Performance Related Pay in the Public Sector

1. Performance Related Pay in the Public Sector • Professor Peter DoltonUniversity of Sussex,and CEP, LSE NISER PRP Conference Seminar June 2014

2. MOTIVATION • Public sector is large part of UK economy output and deliver key outcomes. • Efficiency and responsiveness are essential. • Performance pay is common in private sector – about half of workplaces have some form of performance pay. • Why not in the public sector? NISER PRP Conference Seminar June 2014

3. PLAN • Why have PRP? • Piece rates as simplest form are shown to be efficient – Lazear (2000) Windscreen replacement. • Why not? - Difficult • What’s special about the public sector? • Design issues in PRP schemes • Evidence • Education • Health care • Reflections on Increment Structures NISER PRP Conference Seminar June 2014

4. Why Have PRP • Core issue: cannot pay people for their effort if we can’t observe it • So instead pay for output, tasks or performance - proxy for effort • PRP does two things: • Motivates, incentivises effort • Selects, attracts higher performing workers • Aligns incentives for worker with those of the organisation • Work out the optimal ‘gearing’ of the PRP Trade‐off between incentives and risks NISER PRP Conference Seminar June 2014

5. Design Issues • Linear (per‐unit) or threshold? • Individual or team? • Objective or subjective? • Relative or absolute performance? Tournament? • Monetary reward? Or resources for clients? • Who for? Workers? Bosses? NISER PRP Conference Seminar June 2014

6. What’s special about the public sector? • PRP much less common in public sector: • Is this because the optimal rate is low, or union power? • Measurement issues - Common occupations • Different occupations • Basically a Principal-Agent Problem. • No single factor appears special, but the combination is unique. NISER PRP Conference Seminar June 2014

7. Why is PRP Difficult to Implement? • Basically because: • Multitasking Environment • Incentives can induce counterproductive effects (e.g. Teaching to the Test with thresholds) • Multiple Principals • Let’s examine 10 reasons in bit more detail: NISER PRP Conference Seminar June 2014

8. i) Multiple Goals and Multitasking Occupations: • Dixit (2000) lists: basic skills, vocational skills, citizenship etc for teachers • Kerr (1975) - Folly of rewarding A while hoping for B • Holmstrom and Milgrom (1991)- agent diverts effort from less well measured activity. • Prendergast (1999) - explicit contracts are inefficient with complex jobs. NISER PRP Conference Seminar June 2014

9. ii) Multiple Principals • In Education these include: pupils, parents, teachers, governors, unions, LEAs, taxpayers, employers, pressure groups etc • In Health these include: patients, nurse unions, BMA, Patients Associations etc • Dixit (1997) shows how the presence of multiple principals makes overall incentives much weaker. NISER PRP Conference Seminar June 2014

10. iii) Schools/Hospitals are not FirmsObjectives Are Not Clear. • Schools/NHS Hospitals do not have profit-driving incentives. • Although schools/hospitals compete in a quasi- market these provide only indirect incentives. • Best outcomes are harder to determine and may not be in League Tables of MRSI but long run patient outcomes like well-being. NISER PRP Conference Seminar June 2014

11. iv) Inputs and Outputs are Difficult to Observe • Pupil performance/ patient outcomes may not be observable until years later • Individual teachers/doctors responsible not easy to identify – it’s a team game. • Other influences on outcomes? e.g. parents, relatives • Teachers may want interest and creativity, etc Government may want basic skills. • Doctors want discharge, patients want quality of life. NISER PRP Conference Seminar June 2014

12. v) Career Considerations • In many organisations career considerations like later promotion, create incentives for effort (Dewatripont (1999)). • Teaching ladder & Health Care has admin jobs for the promoted who may not want that. Let the good teachers teach and good surgeons operate!! • Doctors do things to become Senior Registrar and Consultants. – Play the game! NISER PRP Conference Seminar June 2014

13. vi) Peer and Subjective Evaluation are Difficult • Could lead to favouritism • Leniency, Centrality biases • Could lead to misallocation of effort to please assessors. • Costly evaluation and regulation. NISER PRP Conference Seminar June 2014

14. vii) Teaching/Health Care is a Team Activity • Much of Health Care/Teaching is about team effort & collaboration NOT rivalry and competition • Individual contributions difficult to determine. • Individual incentives could mitigate against team work. • Allocation of low ability classes which nobody will want to teach. • Havng said this – its anomolous that sections of the NHS are free enterprise – GPs. NISER PRP Conference Seminar June 2014

15. viii) Code of Professional Ethics • Incomplete labour contracts can be augmented by strong code of professional behaviour. (Matthews (1991), Eshel et al (1998)). • Such a code can provide the necessary individual incentives even though this imposes costs of reciprocal public good. • Professionalism induces intrinsic motivation as a mode of behaviour without explicit reward. If you introduce explicit reward this can destroy this. NISER PRP Conference Seminar June 2014

16. ix) Teaching/Medicine is Heavily Unionised • Individual incentives may be incompatible with collective action. • Teacher unions try to be both union and professional body - leads to conflict of interest e.g. strike activity. • BMA has a stranglehold on doctor pay and conditions – this is often to the detriment of patients and the tax payer. NISER PRP Conference Seminar June 2014

17. x) State Education and NHS has Lack of Competition • Although there is a quasi-market with league tables and parental choice de facto there is not enough competition. • Quasi market is not strong enough to influence teacher incentives. • Private health care in much of the country is too small a share to be competitive. NISER PRP Conference Seminar June 2014

18. Evidence For a policy discussion we need the answer to a causal question: If we introduce PRP, how will productivity change? Evidential requirements for causality are hard. There is little robust evidence on the impact of performance pay in the public sector. •Interested in the main outcome, and potential unwanted side‐effects •Consider: education, health care. NISER PRP Conference Seminar June 2014

19. Evidence 1: Health Care – Hospitals and Nurses • Systematic reviews find different effects but little evidence in favour of performance pay. • Study of Advancing Quality in NW England (Sutton et al 2012):Team‐based (hospital‐level) performance pay; tournament basis; multi‐task safeguards. • Rewards not salary but invested in clinical care • Significant fall in mortality • Different strategies to achieve the gains; collaboration not competition. NISER PRP Conference Seminar June 2014

20. Evidence 1: Health Care – Consultants & GPs • TARGETS AND OUTCOMES BASED: • Fundholding reduced costs – but increased GPs profit • QOF –Resulted in too much expenditure. • CEA – Pays highly paid consultants for past performance – but based on research and other factors – which do not necessarily relate to patietn outcomes. NISER PRP Conference Seminar June 2014

21. Evidence 2: Education International evidence is mixed: Some studies (tournaments) show positive effects (eg Lavy) Others show no effects (eg Fryer) Often strong effects in developing countries BUT general lack of evidence. •Differences in design may be important •Study for PRP 2000 scheme by Burgess et found small effects – by not convincing. Very poorly designed scheme. Dolton et al examine conditions for the identification of PRP effects of teachers. NISER PRP Conference Seminar June 2014

22. Increment Structures?? • From 2015 public sector increment structures are going. • But how do we insure a lifetime wage profile which rewards return to experience. • No productivity measurement to act as metric. • Wage drift problem • Demographics. NISER PRP Conference Seminar June 2014

23. BUT – TO REMIND YOU!!! • Incentives work - Private sector, public sector; unskilled occupations, skilled manual, professionals. • But be careful! - “On paying for A whilst hoping for B” • Design matters crucially - match scheme to production; content of the incentive; framing –loss aversion; measurement; multi‐tasking safeguards; ... • Requires clarity on the organisation’s goals. NISER PRP Conference Seminar June 2014

24. Conclusions • Education/Health Care is multi-tasking with multiple principals • Teacher/Doctor effort is difficult to verify because of output measurement and team work. • Teacher/Doctor effort is costly to monitor • HENCE – Teacher/Doctor incentive effects from PRP are weak NISER PRP Conference Seminar June 2014

25. Solutions?????? • More structured role for DDRB and STRB to creative incentives. • Differential pay by subject and location for teachers & specialism and location for Consultants • For teachers put Professional Code into hands of GTC and let teachers run GTC. • Create real ‘lifetime careers’ for teachers and top medics that do not involve admin jobs. Dont ask GPs to run CCGs • Study leave, innovation grants and better non-pecuniary conditions in terms of hours of work. • Get rid of CEA for consultants. • Take GPs out of self employed business sector. NISER PRP Conference Seminar June 2014