Public service reform needs complex approach


OPINION:The idea of target-based rating systems for individuals fails to appreciate that people are motivated differently, writes PETER LUNN

AN ACCEPTED truth in economics is that people respond to incentives. Translated into ordinary language, this is usually taken to imply that getting people to change behaviour requires a bit of “carrot and stick”. Public servants may be about to get a taste of carrot and to feel the stick.

In the extensive negotiations with unions and employers over the “national recovery plan”, the Government is likely to obtain agreement for public sector reform, which unions may see as preferable to taking further hits on pay and pensions. Most commentators assert that reform is overdue. They may be right, but “reform” can mean many different things.

The Government is aiming for the full implementation of the recommendations of the Task Force on the Public Service. Some reforms appear straightforwardly sensible and are backed by bodies of evidence. These include developing more online services, sharing resources across public organisations, allowing freer movement of staff and, perhaps especially, basing promotion solely on merit.

Yet the core of the reforms is about applying carrots and sticks or, as the official documentation puts it, “managing for performance and challenging underperformance”.

Every public service organisation and every individual worker is to get explicit targets and to be evaluated against those targets, via performance ratings. Managers are to ensure that a specific proportion of their staff receive below average scores and ratings are to be linked to career progression. The Government accepts that this requires “a major cultural change in the public service”.

Such plans may prove popular. There is a widespread belief that the public sector is shielded from the rigours of the private sector, with respect to performance as well as pay. The argument is that introducing some of that rigour will improve efficiency and help us to escape the budgetary mess we are unquestionably in.

The job of an economist, however, is to look dispassionately at the evidence. Beliefs and views do not constitute evidence. Instead, there is a wealth of empirical studies in economics and organisational behaviour of direct relevance to workplace motivation and productivity. What does it show?

It may surprise some to learn that such stringent performance rating systems are not that common in the private sector, especially outside large multinationals. Indeed, it surprised the economists who first discovered this. A more sophisticated analysis has since emerged.

Looking across several decades of studies, Canice Prendergast, professor of economics in Chicago, found what he called “dysfunctional behavioural responses”. That is, rating systems like that proposed for Ireland’s public service produce undesirable incentives as well as desirable ones.

The problem is that most outcomes depend on more than one worker, making it difficult to isolate individual performance. When performance is debatable, incentives are no longer straightforward.

The system rewards ingratiation. Employees devote time to being seen to be productive, leaving less time to be productive. Workers deliver impressive outcomes just before assessments and slack off afterwards. The ironic upshot is that productivity can actually fall when rating systems are introduced.

The research also shows that private sector managers are unwilling to give low ratings, marking poorer performers as average instead. This behaviour has been observed in those areas of our public service where the system has been introduced already and it is the basis for forcing managers to give a set proportion of low marks. Why are private sector managers unwilling to swing this stick? Because they understand that branding someone a poor performer is unlikely to motivate improvements.

Two interesting findings of behavioural economics are relevant. First, almost no workers rate themselves as below average, so those handed low ratings perceive it as unfair. Second, perceived unfair treatment is known to reduce productivity even when there are large financial rewards to working harder. Fairness is a powerful workplace motivator. Bruised workers are likely to resent their boss and to revise downwards their perceived likelihood of promotion – strong demotivators.

Forcing managers to identify a set number of poor performers also rewards that ever-present creature of office politics, the back-stabber. Teams do not thrive when individual players stand to benefit from the misfortunes of colleagues.

Bad incentives can be created even where targets are objective and measurable, because innovation and flexibility matter too. Important developments, ideas or events often arise after targets have been agreed. Consequently, the rigid incentive system may mean more missed opportunities and less responsiveness.

Overall, there is much evidence that target-based rating systems are unlikely to increase productivity and may even reduce it, which is why most private companies do not use them. This is not to say reform is not needed. Our public service probably could work better. Comparisons with other developed nations show that Ireland is not among the best performers, nor is it handicapped by a poor public service – “fair-to-middling” might capture it. What reforms might improve on that?

The assumption that everyone is ultimately motivated by narrow personal reward has rightly gone out of fashion. Empirical evidence, especially that offered by behavioural economists, shows it to be wrong. The carrot-and-stick approach may appear to be common sense, but people have many and varied incentives. We are much more sophisticated social operators than donkeys.

A recent and extensive study by the Work Foundation in the UK identified common properties of the most successful private sector organisations: good communication between fellow workers; open and accessible managers; simple management structures; a culture where change is not feared; trust, loyalty and pride in the organisation.

Some of these properties make occasional appearances in the Government’s lengthy reform documents. It is not too late to bring them centre stage.

Peter Lunn is an economist with the Economic and Social Research Institute and the author of Basic Instincts: Human Nature and the New Economics (Marshall Cavendish Business, 2008)