Old programs reinforce habits,prevent change needed in public sector

Governments face the same kinds of organizational challenges and pressures that private-sector organizations face. They need to focus on the needs of customers and be more productive, more flexible, more responsive. The ability to achieve these goals is a measure of competitive advantage.

Lester Thurow, a management expert, argues that in future, people will be the only sustainable source of competitive advantage, not only in private-sector organizations, but also in the public sector. For governments, this means taking a new approach to people management.

The new reality in public-sector employment
If public-sector organizations want to recruit, motivate and retain high-performing employees, they should take a close look at current compensation trends and at employee expectations.

At one time, a public-service career, in which an individual contributed to the “public good,” was considered something of a reward in itself and public servants were seldom paid as highly as people doing similar jobs in the private sector. The new generation of employees, however, is less likely to consider government work its own reward. Today’s employees expect competitive pay for the work they do, whether they do it for the public or the private sector.

In New Strategies for Public Pay: Rethinking Government Compensation Programs, Howard Risher writes, “many pay programs in government have been unchanged (other than in details) for 20 years or more.” Yet consensus is growing that conventional public-sector compensation programs no longer work, and do not meet the needs of employers.

As governments restructure, cut costs and try to boost performance, compensation programs can make all the difference. Outmoded programs entrench old habits and prevent needed change.

Conventional government pay programs
Rewards can be financial, social or psychological. For most employees, the most important rewards are financial. They include base pay, incentive payments and benefits. Although the public sector may offer other kinds of rewards, such as the opportunity to learn new skills, the chance of promotion, or public recognition for outstanding performance, money is still the most important reward. If employees do not feel that they are receiving a fair salary, other kinds of rewards will be insufficient to motivate them. Money and recognition programs must be integrated so that they work together and complement each other.

In the public sector, there are two main barriers to overcome in redesigning any financial compensation program.

First, most conventional public-sector wage and salary programs reflect the employee’s classification rather than the employee’s performance and therefore provide no feedback on employee behaviour.

High-performing and underperforming employees in the same category often receive the same pay. Many government employees have no incentive to strive for higher levels of performance. This situation engenders a sense of entitlement in many employees.

Second, these programs were designed to compensate employees according to their place in the hierarchy and to encourage them to seek promotion as a way of earning larger salaries. They were not designed to help employees adapt to changing work environments and conditions. They reinforce a static structure and inhibit restructuring.

Although using compensation as an incentive for improved performance is an accepted practice in the private sector, the idea of merit pay has been slow to catch on in the public sector and is still rare and controversial. General increase or step-increase policies in the public sector are still the norm.

Government benefit programs
Benefits, which offer a way to reward employees in ways other than direct pay, are treated differently in the public and private sectors. While base pay is usually lower in the public sector than in the private sector, the value of benefit packages is higher. In the public sector, the cost of paid time off and benefits is typically more than 20 per cent of compensation costs, whereas in the private sector, it represents 15 to 20 per cent. Defined benefit pension plans are still common in the public sector, although they are being eliminated in the private sector.

Another difference is the tax deduction available to employers. For private-sector employers, organizational contributions to benefit plans are a fully deductible expense; this is not the case in the public sector.

Designing an effective reward system
At a minimum, a reward system should be able to respond to and accommodate changes in the structure of the organization and should be aligned with the organization’s overall business strategy. In designing an effective program, ask the following questions:

•What results do we want to achieve?

•What employee behaviours do we need to achieve these results?

•How can we align our recognition programs with our current compensation scheme, our philosophy and our strategy?

•Should we have both formal and informal recognition programs?

•How many programs do we need and how will they reinforce each other?

•What activities and people will be eligible for recognition?

•How will we administer the programs?

The new program must be able to accommodate future changes. It can take up to three years to fully implement a new salary structure. Yet in three years, the organization can change dramatically.

Recent trends in government rewards programs
If public-sector organizations are to boost employee and organizational performance, they must find ways to institutionalize employee recognition and make it part of their organizational culture. Recent trends in government rewards programs include cash bonuses and non-cash rewards.

Making cash bonuses work: Cash bonuses can be effective in motivating public-sector employees to improve their performance. The important questions to ask in designing a cash bonus program are:

•Is the bonus appropriate in relation to the performance it rewards?

•Who is eligible for the bonus program? and

•What criteria are used to determine who receives a bonus?

Cash incentives may be large (a percentage of base pay) or small (a gift certificate), and should be clearly related to the significance of the employee’s contribution. A large reward for a minor achievement does not stimulate employees to exert themselves to deliver outstanding performance.

Most organizations determine employees’ eligibility for bonuses based on their position, salary level or salary grade, depending on the size of the organization. Although those who administer the program are usually pressured to include as many people as possible in the program, only employees who are in a position to make a significant difference to the organization’s results should be eligible. If everyone is eligible, the program will become meaningless and ineffective.

The criteria for receiving a cash bonus should be carefully selected. Cash bonuses should be used to reward behaviour that directly contributes to achieving the organization’s goals. In some cases, employees should meet more than one measure of performance to be awarded a bonus.

Large cash incentives provide more motivation than smaller ones, but they need to be designed so that they cannot be manipulated. This means instituting strong controls and maintaining complete and reliable data on which to base decisions about paying bonuses.

Non-cash rewards: Non-cash awards usually fall into one of four categories: merchandise, travel, recognition and status. Merchandise and travel work best in influencing short-term performance, whereas recognition and status (perks) can be used to bring about long-term change and affect organizational culture. In both cases, the perceived value of the award to employees can often be greater than its actual cost to the employer.

The questions to ask in designing a program of non-cash rewards for good performance are:

•Do the rewards make sense in the context of the organization’s culture? and

•Do the rewards appeal enough to the employees to make them a real incentive?

Awards can be tailored to fit the particular culture of the organization. For example, the merchandise or perks that might motivate employees of a government agency involved in health care might be very different from those that would motivate members of a transportation planning agency.

One of the best ways of ensuring that rewards appeal to employees is to offer a range of awards so that employees can choose something that is meaningful to them. One employee might prefer tickets to a sports event; another might choose a voucher for a meal in a good restaurant.

Some rewards can be offered to an entire group to reinforce a sense of teamwork. Others may go to individuals for providing outstanding service to the public, and thereby encourage others to follow that individual’s example. Whatever the reward, it should be something that reminds the employee about the larger goal of providing the best possible service to the public while improving productivity.

Administering a rewards program
Making a rewards program work takes planning and good management. The program needs realistic targets and clear goals. It must be easy to understand so that the relationship between desired behaviours and rewards is clear. It must also be administered impartially by financial staff, so that employees perceive it as fair. When problems arise, financial staff need the flexibility to deal with minor problems, and senior management must be prepared to tackle more serious issues.

The future of public-sector compensation programs
Conventional payment programs are not likely to disappear from the public sector in the near future. Government employees will continue to be paid according to their place in a rigidly classified hierarchy. However, the system may begin to change in favour of “incentive” programs that reward individual and team performance, and routine annual salary increases may gradually be phased out.

Merit pay programs will slowly gain ground, along with skilled-based pay and gain sharing. Benefit programs will need to become more flexible to accommodate these changes, as organizations try to control retirement and health-care costs.

Eric Cousineau and Sara Rafuse are human resource consultants at Johnston Smith International, a Toronto-based strategic change management consulting firm. For more information they can be reached at (416) 365-1865 or visit www.johnstonsmith.com.

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