The perils of performance-related pay

Pressure is building to introduce more performance-linked pay schemes in social care. Mark Hunter reports on whether such schemes have been successful and whether they compromise practice

It’s not often that the Association of Directors of Adult Social Services, the Association of Directors of Children’s Services and the Local Government Association all refuse to speak to Community Care. But at the mention of three little words: performance related pay it was suddenly as if we’d insulted their granddaughter.

We did eventually speak to Local Government Employers, which is part of the LGA group. But its principal strategic adviser, Jon Sutcliffe, could barely bring himself to say the words.

“PRP is a very emotive issue so there tend to be other terms we use,” he says.

Terms such as competency pay, merit awards, payment by results and incentives all describe the process of relating pay to performance.

Jobs with PRP

But while the employers’ bodies are reluctant to comment on PRP, flick through to the classified section of Community Care and suddenly the reticence disappears. Several agencies and local authorities, including Wandsworth, Bexley, Milton Keynes and Dorset, are advertising social care jobs with elements of performance-related pay. Last month the family court body Cafcass announced a competence-based pay scheme for its employees including its frontline social workers. A survey by Local Government Employers last year found that 80% of first-tier officers, such as directors, received more than £5,000 annually in PRP.

And, as revealed by Community Care in June, the financial model for social work practices envisages performance-related funding that would rise from nothing in the first year to 60% in year four.

So, with PRP clearly happening throughout the social care sector, why does no one dare mention its name? Part of the problem is PRP’s rather chequered history. Pioneered in the private sector as a way of motivating staff, PRP first began to interest public sector bodies in the late 1990s. In 1999, the white paper Modernising Government emphasised the role of financial and other incentives to promote better performance. In 2000, the first threshold payments were introduced for teachers. Similar schemes for the police and probation officers followed.

In 2001 Newham became the first local authority to introduce PRP for social workers and offered an annual bonus of £1,500 to those who met appraisal targets. The unions opposed the move and the Unison representative at the time predicted it would not last. He was right. Newham abandoned the scheme in 2005. The police scheme has also been discontinued.

In fact many of the early public sector PRP schemes seem to have withered on the vine, mainly because there is very little evidence that they actually worked. Studies of NHS managers in 1997 and 1998 (see Sources, facing page) showed that not only did PRP fail to improve performance but that it also caused jealousy between staff and undermined morale. PRP has also been found to discriminate against women and part-time workers because their roles are often undervalued.

Risk of discrimination

“PRP can be very difficult to operate fairly so there’s a real risk of discrimination,” says a Unison spokesperson. “There can also be a detrimental effect on the morale of employees and these schemes tend to be very expensive. So although we don’t oppose PRP out of hand, we do stress that if it is introduced it needs to be very closely monitored and safeguards built in.”

A study of PRP in the public sector published last year by the Office of Manpower Economics concluded that public sector workers did respond to financial incentives, but these responses tended to be small, probably because the incentives themselves tended to be small. A more worrying conclusion was that PRP could lead to “gaming” whereby workers would alter their behaviour to achieve their bonus without increasing productivity. Finally, the study concluded that the jury was still out on whether PRP had actually improved the provision of public service:

“While it is possible to show that in some cases public sector workers have responded to these schemes, the overall benefits for society have not been assessed.”

One of the major drawbacks of PRP in the public sector and particularly in social care is the difficulty of assessing “performance”. While it may be possible to measure the number of visits made or assessments conducted, how do you judge the more intuitive aspects of the profession?

Tony Hughes is director of public sector consulting at the Hay Group and has worked with several councils on their pay structures. He agrees that PRP can be “more problematic” in the public sector but says that if it is done right it can produce benefits for employees, clients and the organisation.

“Transparency and equity have to be built in from the outset,” he says.

Crude systems

On the issue of assessing performance, Hughes describes a process whereby employees are ranked on a matrix in which the vertical axis measures “hard performance indicators” such as number of visits made, speed of response and so on, while the horizontal axis measures softer indicators such as behaviour, co-operation with colleagues and client satisfaction.

“The employees who end up in the top right hand corner of the matrix should be those gaining the bigger pay awards.”

Of course, this would mean that those who appear in the lower left hand quadrant should receive nothing at all. Strangely, this does not always happen. Indeed, one of the criticisms of PRP is that some organisations seem to have used it as a way of adding a non-consolidated (and therefore non-pensionable) lump to salaries, thereby making them seem a little more attractive than they actually are.

This, says Hughes, goes against the whole ethos of PRP: “There’s no point in PRP awards if everybody gets one.”

Sutcliffe agrees: “You would expect that about 5% of employees would have at least part of their performance-linked pay withheld. But in practice that doesn’t seem to happen. Our figures show only a few hundred employees have payments withheld out of a total workforce of 1.7 million.”

Keen to learn

Nevertheless, Sutcliffe says councils are keen to learn from mistakes made in the past and to bring in salary schemes that form part of an organisation-wide performance management culture.

“Unfortunately we have had experience in the past where PRP has been introduced with rather crude target-based systems, which can be costly and really aren’t very effective,” he says.

“The organisation has to have a very mature performance culture before you introduce performance-linked pay. But some have made the mistake of trying to use PRP to drive a performance-related culture. That’s putting the cart before the horse.”

Sutcliffe says about 40% of councils have some link between employees’ contributions and the progression of their pay, although he says there are many different models and “for most of them the scheme only applies to about 10% of the workforce”.

Safeguards

Those that are the most successful are those that have built-in safeguards to ensure they are not only fair but seen to be fair.

“It’s not just the imposition of pre-set targets,” says Sutcliffe. “It should also include skill sets, behaviours, training and so on. It has to be transparent because if it’s not then there’s a big risk you will end up with problems of pay inequalities. You also need to be absolutely sure that your line managers themselves are competent to make a fair assessment of performance.”

Sutcliffe acknowledges that PRP can be a bitter pill for public sector employees to swallow. But he is adamant that councils should get value for money from their staff.

“This is a big cultural change for the public sector,” he says. “It’s difficult to introduce and the unions are always going to be wary of this sort of agreement. However, we have long advocated that there should be a closer link between employees’ pay progression and the contribution that they actually make to the service. The wage bill for local authorities is £26bn. That’s a huge amount of public money and there has to be some accountability on the way it is spent.”

Sources

• Office of Manpower Economics (2007), Performance pay in the public sector: a review of the issues and evidence, available at www.ome.uk.com

• Dowling, G and Richardson, R (1997), “Evaluating performance pay for managers in the National Health Service”, International Journal of Human Resource Management, Volume 8, No3

• French S, Marsden D (1998), What a performance: performance related pay in the public services

This article appeared in the 20 November issue of Community Care under the title What a Performance