Allan Hawke is aware of the argument that performance pay is supposed to work in organisations where rewards constitute a significant part of total remuneration, judgments about performance are based on things under the direct control of the individual being assessed, and people are satisfied that the assessments and mechanisms used are fair and reasonable. And, he’s ‘absolutely certain’ none of those preconditions can be assured of in the APS.
Leaders often define themselves by the issues on which they take a stand. My seven-and-a-half years as a secretary in three departments of state spanned an era when performance-based pay became the order of the day — a fashion I resisted for the reasons outlined here.
The essence of my argument is:
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- performance pay is at odds with public service culture;
- performance pay ignores the complexity of how the public service actually works;
- performance pay is bad for morale and teamwork; and
- performance pay gives senior leaders an excuse to avoid real leadership.
During my public service, I came to appreciate the importance of rituals, symbols and words. So, it may come as no surprise that I believe the term “human resources” indicates a mindset that treats people as human capital, assets, units of production, etc., with inherent control connotations. HR mostly stands for “human remains” which describes what’s left after they have done their job. This is not just nit-picking semantics — words, phrases, and terminology such as “HR” can be bullets. The term should be outlawed in favour of the more positive notions of “People and Performance”.
The performance-pay paradox
Performance-based pay experiments in the Australian Public Service have been abject failures in the eyes of the people affected by them.
Given the complexity of much of the public service, success or failure are mostly shared outcomes — that’s because responsibility for meaningful bundles of work can rarely be made co-incident with individual responsibility. This factor alone bedevils performance pay.
Performance appraisal and pay assumptions usually conclude:
- evaluation covers performance over a (normally) 12-month cycle, not just the period of recent memory;
- evaluators are consistent with one another or equilibrated through a moderation process;
- evaluators apply a consistent “objective” standard between employees; and
- individual employee contributions can be discerned from the contributions of other managers and workers.1
These beliefs usually arise from the command and control school of management.
Theory X and Theory Y applied to you
Douglas McGregor 2 developed Theory X and Theory Y in the 1960s to describe what he discerned to be two very different approaches to workforce motivation. Importantly, McGregor regarded X and Y as binary constructs, whereas I argue that they represent different poles of a continuum and where employees sit on the scale depends on the leadership and prevailing circumstances at the time.
Based on traditional views of direction and control, Theory X asserts that:
- the average person has an inherent dislike of work and will avoid it if they can;
- most people must be coerced to contribute toward organisational objectives; and
- most people prefer to be directed, wish to avoid responsibility, have relatively little ambition, and want security above all.
Theory X managers see their job as being “to motivate” their employees, believing carrots and sticks are the only effective way to get things done. Herzberg proved 30 years ago that motivation is an internal construct and you can’t actually motivate others to do much of anything other than what they want to do, or what they perceive to be in their self-interest.3
This might be illustrated by how supervisors respond when an employee approaches them about a stuff-up. The carrot and stick school tends to shoot the messenger, assign blame, and punish. So, employees learn not to confess further errors, potentially leading to disastrous consequences. Those with a more positive view thank their staff for drawing attention to the problem and work with them to fix it. They get told of future problems as they emerge and have the opportunity to resolve them before things get too far out of hand.
The rewards aren’t worth it
I think the vast majority of APS staff would not see performance pay as being in their self-interest. The rewards (even for secretaries) are relatively small, the ranking system rankles because many good performers not given the top rating think they have been short-changed, and the system is not regarded as fair.
Leadership and management policies and practices provide insight into how leaders regard their employees.
Punished by rewards1 argues the case against the carrot and stick approach.
Performance-pay acolytes (usually in an unstated or unrecognised manner) consider that a reservoir of withheld effort must be coaxed or forced out of people. This is the underlying premise for incentive pay programs and/or manager’s efforts to motivate and control their workforce.1
The reality is that there are not many bad people in the workplace — Deming’s rule of thumb says 4% of the workforce will be brain-dead non-performers. It’s particularly interesting that so many executives shy away from dealing directly with poor performance and unacceptable conduct in the workplace, especially given the way those affected by these inappropriate behaviours feel about it. One might, therefore, expect this aspect to feature in performance-pay regimes, but even there it seems to be the exception rather than the rule.
Performance pay in the APS
Most APS performance-based pay programs follow a three-step process:
- determining the approach — what’s to be done, by when and to what standard;
- the performance period — normally the calendar or financial year; and
- the performance review – the boss undertaking an “objective” evaluation of the subordinate’s performance.
Typically, evaluation involves a boss/subordinate discussion followed by the assignment of a numerical rating, sometimes with forced rankings according to the classic bell-shaped normal distribution curve. (Defence’s system, by contrast, was based on incremental advancement up the pay scale, without forced rankings.)
The outcome usually has a remuneration implication covering pay-at-risk, merit pay, bonuses, and judgments about contenders for promotion.
Responses to “why do it?” usually are:
- as a basis for differential pay/reward for outstanding performers;
- to provide performance feedback to individual employees;
- to identify candidates for promotion;
- to foster communication between supervisors and subordinates; and/or
- to motivate employees.
It’s origins in the APS
As I recall it, performance pay was introduced as a back-door way of lifting remuneration for senior staff. That could not be achieved through the Industrial Relations Commission because of the very restrictive rules applying to pay increases at that time, which the government had advocated to the commission and felt bound to adhere to. It was argued that since employees contribute at different levels of effectiveness and effort, this could be recognised through the introduction of a performance-pay regime. The fact that that rationale no longer applies seems lost with the effluxion of time, although enlightened departments and agencies have done away with performance pay.
Nevertheless, the practice remains widespread in the APS (and is almost universal in the private sector) because so many managers believe in it. They believe it works without consciously and critically analysing the assumptions behind the practice.1 And they believe in it, despite 90% of managers considering the approach to be unsuccessful.4
Performance pay is inherently ‘the wrong thing to do’
Some commentators argue that the practice continues despite evidence to the contrary because it relates to the manager’s need to maintain control — or the illusion of control.1
Peter Scholtes, who has researched and written quite a bit about performance, appraisal and pay, argues that such a performance “management” regime is inherently the wrong thing to do because three faults are common to all variations on the theme:
- it doesn’t work;
- it’s wrong to focus only on individuals or groups, because most opportunities for improvement involve systems, processes and technology; and
- performance “management” is judgment, not feedback — it’s a hierarchial dynamic.4
Even when well-intended, ratings are judgmental and related to control of the person being evaluated based on the presumption that the person’s inadequate contribution is separable from any systemic origin of poor performance.
It’s a system ripe to be gamed
Where such schemes are in operation, most individuals or groups will game the system and work towards optimising their take, regardless of its wider impact on achieving the results they or their group are there to deliver. Creative accounting, goal displacement, withholding information, reduced quality at the expense of more output, individual visibility that discourages co-operation and other strategies are the perverse results of such a perverse system. The inherent contradiction of proselytising individual performance pay assessments while simultaneously exhorting teamwork escapes the acolytes.
The method, criteria and philosophy of evaluation differs between one evaluator and another. People are subjective and they are not at all objective about their subjectivity.
Numerous factors affect favourable or unfavourable bias — including age, family, and educational background, physical appearance, etc. None of these are job-related, but they do influence the outcome of performance evaluation. Where these discriminatory practices are pointed out, the people concerned deny they exist.1
Performance pay can lead to patronage, subordinate sycophancy, playing and paying favourites, oiling the squeaky wheel, toadyism and other inappropriate practices. Imagine the consequences of ministers being involved in the process and decisions below secretary level.
A former secretary once commented that he had assessed his SES as all being in the top 5% to 10% of the APS! And he had a PhD in mathematics.
Let’s assume for the purpose of illustration that there is a truly unbiased performance pay system in a typical Gaussian distribution. Half of your people will learn that they are below-average — a statistical inevitability. Some may accept their fate; others will view this as proof that their manager is incompetent. Some will redouble their efforts to prove the judgment and system wrong — that may be noticed, and they may be lucky enough to be ranked above-average next time. If so, someone above-average last time will fill their below-average slot this time.4 All of this must do wonders for morale and superior workplace performance.
Then there’s the case where people are told their rating by their direct supervisor before it disappears into the black box of moderation and comes out at a lower level — apart from the lack of transparency, the recipient’s perception is one of unfairness and it’s deeply demotivating. Those who invoke “science” in moderating people’s scores to a decimal point are kidding.
The Orwellian named “efficiency dividend” has had particular effects on some small agencies (particularly those where most of their budget comprises staff costs), leading to very significant differences in pay rates for people doing jobs classified at the same level. The reality is that how well or badly people are paid in these circumstances often turns on how well their organisation has done in the budget-bidding process. As well as the equity argument, this works against mobility and a unified APS. The Moran blueprint’s analysis of what’s happened since devolution of bargaining in 1997 is spot on, as are the accompanying recommendations.
I think there is a compelling case to abolish performance pay and return to centralised pay fixing, perhaps under the auspices of the PSMPC.
How the department secretaries did it
How did I rationalise these views with the performance pay regime for secretaries?
In my day, the prime minister determined, on advice of the Remuneration Tribunal, that secretaries would be eligible for an annual 10% bonus of total remuneration for superior performance, or 15% for outstanding performance.
Every 12 months, each secretary wrote a self-assessment based on criteria that included:
- meeting government objectives;
- strategic, high-quality, frank and timely advice to ministers;
- leadership; and
- professional and personal integrity and adherence to the APS Values/Code of Conduct.
Other aspects were covered from time to time, including what was being done about IT outsourcing when that ideology was popular.
The self-assessment, which formed the basis of a discussion between the secretary and portfolio minister, was copied to the secretary of the Prime Minister and Cabinet (PM&C) and Public Service Commissioner. They, in turn, discussed the secretary’s performance with the portfolio minister and reported to the prime minister, who decided the outcome.
The Remuneration Tribunal’s guidelines said that performance-based remuneration was not a device to provide salary supplementation to officeholders and should not be applied or administered in that way. Rather, it was a way of recognising performance over and above what was reasonably expected of the officeholder performing their duties competently.
I could never believe that secretaries would work harder or differently just because of the possibility of an additional 10% or 15% before tax.
Accidental politicisation of the APS?
A key question that arose in my time was whether the system of appointing and removing secretaries caused politicisation of the APS. The issue was complicated by differential use of three and five-year appointments and the implied message in who got those “contracts”. However you answered these questions, there was the potential for a perception issue.
The portfolio minister obviously expressed satisfaction or dissatisfaction with a secretary’s performance in discussion with the secretary of PM&C and Public Service Commissioner. One danger was the inference that the subsequent award (or non-award) of performance pay meant that the secretary had satisfied (or not) the minister’s partisan political demands.
In the case of the term of office, people drew conclusions about the prime minister’s view by reference to whether the appointment was for three or five years.
I argued without success to do away with performance pay and fold it into base salaries, although that did subsequently occur for secretaries when Prime Minister Rudd came to office.
The discussion on goals, priorities, and the nature of the minister/secretary relationship is a very positive step, as is the annual self-assessment report from the secretary and associated interaction with the portfolio minister. Interestingly, cabinet ministers were wary that their performance and judgments were also being assessed and reported to the prime minister by the PM&C secretary, and may have tailored their comments accordingly.
Performance-based pay conclusion
To sum up, I believe that performance bonuses, performance appraisals linked to pay outcomes, and other performance-management schemes that involve a “proportion of pay at risk” lead to distorted results and raise issues of equity, ratings moderation, and forced distribution.
I am aware of the argument that performance pay is supposed to work in those organisations where rewards constitute a significant part of total remuneration, judgments about performance are based on things under the direct control of the individual being assessed, and people are satisfied that the assessments and mechanisms used are fair and reasonable. But, I don’t believe any public or private sector organisation can satisfy those criteria. I’m absolutely certain that none of those preconditions can be assured in the APS, and that it’s no accident they underlie the rampant misbehavior in the financial services sector. I delivered this address in 2001, but this issue remained under the carpet until Justice Hayne let the cat out of the bag.
To me, a 1996 Human Resources Management article quote captures it nicely:
“From several perspectives, merit pay schemes do seem desirable; yet, in spite of this, merit pay often brings about results precisely the opposite from those desired: dissatisfaction, discouragement and decreased performance.”
I tried to influence the Management Advisory Committee’s paper on Performance Management — to no avail against the prevailing orthodoxy. Some years later, the ANAO carried out an audit on performance management in the APS that should have been enough to convince the diehards to abolish performance pay, but the practice continues today, with the same problems and unintended consequences. It’s hard to escape the conclusion that APS agency heads who remain performance-pay devotees are disciples of and wedded to Theory X practices.
As always, I welcome any comments, criticisms and suggestions; please direct them to me at [email protected]
- Kohn, Alfie: Punished by rewards: the trouble with gold stars, incentive plans, A’s, praise and other bribes (Boston: Houghton Mifflin Co., 1993).
- Douglas McGregor, of the MIT Sloan School of Management, developed his Theory X and Theory Y explanations of human motivation in the 1960s. He is cited as the creator of the “human resources” term, influenced the way performance reviews are conducted and shaped the idea of pay-for-performance in the private sector. Although his theories are rarely referred to nowadays, they underpin many modern-day management philosophies, including the “hard” versus “soft” schools.
- Herzberg, Frederick: One more time: How do you motivate employees? Harvard Business Review, September-October 1987.
- Scholtes, Peter R: Reward and incentive programs are ineffective — even harmful and his other articles and books, particularly The leader’s handbook.
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