PERFORMANCE-RELATED PAY SCHEME FOR GOVERNMENT EMPLOYEES IN CHILE: 1998-2004

1. GOVERNMENT OF CHILE MINISTRY OF FINANCE Budget Office PERFORMANCE-RELATED PAY SCHEME FOR GOVERNMENT EMPLOYEES IN CHILE: 1998-2004 Alberto Arenas de Mesa Deputy Director, Budget Office, Ministry of Finance of Chile October 07, 2003

2. MODERNISATION OF THE STATE AND ITS FUNCTIONS In the 1990s Chile began to modernise its public sector management, starting, in 1998, with the pay structure, by introducing a results-linked concept, or performance-related pay (PRP). The reform process took place in an economy with no fiscal deficit and with the participation of the public sector workforce unions, as players and beneficiaries of a modernised state.

3. PUBLIC SECTOR ANTECEDENTS PUBLIC SECTOR STAFF DISTRIBUTION: 2002

4. PUBLIC SECTOR ANTECEDENTS Public spending on human resources grew substantially between 1990 and 2002, by 124% in cumulative real terms, an annual real average increase of 6.4%. Spending on central government staff was equivalent to 19.2% of total public expenditure in 2002 and to 4.4% of GDP. Specifically, between 1990 and 2002 salaries rose in cumulative real terms by 71%, well above the 47% real growth in national pay levels in the same period.

5. CHILE’S CIVIL SERVICE REFORMS Unlike reforms in other countries, where civil service reforms have aimed to reduce the size of the public sector, exercise more control over expenditure and balance the fiscal finances, Chile’s reform process is directed mainly at strengthening management and administration capabilities in its public organisations. The reform can be divided into two stages: • 1998-2002: The Initial Stage • 2003 onwards: Consolidating the Process

6. PERFORMANCE-RELATED PAY1. 1998-2002: The Initial Stage The PRP scheme was applied at the level of individual members of staff and of the organisations, and allowed regulated growth in pay rates. The aim is to reward good performance by individuals and organisations, raise the quality of public services, increase salaries, and motivate civil servants. • Base increment: The fixed component, paid in all cases to all employees: • 5.5% in 1998 • 6,0% in 1999-2002 • 8% in 2003 • 10% in 2004 • Individual performance increment: PRP applied to each employee, awarded on the basis of individual performance ratings: • i) 4% for the 33% of highly-rated staff in each workplace • ii) 2% for the second, lower-rated group, up to a total 66% of the best-rated.

7. PERFORMANCE-RELATED PAY1. 1998-2002: The Initial Stage • Institutional performance increment: PRP applied at organisation level. This introduces management by results in public organisations. Employees receive a pay increment related to their organisation’s performance on its management objectives, agreed in the management improvement programmes (MIP) • Compliance with the management objectives in an annual MIP gives agency employees the right to a 3% salary increase the following year, provided the agency has met at least 90% of the annual objectives. The increase is 1.5% if compliance is between 75% and 90%.

8. MANAGEMENT IMPROVEMENT PROGRAMS • First two years: performance against quantitative goals, 1,200 indicators • Budget unable to assess relevance and accuracy, 99.5% received maximum benefit • In 2000 focus changed towards assessing progress in managerial systems development • Managerial systems in 7 areas: • Human resources • Customer service • Strategic planning and management control • Internal auditing • Decentralization • Financial management • Gender focus • For each of the above, previous regulations, directives, but little compliance

9. MANAGEMENT IMPROVEMENT PROGRAMS • Every area divided into systems • Progress in every system coded through descriptors • Government agencies assess their current situation and propose next stage to attain

10. MANAGEMENT IMPROVEMENT PROGRAMS

11. 1. Preparation and approval of Framework Program 2. Preparation of agency MIPs and submission to Ministry of Finance 3. Agency MIPs sent to Ministerial Committee for approval. 4. Preparation of MIP Decrees 5. Evaluation MANAGEMENT IMPROVEMENT PROGRAMSOperational Design

13. PERFORMANCE-RELATED PAY2. 2003 onwards: Consolidating the Process New Deal on Employment and the Senior Public Management System Work continued in 2003 on improving public management to provide better public services. In 2001, after lengthy negotiations, the government and the public sector employees’ union, (ANEF) reached an agreement; in 2002 a new law was drafted and sent to Congress, in October, and finally came into force in June 2003. The aim of the new legislation, known as the New Deal on Employment and the Senior Public Management System (Nuevo Trato Laboral y Sistema de Alta Dirección Pública), is to develop an integrated policy on public sector employment through improved incentives, and through major changes in the mechanisms for appointing senior civil servants.

14. PERFORMANCE-RELATED PAY Specifically, the new law strengthens the PRP scheme with higher incentives in the pay structure and increments for excellence at organisational level; sets up a permanent system of voluntary redundancy; and, in 2004, increases the modernisation allowance by 8%. Modernisation allowance: 1998-2004

15. PERFORMANCE-RELATED PAYPublic Sector Pay Structure : 2001 and 2004

16. PERFORMANCE-RELATED PAY a)      Allowance for collective performance: PRP for team work. The increase is a new tool, applied on a decentralised basis by the heads of each organisation. The increment for collective performance is awarded to staff in teams, units or work areas depending on how well they meet their annual targets. As from 1 January 2004, target fulfilment by such groups in the preceding year will give the staff involved a 4% rise where compliance is at or above 90%, and to a 2% rise where the level is below 90% but at or above 75%. The head of each organisation will be responsible for defining annually the teams, units or work areas according to functional or territorial parameters, or both. Territorial parameters may be applied nationally or by region or province.

17. PERFORMANCE-RELATED PAY • Annual prize for excellence in public organisations: This prize will be awarded to the organisation that has excelled in service to the public in terms of productivity and quality. It will be given, from 2003 onwards, when the organisation with the best results has achieved 100% or above of its MIPtargets. The prize will consist of a 5% increment on the same base as the modernisation allowance. The National Civil Service Office will be responsible for managing and awarding the prize. • Senior executive allowance: With the implementation, in 2004, and development of the Senior Public Management System, top executives will receive a senior executives’ allowance, of which a percentage is variable, awarded on the basis of performance and target fulfilment set out in a specific performance agreement.

18. Senior Public Management System The new system covers civil servants in senior posts as heads of public organisations or their organisational units, and whose functions are chiefly the execution of public policies and the provision of services to the community, i.e. first and second level management. The System is based on entry through open public competition, on the principles of transparency, equity and merit. From 2004 onwards senior civil servants will receive a senior manager’s allowance of which part is performance linked. Heads of organisations and second level managers will receive the allowance depending on the percentage of targets met in their performance agreement of the preceding year, according to the following formula: i) a maximum 20% increment for meeting 100% or more of the targets, and ii) 50% of the maximum for meeting between 80% and 100% of targets.

19. DIFFICULTIES IN APPLYING PRP The implementation of the performance incrementhas been in force long enough to allow the organisations to draw some basic conclusions on both the drafting and the implementation, and for the staff organisations responsible for the technical and operational side of the programme to improve the processes and its tools. Main Results: Management Improvement Programs: 1999-2002 General Summary of Compliance for Agencies

20. DIFFICULTIES IN APPLYING PRPGeneral Summary of Compliance for Agencies: 2001 and 2002 160 79% 139 140 66% 116 120 100 80 Number 60 17% 17% 17% 40 30 29 28 4% 20 8 0 0% 1,5% 3% Compliance %

21. DIFFICULTIES IN APPLYING PRPGeneral Summary of Compliance for Agencies: 2001 and 2002

22. DIFFICULTIES IN APPLYING PRPGeneral Summary of Compliance for Agencies: 2001 and 2002 From 2001 onwards a new methodology has applied for the MIP, which explains the drop in the number of organisations in the highest level. However, There were no major changes in the number of staff; 94% achieved the maximum allowance in 2002. The fall, in 2001, in the number of organisations achieving it is due to the impact on decentralised organisations in the regional and provincial governments when targets and control mechanisms were imposed centrally and external adjustments were made. This reduced their performance levels considerably. General Summary of Compliance Staff distribution

23. DIFFICULTIES IN APPLYING PRPGeneral Summary of Compliance for Agencies: 2001 and 2002 Summary of Fulfillment for Centralized Agencies Summary of Fulfillment for Decentralized Agencies

24. MANAGEMENT IMPROVEMENT PROGRAMS, 2001

25. MANAGEMENT IMPROVEMENT PROGRAMS, 2002

26. CHALLENGES IN APPLYING PRP A significant challenge will be to apply the new PRP instrument for collective performance, which it is hoped will strengthen decentralisation and staff commitment to organisation goals. The organisation performance allowance for heads of organisations should recognise the achievement of strategic goals set in the respective performance agreements. The MIP management tool has not only reinforced the incentives for more effective and transparent management, but also forms a base from which to extend these efforts. In the short term, progress in meeting basic management system targets gives staff a financial increment. In the medium term, organisations that meet comprehensive targets or standards can then guarantee a level of management responsibility, which could give them differentiated institutional status.

27. CHALLENGES IN APPLYING PRP The Ministry of Finance is considering eliminating some kinds of controls of a financial-operational nature, like the pre-established regulation on cash surplus transfers, and integrating budget sub-items for operational expenses, in order to allow organisations to reallocate resources autonomously within the authorised overall appropriations. Work must continue on reviewing aspects of establishing MIPs in each organisation, and encouraging participation in, diffusion to and comprehension of the programme by employees and different managerial levels.