Monday, July 4, 2011

Why peformance pay is difficult to implement in social sectors?

Conventional wisdom would have it that performance-based pay is the most effective strategy to improve outcomes in any organization. Corporate sector payouts accordingly have two parts, a fixed salary and a variable performance-linked bonus. Can the same strategy succeed in public sector bureaucracies like education, health care, and other regular government departments?

As I have already blogged about it here and here, I am sceptical of its success when implemented in scale in a country like India. Here are a few reasons why performance-based pay can run into problems in real-world implementation on scale.

1. Quantification and measurement problems

The fundamental pre-requisite for any credible performance-based pay system is its ability to quantify and measure outcomes. To start with, there is a strong case that not all dimensions of performance in social sectors can be quantified. Complicating any measure of quantifiable outcome is the role of widely varying exogenous factors like social and economic background of student/patient/customer, family environment, historical and legacy factors etc, all of which exert considerable influence on the final outcome. Furthermore, it is important to have some level of broad consensus about the variables used to measure performance outcomes and the actual measurement process itself. Such consensus is rarely forthcoming.

For example, how do we reliably measure learning outcomes among students? Even assuming some level of consensus among all stakeholders about what should be measured, what are the instruments available for its measurement? How do we ensure that instruments like examinations are not subverted when implemented in scale? How do we capture the personal interest shown by certain teachers, that encourages parents to send children in larger numbers? These are questions for which there may not be answers which have some reasonable level of acceptability.

2. Monitoring problem

Once there is a broad acceptability of the performance measure and the process of extracting it, its credibility also depends on the rigor of monitoring. Too much rigour in the measurement and data collection process also runs up against the problem of cost-effectiveness. It is natural that any such measurement system, especially if deployed for not-so-low stakes decisions, is bound to attract attempts at subversion.

Even assuming the availability of a credible enough performance measurement framework, like in case of maternal and child health interventions, the challenge of reliable data collection remains. How do we ensure that the ANM is not reporting inaccurate figures? Super-checks and sample validations by third party agencies, while useful, may not be credible enough when done on a state-wide or national scale.

3. How much bonus is appropriate?

A bonus is effective only when its magnitude is beyond a particular threshold. Too low a bonus fails to evoke the desired or even any performance response. This is more likely given the already high salary levels among government employees. However, too high a bonus, apart from being not cost-effective, also distorts incentives by raising stakes. Complicating matters, the optimal bonus level varies both across sectors and with each sector from place to place. For example, what works in education may not be the same in health care. In education itself, performance bonuses may differ from primary to secondary school, and from one geographical area to another.

Given all these factors, calculating the bonus with any reasonable level of accuracy, becomes a very complicated task. Further, if there are too many bonus slabs, then that creates another set of dynamics.

4. Cultural socialization

Any performance-based payment initiative has to be institutionalized both administratively and culturally. But the latter is difficult to achieve when implemented in scale in countries with wide social and cultural diversity.

In fact, its widespread cultural or social acceptance as an incentive to reward good performance underpins the success of the administrative implementation. Such consensus plays the critical role of creating the stakeholder pressures and institutional vigilance that are vital to ensuring that forces to subvert the system from within are foiled.

In the absence of socialization about its benefits among the stakeholders, willy-nilly subversive tendencies creep in. Once a significant share of the employees have partaken of bonuses at some time or the other, it is only a matter of time before they come to view these bonuses as entitlements and unions enter the fray.

5. Maintaining credibility

The success of such initiatives is, to a large measure, dependent on its acceptability among the large portion of its stakeholders. This credibility rests on tenuous foundations. It is easily shaken by a few jolts, which most often ends up giving a convenient excuse for opponents to question its reliability.

Once a few lapses get highlighted, especially high-profile ones, a downward spiral is never far away. Loss of credibility inevitably follows. It suits the vested interests to publicise such shortcomings to add credence to their opposition.

6. Political constraints

Any government service delivery channel, especially in democracies, is embedded in a political system. It is therefore natural that the processes and administering stakeholders are exposed to political dynamics. The most visible manifestation of this are trade unions. There are far too many areas where political considerations can take precedence in the conceptualization, implementation and sustainability of performance-based pay initiatives. Once such considerations creep in, it dilutes the program's objectivity and raises hackles among rival political and social groups, thereby denting the credibility of the process.

In fact, it should be sine-qua-non that all new public policy initiatives are analyzed in terms of political constraints to see the practicality of its implementation and examine whether there are strategies to overcome the identified political hurdles. A program that appears logically sound, but fails this test may not be worth pursuing.

7. Scale dynamics

Much, if not all, of the evidence of success with performance-based pay in social sectors comes from small scale experiments. Such studies fail to account for the dynamics that emerge once a performance-based pay program is scaled up. Apart from the logistical exercise of managing the collection of reliable data, there are also issues arising from socio-political factors. In fact, all the aforementioned factors have the potential to manifest in the most unexpected manner when the initiative is implemented in scale.

The administrative challenges are the most formidable. For example, how do we address the problem of teachers and administrators in a remote village or taluk colluding to subvert both the measurement and its collection. And imagine the problem when there are a large number of such taluks.

It is anybody's guess as to how these factors interact with each other and contribute to the emergent system. But most often the emergent dynamics are detrimental to the sustainability of the initiative.

In conclusion, I am inclined to believe that any performance-based pay system foir government officials, while unobjectionable at a theoretical level, may be very difficult to implement, most certainly for political and administrative reasons, in the prevailing environment in countries like India. While it may succeed in a limited area, scope and time, it may not yield the desired results with a more ambitious scope and pan-Indian area of implementation.


KP said...

Dear Gulzar,

Thanks for a post that explains the problem with performance based incentives in government, particularly for a country like India.

Bureaucratic roles are structured to be outside the realm of competition. ( While various interests may compete for a decision in their favour).

By definition, the role is afforded a large degree of protection, to ensure fairness in decision making within the constraints of a political mandate.

The "cost to company", basis - that will include incentives - is an extremely narrow comparison and completely avoids an assessment on the basis of the nature of the role - and ignores subsidised perks and benefits of stability etc., <particularly in the case of roles in government agencies).

In many cases the starting point of the discussion is "similar role -similar pay - similay type of incentive" - but that sometimes is just a clever starting point from where this discussion begins.

I am assuming that "incentivization" here is in comparison with the private sector - where the pay for performance principle has its own unique downside.

The current discussion on incentives centered on the learning from the financial crisis - is the shift in power to managers from shareholders - where perverse incentives have made managers more powerful.

Incentivization has complicated the already muddled scenario between Principal (shareholders /stakeholder / Government) - Agent (executive / bureaucrat) - and Society.

regards, KP.

KP said...

Dear Gulzar,

Here I found, an illustration of what can go wrong in incentive based approaches to education.

Search : Systemic Cheating is found in Atlanta's school system

NYT. .. on cheating in Atlanta's state-mandated criterion-referenced competency tests.

I like this quote from the article

“It becomes a question of what it means to be educated,” said Maria Pease, a former teacher who is the parent of a high school student. “Does it mean the highest test score? I would argue it does not. This is part and parcel of a general dysfunction that isn’t particular to Atlanta public schools.”

if this is the case in the US, the decline in India in social sciences education ... and anything other than professional degrees (management?)... which actually is a case of both mis-signalling and mis-labelling ... is regressive in the long run.