Transcript Peter Dolton performance pay in the public sector

Performance Related Pay in the
Public Sector
Professor Peter Dolton
University of Sussex,
and CEP, LSE
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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?
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PLAN
• Why have PRP?
• Piece rates as simplest form are shown to be
efficient – Lazear (2000) Windscreen replacement.
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Why not? - Difficult
What’s special about the public sector?
Design issues in PRP schemes
Evidence
– Education
– Health care
• Reflections on Increment Structures
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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
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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?
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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.
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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:
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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.
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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.
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iii) Schools/Hospitals are not Firms
Objectives Are Not Clear.
• Schools/NHS Hospitals do not have profitdriving 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.
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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.
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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!
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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