another reason for its use in private enterprise is the tendency for bureaucracies to become closed and static institutions. However, more often than not, the employers set the terms of the reward system in a manner that reinforces current organizational values with the focus being to meet predetermined goals that can even lower vision, risk-taking and innovation. The net effect is that people will be more stereo-typed in their position as anything otherwise may have an adversely impact on their reward (Hayes 1999). Furthermore, on a highly basic level, pay-for-performance can be an unfair form of compensation. Rewards are sometimes said to ignore the real reasons that may necessitate a given situation. The use of a commission system, for instance, may fail to recognize pricing or packaging as the reasons for the inability of the salesmen to meet their targets (Hayes 1999). The focus can shift to altering employees in a superficial manner, rather than upon harmful external factors that are the real root of the problemand addressing the 'root' of the problem, whether it is poverty or injustice, is the purpose of public bureaucracies, especially educational ones. At one corporation, while the employees first embraced the concept of getting larger payment incentives for outstanding work, eventually they became frustrated with the realization that extraneous factors affected their work and thus their earnings, even though they were trying their best at all times (Lagace 2003).
Teamwork is a feature of most public institutions, but high-performance teams are often reluctant in admitting colleagues with lower capacity and performance fearing a reduction in their bonuses, or can make life uncomfortable for individuals whom they did not want on their teams, but with whom they must work (Lagace 2003). Pay-for-performance can lead to personality conflicts or severe disparities in skill levels between teams with employees becoming more self-serving than showing interest in the group or organization.
Another problem, not peculiar to public bureaucracies but especially endemic to them is funding. One of the reasons that pay-for-performance workplaces become so competitive is that employees who routinely receive bonuses are often disappointed when they can no longer get them and thus experience some degree of difficulties in keeping up with their lifestyle (Lagace, 2003). They get angry at their colleagues and supervisors if they think they have been short changed. Worst of all at a public institution, frustrated employees may vent their anger at the people whom they serve. A social worker might feel angry at his or her employees who have not 'performed' well enough to secure her a bonus; a teacher might be angry at students whose standardized test scores are not high, even though they are functioning at the optimal level of their ability.
Public bureaucracies often have less money to use as incentives, which can make competition even more, rather than less competitive at private institutions, and resentment may also develop if, for reasons unrelated to performance, there is a reduction in the budget of the organization, thus; also reducing the funds available for performance-based incentives. A team or employee who meets their benchmarks yet does not receive the same compensation as the year before, because of government cutbacks, will be even angrier, perhaps, than a private-sector employee whose base pay is significantly higher than a public employee.
Even these positive and pessimistic scenarios assume that the pay-for-performance system is working at an optimal level, but this too is far from assured. Managers and non-managers think differently about the compensation enjoyed by employees. While more managers are of the view that better performing employees get better compensation, few non-managers seem to agree with that view. Even more revealing is the position held by the employees themselves who allege to be regularly assessed against criteria that are previously unknown to them (Meisinger, 2007). Defining the rules by which compensation becomes essential, and a perceived lack of clarity or worse, perceived unfairness can hinder rather than strengthen performance. Pay-for-performance requires defined standards and a system of review and appeal that is reasonable and proven to work.
Ultimately, unlike a profit-making company, whose primary responsibility is to shareholders, and who might explain short-term profits that can temporarily increase the organization's bottom line, a government agency is supposed to serve the public and stress teamwork, rather than ruthless competition over the long term. A compensation system should be effective. It should be transparently fair and unambiguously understood by all concerned (Meisinger 2007). Given the size and confusion endemic to most public bureaucracies and the difficulty of achieving these objectives at even small private companies, pay-for-performance is likely to do more harm than good, and divert attention from achieving the organization's objectives.
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