1. Pay Reform in Public
Administration: Moving
Beyond Standard Advice
Zahid Hasnain, Senior Public
Sector Specialist (EASPR)
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2. Outline of the Presentation
1. What is the ―functional problem‖?
2. Key theories and reform levers
3. Short term career incentives
4. Longer term career incentives
5. Pay reform options
2

3. 1. What’s the problem?
3

4. In general, there are 3 problems that pay policy
reform are seeking to mitigate:
1. Agency productivity:
• Need to attract and retain high quality staff — competitive with the
labor market for all the key positions.
2. Individual effort:
• Pay should be perceived to be fair and transparent — compensation
should be matched to the demands of the job and staff should be
able to easily see this.
• Need to induce performance and accountability of staff to serve the
public.
3. Public sector wide :
• Need to do all of the above while ensuring that the overall wage bill
is fiscally sustainable and does not crowd out other expenditures.
Difficult to achieve all of these objectives as they may
be mutually inconsistent 4

5. 2. Key theories and reform levers
5

6. What motivates people?
• Theories of motivation
• Expectancy theory
• Reinforcement theory
• Microeconomic principal-agent model of labor
relations
• Behavioral economics - distinction between
intrinsic and extrinsic motivation (are public
service workers ―knaves or knights‖?) – LeGrand
vs Pink
6

7. What are the reform levers?
• External incentives
• Longer term incentives: Promotion, steadily increasing pay
over a long career, and recognition from peers.
• Short term incentives: Performance-related pay, non-
monetary recognition , and renewal of a fixed term contract.
• Opportunities to perform
• The space for self-directed work, a key enhancement to
intrinsic motivation, and adequate resources including, for
managers, reasonable confidence that they can obtain
results via the staff that they direct:
• Both external incentives and opportunities to perform are
important, particularly for managers. 7

8. Long and short term incentives seek to
address these differently
• Long term career incentives are largely about intrinsic motivation
• The public sector attracts people who like stability/certainty/predictability
• Respect and reputation are important parts of the long term reward structure;
• As long as pay is adequate to recruit people who are attracted by public
service then (merit-based promotion providing the prospect of higher pay later
in the career is an important part of the reward structure;
• Short term performance incentives focus on extrinsic motivation:
• Performance rewards are ways of addressing the problems of moral hazard
and adverse selection
• PRP however, can crowd out ―intrinsic incentives‖ (―if you’re going to treat me
like a factory worker on piece rate, I’ll act like one‖);
• The big return from performance-based rewards might be over time – as staff
who work well under performance-based incentives are attracted into a public
service that has it in place.
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9. The pay structures in developing countries can
be seen as unstructured attempts to address at
least some of the external incentive problems
• ―Typical‖ country will have base pay plus a plethora of allowances
and salary ―top-ups‖ for ―key‖ staff
• Why does this structure exist?
• Allowances and top-ups are needed to attract and retain certain
categories of staff
• Decompression of pay is generally not politically possible and
increases in pay for all staff will blow the budget
• The pay system is non-transparent; but that is at some level the
whole point because a transparent system would make it politically
more difficult to have pay that varies by categories of staff
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10. Indonesia is typical in many ways
Example: Monetary compensation in selected agencies
(excluding honoraria and in-kind benefits)
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11. WB standard advice of merging allowances into
basic pay has not worked
• We usually see these allowances re-
emerge over time
• The main reason is that it does not solve
the underlying problems, given the
political constraints
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12. 3. Short term incentives
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13. OECD countries have moved towards short term
incentives to try solve the 4 problems
• Realization that a uniform pay spine across the civil service was
not meeting the objectives.
• Starting in late 1980s, several OECD countries moved to pay
flexibility in the civil service:
• Differentiation: The same job can pay differently across agencies
and geographical locations
• Individualization, or performance-related pay: Two individuals in
the same agency in the same job get paid differently based on
performance
• Delegation: Decisions on pay are transferred from central civil
service agency to line ministry/agency which presumably has better
information about staff
• This mirrored developments in the private sector in the 60s and
70s. 13

14. Performance-related pay is now on the agenda:
What is the international experience?
• Many OECD countries, and some MICs (e.g. Thailand, Brazil)
have introduced PRP for core civil servants and service delivery
staff.
• Opinion is highly divided on whether or not performance pay
works.
• (Hasnain, Manning, and Pierskalla, 2012) recently completed a
review of the literature on performance related pay:
• 110 studies reviewed
• Disaggregated findings by (a) quality of the empirical study; (b) the
different types of public sector jobs; and (c) geographical context
(OECD or developing country)
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15. The theory behind PRP
• Largely focuses on individual incentive effects: Addressing
problems of moral hazard and adverse selection
• Impact on staff effort
• Impact on sorting: Higher quality staff who are likely to do better
under PRP self-select into the agency
• Counter argument: when tasks are multi-dimensional
incentivizing only some tasks that are observable and
measurable will lead to a substitution of effort allocation from
the unobservable to the observable tasks (―teaching to the
test‖)
• Behavioral economics also warns that PRP may crowd out
intrinsic motivation
15

16. Findings disaggregated by job type using
James Q. Wilson’s typology
Findings by job type
70
60
60 Failed Neutral Positive
Number of studies
50
40
30 24
19
20 15
8
10 5
1 3 3
0
Prod. Job Craft Job Coping Job 16

17. Findings by job type and country context
Relevant studies (craft or coping job) by country
context
50 46
45
Failed Neutral Positive
40
35
30
24
25
19
20 17
15
10
5 3
1
0
OECD Developing Country
17

18. Findings by job type and quality of study
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19. Findings by job type and quality of study
Findings for high quality (4 and 5) relevent
studies only
50 Failed Neutral Positive
44
45
40
35
30
25
20
15 12
10
10
5 2
0 0
0
Craft Job Coping Job
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20. To summarize
• Evidence suggests that explicit performance standards linked to
some form of bonus pay can improve, at times
dramatically, desired service outcomes.
• More rigorous studies are overwhelmingly for jobs where the
outputs or outcomes are more readily observable, such as
teaching, health care, and revenue collection.
• Insufficient evidence, positive or negative, of the effect of
performance-related pay in organizational contexts that that are
similar to that of the core civil service.
• Insufficient evidence in developing country contexts, particularly
for high quality studies.
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21. However, plenty of caveats
• Design of the PRP is key — badly designed incentive
schemes can result in ―gaming‖ the system.
• Lots of design elements to consider — what aspect of
―performance‖ is to be measured, how is it to be
measured, what will be the size of the performance
bonus, group vs. individual bonus.
• Few studies follow up PRP effects over a long period of
time — positive findings may be due to Hawthorne
Effects that dissipate over time.
• How does politics effect PRP? May be difficult to give
performance bonus to only few staff 21

22. Gaming
Frequency distribution of ambulance response times for life-
22
threatening emergency calls in UK
Source: (Bevan and Hamblin 2009)

23. 3. Longer term career incentives
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24. Longer-term incentives are less
information intensive
• Evidence of effort and ability gradually
emerge as staff undertake a variety of
different roles
• Much performance information is
tacit/reputational – more likely to be
accurate (but harder to refute if inaccurate)
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25. Longer-term incentives may be harder to
“game”
• The proposition is that it is hard to cheat about effort and ability
over the long term
• Long term incentives may also be more in line with intrinsic
motivation
• Types of long-term incentives:
• Competitive promotions
• Deferred compensation
• Reputation
• Necessary conditions
• There must be a real risk of not getting promoted based on
performance
• There must be room for career progression 25
• Pay must be sufficiently decompressed

26. 5. Pay reform options
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27. Why change?
What is the evidence that the system is broken?
1. Is there an agency productivity problem?
• Review the ability of the public sector to attract
and retain necessary skills
2. Is there an individual effort problem:
• Assess the degree to which current
management arrangements are minimizing
absenteeism and are keeping staff ―engaged‖ in
the agency’s mission.
3. Is there a public sector wide problem: 27
• Is the wage bill fiscally sustainable?

28. Look for a right balance between long
term and short term incentives
Maximizing Maximizing
extrinsic intrinsic
motivation motivation
External Long term Can provide Can provide
incentives to motivation motivation
perform
 
Short term Can provide Can demotivate
powerful motivation


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29. If a significant move towards PRP is
contemplated – pilot and leave an escape
hatch
• Pilot in a craft job — teaching, revenue
collection, health
• Meticulous focus on the design
• If possible, build in an impact evaluation
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30. Thank You
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