Public Services Management: Still searching for management's Holy Grail: A study has cast doubt on the effectiveness of performance-related pay, reports Martin Whitfield

A REVIEW of performance-related pay and management systems has found the majority to be fundamentally lacking in effectiveness and only of limited use.

The study, published yesterday by the Institute of Personnel Management, casts doubt on one of the most popular management tools and states that performance-related pay is often perceived as a means of managing the pay bill rather than reward for performance.

Some form of measurement system, described by the IPM as the 'cult of performance', was said to be in place in more than two-thirds of the 850 firms responding to the research. Driven by business considerations, such as cutting costs in the private sector or compulsory competitive tendering by local authorities, performance management practices were said to rely too heavily on commercial criteria rather than staff motivation and development.

The study covered organisations employing 20 per cent of the workforce, more than 4.2 million employees. Employers were fairly equally split between high performing private companies as measured by pre-tax profits over the past five years, public sector organisations, and other private companies.

All three groups had embraced performance management, particularly the larger employers. More than 80 per cent of organisations employing over 2,500 workers had some form of performance measurement. The totem of performance management - the mission statement - had been issued by three-quarters of the biggest employers and by 70 per cent of those in the public sector. Yet the report discovered that up to one-third of organisations with mission statements had not communicated them to all employees.

Public sector employers had higher levels of communication of their corporate plans and financial targets, but were less efficient at updating the workforce on the results and on efficiency and productivity.

The research, carried out in two parts by the Institute of Manpower Studies and Clive Fletcher and Richard Williams, of the University of London, concluded that although there was little doubt that good performance systems could have a beneficial impact, it was difficult to prove. 'Establishing the effectiveness of performance-related pay schemes is akin to the search for the Holy Grail among pay and personnel specialists,' it said.

The perceived benefit of those who used PRP was far greater among those who used it as part of a total system rather than a single policy tool. There was no correlation between the use of PRP and high performance and it was just as likely to be used by poor performing companies as the more successful. Only two-thirds of organisations monitored their systems. 'The overall picture of effectiveness attributable to performance management techniques is a hazy one.' The biggest difficulty faced by managers was the use of performance-related pay. Often introduced after intervention by the chairman or chief executive or even elected members in local authorities, pay systems in themselves saw mixed results.

One manager summed up the feelings of many interviewed in depth in 26 organisations: 'The trouble with performance-related pay is that it motivates 20 per cent of employees at the expense of the other 80 per cent,' he said.

Good people had a tendency to rise upwards with very little help but it was the mass of reasonably competent performers who needed encouragement and back-up to make sure they achieved their potential. A hidden but noticeable agenda of 'weeding out' the poor performers through low rewards might also lead to the creation of more stressful and competitive work which could be detrimental in the long term.

Reward-based performance tended to be overwhelmingly fixed on the individual while an opposite philosophy may operate in another part of the organisation where the emphasis was on teamwork and the collective and co-operative nature of work.

Even when the concept of performance-related pay was accepted by the workforce, its implementation could still cause some problems and frustration over unmatched expectations. The study cited the example of a large local authority where staff were given the choice of whether to move to PRP or to stay on the existing incremental scale. All but 340 of 12,000 opted for PRP. 'The ideal of PRP is one thing, the reality is another. In this same organisation, approximately 90 per cent of staff made exactly the same salary progression under PRP as they would have anyway under the incremental system,' it stated.

Dissatisfaction followed the enthusiasm amid complaints that the process was budget led, not performance led. There were accusations that some departments were more successful at horse-trading with the finance officers so that they gained greater flexibility than others for no particular reason.

In the private sector, similar complaints of PRP ending up as a demotivator rather than an incentive were common. Staff objected that managers who got the company into a mess and then out of it were much more likely to be rewarded than those who never got the firm into a mess in the first place.

Meeting financial targets was always seen as a much more important objective than being an effective manager of staff. 'The majority felt that the real motivators at management levels were professional and personal pride in the standards achieved, or loyalty to the organisation and its aims or peer pressure.'

The recession had also had its own impact on performance systems. Again, there was the suspicion that they were used to control the wage bill and they could compound the motivation problems during a period of financial difficulties. 'The problems of external constraints on performance plagued most of the PRP systems and none of them had worked out an effective response as yet.'

The point was summed up by one manager: 'How can you motivate people when they are wondering if they will still be in a job next month?'

A further obstacle to the acceptance of performance systems was the resistance by staff to the formal procedures often adopted to ensure the workings of appraisal. A new wave of bureaucracy was feared, run by the personnel or human resources department.

'Instead of releasing individual potential, the risk is that the performance management system process (through form filling and measurement of individual activity) may appear to the individual as a 'bureaucratic prison' serving more to demotivate employees than to improve performance.'

The 140-page document does not report wholly negative reactions to performance measurement. Public sector management is clear that it has provided a suitable vehicle for helping a change in climate.

Staff were reported to be more output conscious instead of just process conscious and they were more aware of service delivery levels and how a performance culture should apply to the public services.

'Organisations which have recognised the limitations of relying solely on the tools of performance management, such as appraisal or performance-related pay, in isolation from the wider context of performance appear to have had more success with their policies,' concludes the IPM.

Performance management in the UK - an analysis of the issues. Published by the IPM; price pounds 35.

(Photograph omitted)