Mahan's Pay-for-Performance idea should not be controversial
The Theory of Incentives: The Principal-Agent Model, by Jean-Jacques Laffont
Anyone who's worked in tech knows that linking compensation to reaching performance metrics is old hat. Surprising, then, to hear retrograde analysis from CM Cohen trying to delay Mahan's limited application of the idea to SJ city gov't. The U.S. Office of Personnel Management explains why pay-for-performance works even at the federal level.
The U. S. Postal Service (USPS) and the U.S. General Accounting Office (GAO) have both adopted programs that compensate their employees based on performance.
During the early 1990s, the USPS experienced severe financial difficulties including a projected budget deficit of some $2 billion in 1992. Factors identified by the USPS that contributed to this crisis were that pay was not related to performance, compensation was not at levels comparable to the private sector, and customer focus was lacking.
To help address these problems, the USPS adopted a pay-for-performance plan for its management employees that included a group incentive program (i.e., a variable pay program). (Note: agencies covered by title 5 also can use this type of program.)
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The program is a group incentive plan that provides lump sum cash payouts based upon how well organizational units achieve their objectives.
The success of the USPS' pay-for-performance program, as measured by its three "Voices," has been significant. From 1994 to 1998 the percent of on-time delivery for overnight mail has steadily increased each year, while lost workday injuries as a percent of work hours has steadily decreased each year. And, for the first time in its history, the USPS has had a positive net income for 5 consecutive years.
Broadbanding at GAO
Gil Fitzhugh from the GAO described its pay-for-performance program. The program's objectives include basing rewards on contributions and performance, making pay increases available yearly, and providing larger base pay increases than are currently allowed under the General Schedule to top performers.
To determine pay increases, panels made up of unit managers take into consideration the employee's performance appraisal, a contribution statement prepared by the employee, and the panelists' knowledge of the employee's work.
Employees are then compared to each other in terms of the extent to which they exceeded job expectations, the magnitude of their contributions, the complexity of their work, the quality standards they met, the teamwork skills they demonstrated, and the innovation or creativity required of their job. Top performing employees can receive as much as a 6 percent pay increase.
Mr. Fitzhugh stressed that successful pay-for-performance plans must have clear and convincing objectives that will improve quality and help the organization operate more efficiently and economically.
Read the whole thing here.
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