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Public Personnel Management
The Challenge of Making
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D O I : 10.1177/0091026013495770
Systems W o r k in the Public
Brigitte W . Schay’ and Sidney F. Fisher’
The federal government has successfully experimented with a variety of performancebased pay (PBP) systems for more tban 30 years. Hov/ever, tbe first large-scale
expansion of PBP to civilians in the Department of Defense, tbrougb tbe National
Security Personnel System (NSPS) and its subsequent repeal by Congress, bave
resulted in a setback for PBP and renewed debate over the merits of merit pay in
the federal government. This article reviews theory related to PBP and documents
historical results of PFP projects in the federal government. Longitudinal survey
results from five major PBP demonstration projects and NSPS are compared on key
concepts and analyzed by demographic subgroups. Hofstede’s cultural dimension of
individualism-collectivism is used to explain reasons for ongoing resistance to PBP,
especially from labor unions.
performance-based pay, merit pay, procedural justice, trust, union involvement
The federal govemment has successfully experimented with a variety of performancebased pay (PBP) systems for more than 30 years, utilizing the demonstration project
authority granted to the U.S. Office of Persotinel Management (OPM) by the 1978
Civil Service Reform Act. It allows OPM to waive personnel laws and regulations to
test innovations in human-resource management. However, the unsuccessful expansion of pay for perfonnance to the largest Federal agency, the Department of Defense
‘U.S. Office of Personnel Management, McLean. VA. USA
Brigitte W . Schay, 8340 Greensboro Dr. Apt. 718-720, McLean, VA 22102, USA.
Public Personnel Management 42(3)
(DoD), through the National Security Personnel System (NSPS), has resulted in a
renewed debate over the merits of merit pay in the federal govemment.
The present study examines two major aspects of PBP: theory and research related
to PBP, including differences between individual and collective pay schemes; and
empirical data from demonstration project evaluations. Attitudes toward merit pay are
compared across projects on key concepts and further analyzed using Hofstede’s cultural dimension of individualism-collectivism to elucidate the reasons for differences
between unionized and nonunion employees. Demographic subgroup differences are
also analyzed. Changing from a longevity-based system to one that pays based on
performance represents a major culture change for the civil service. Results of successful federal demonstration projects show that it typically takes 3 to 5 years before
a majority of employees will support PBP.
While the federal demonstration projects were limited by statute to no more than
5,000 employees each, DoD’s NSPS was intended to cover all white-collar DoD
employees under one uniform system. NSPS was authorized by the 2004 National
Defense Authorization Act (NDAA), implemented in 2006, and repealed by Congress
in the 2010 NDAA. About 211,000 nonbargaining unit DoD employees had been converted to NSPS in two so-called spirals or implementation phases, representing 38%
of the white-collar DoD workforce of 555,166 by March 2009 when conversion to
NSPS was halted. Employees were converted back to the general schedule (GS) system starting in the spring of 2010 and continued transitioning in 2011.
Federal unions vociferously opposed NSPS from the beginning, limiting coverage to
nonbargaining unit employees. The official NSPS evaluation report published in 2009
acknowledged a variety of problems with implementation and perfonnance management (SRA Intemational, 2009). A subsequent report by the Defense Business Board
noted problems with pay-band structure and pay-pool processes, and lack of transparency in performance ratings and payouts. The report also cited problems that led to the
erosion of tmst between labor and management going back to the original legislation,
which included the labor-management provisions that were never implemented and
later overtumed by Congress (Review of the NSPS [NSPS Review], 2009). Edward E.
Lawler (1971), who has studied pay systems for the past four decades, said that, “No
plan can succeed in the face of low tmst and poor supervision, no matter how valid it
may be from the point of view of mechanics” (Lawler, 1971, p. 163).
Merit Pay Theory
Merit pay systems focus on individual performance and seek to motivate employees to
perform at higher levels by tying perfonnance to monetary incentives. The literature
on motivation in organizations is replete with theories and concepts that stress different factors in work motivation: intrinsic and extrinsic motivation, needs or expectancies, satisfiers and dissatisfiers, and equity and reinforcers. Although Herzberg (1966)
believed that pay is merely a “hygiene factor” or potential dissatisfier, Lawler’s (1981)
research has shown that performance-contingent pay can be a powerful performance
incentive because money can satisfy many different needs.
Schay and Fisher
Expectancy theorists postulate that the belief that one’s effort will result in effective performance (Expectancy I) is in itself a motivating factor and is thought to be
even more motivating than Expectancy II or the corollary belief that effective performance will lead to certain rewards (Vroom, 1964).
A third theory of interest is equity theory (Adams, 1963), which proposes that individuals compare the ratios of their inputs (performance) and outputs (rewards). If they
perceive themselves to be overpaid or underpaid, they may either adjust their efforts
or inputs, rationalize the discrepancy through cognitive distortions, or withdraw from
the situation, that is, change jobs.
While the concept of PBP has considerable support in the absfract, in practice, PBP
usually means pay for a supervisory rating. This is where skepticism sets in. Lawler
(2000) states that, to be motivating, PBP systems require that individuals trust the
organization to deliver on its reward system commitments. When these systems fail, it
is usually because of lack of trust due to perceived unfairness or lack of system fransparency. If merit pay is implemented successfully and administered fairly, the majority of employees will overcome their initial skepticism, trust their supervisors, and
ultimately accept the new system.
Perceptions of fairness have been found to be critical to the success of PBP systems. According to the theory of organizational justice, employees are concerned with
the fairness of two aspects of organizational decisions: outcomes and procedures
(Greenberg, 1987). In the context of PBP, employees are concerned with the amount
of merit pay they receive (distributive justice) and the fairness ofthe procedures used
to determine that amount (procedtiral justice: Heneman, 2002).
Pay for Individual Versus Collective Performance
The principle of pay for performance involves providing monetary rewards through
carefully designed compensation systems that base pay on measured performance
within the control of participants (Durham & Bartol, 2003). In the federal government,
merit pay is most frequently based on individual performance. Typically, supervisors
rate employee performance or confribution, and the ratings are franslated into either
pay points that are converted to dollars or a percentage ofthe employee’s pay. Privatesector research indicates that merit pay has been used mostly with exempt employees
and less frequently with unionized employees, who tend to oppose it. Betcherman,
McMullen, Leckie, and Caron (1994) found that PBP plans such as profit sharing,
employee stock ownership plans, knowledge pay, and merit pay were more often
employed in nonunion firms. While union workplaces are less likely to use individual
PBP plans, group incentive plans were found to occur with similar frequency in union
and nonunion establishments (Verma & Fang, 2002). PBP schemes based on collective performance, for example, gain-sharing, have been used less frequently in the
federal government than individual PBP plans.
Opponents of merit pay often point to team-based rewards as an alternative.
According to research conducted by Rynes, Gerhart, and Parks (2005), this is not
likely to be a viable alternative because group-based plans also have drawbacks. In the
Public Personnel Management 42(3)
United States, in particular, employees prefer to have their pay based on individual
performance. This finding was strongest among the most productive and achievementoriented employees. While individual-based plans may generate too little cooperation
when work is highly interdependent and may be seen as unfair when system factors
rather than individual effort and ability determine performance (a valid point of view
propagated by total quality management [TQM] expert W. Edwards Deming and
TQM adherents), group-based plans can weaken incentive effects via free-rider problems. According to Rynes and her colleagues, this problem generally increases with
group size. One example is the federal government’s only demonstration project based
on TQM principles and involving productivity gain-sharing (Pacer Share Demonstration
Project, terminated in 1993; see Shettel Dutcher, Sheposh, Dickason, & Hyashida,
1994). It failed to motivate employees and did not improve organizational performance. Group-based plans can also result in high achievers going elsewhere to have
their individual contributions recognized and rewarded, as predicted by equity theory.
If employees perceive themselves to be underpaid, they may adjust their inputs or
withdraw from the situation, that is, leave the organization.
Alternative Pay Systems in the Federal Government
A variety of PBP demonstration projects were implemented beginning in 1980, testing
an integrated approach to job classification, compensation, and performance management by combining PBP with pay-banding or broad-banding. Under pay-banding, the
15 GS grades are combined into broader bands describing levels of work, for example,
entry/developmental, full performance level, senior expert/supervisor, and manager.
Thus, for professionals, the 15 GS grades have typically been combined into three or
four bands with open ranges, rather than the traditional 3% steps, allowing greater pay
distinctions based on performance. The current study will focus on the evaluation
results of the first five major demonstration projects testing a variety of PBP systems,
as well as the results of NSPS.
The first demonstration project that also inspired many subsequent projects was the
so-called “China Lake” project, implemented in 1980 and made permanent by
Congress in 1994 at two Navy research labs in China Lake and San Diego, California
(Navy Demo). It was followed by the National Institutes of Standards and Technology
(NIST) Demonstration Project of the Department of Commerce implemented in 1988
and made permanent in 1996; a similar ongoing demonstration project for various
other components of the Department of Commerce (Commerce Demo) implemented
in 1998 and made permanent in 2008; and the ongoing DoD Science & Technology
Reinvention Laboratory Demonstration Program (DoD Lab Demo) covering the first
nine of 15 research laboratories that implemented their PBP programs between 1997
and 2002. The results of these programs have been documented in OPM evaluation
reports and other publications (Adams Shorter et al., 2002; Caldwell, Schay, &
Simons, 1997; Department of Commerce Personnel Management Demonstration
Project EvaluationYear Seven Report [DOC], 2006; Schay, 1996, 1997; Schay &
Prather, 2005). In addition to these largely successñil PBP demonstration projects.
Schay and Fisher
Table I . Myths and Realities Concerning Merit Pay.
Organizations have abandoned merit pay
Merit pay is the most frequently used reward program; over 80% of employers
Merit pay programs are ineffective
Merit pay is almost always related to improved employee attitudes (which, in turn,
are related to attendance and retention), and merit pay is sometimes related to
improved job performance
Merit pay decreases satisfaction with work
Merit pay adds to satisfaction with work
Employees prefer team- and organization-based rewards over individual rewards
such as merit pay
Employees prefer individual rewards over team and organization rewards
Source. LeBlanc and Mulvey ( 1998) and Heneman (2002).
fhere have been ofhers, such as fhe DoD Acquisifion Demonsfrafion projecf (DoD Acq
Demo) implemented in 1999. Since 1989, other PBP systems have been implemented
by agencies that either fall outside of Title 5. U.S.C. and are nof subject to 0PM regulation, or received special legislative authority from Congress. For more detailed
informafion on the federal agencies covered by PBP systems, see the 2012 Federal
Employee Almanac (FederalDaily Staff, 2012) and OPM’s December 2008 reporf on
Alfemafive Personnel Systems in fhe Federal Govemmenf (U.S. 0PM, 2008).
The total number of federal employees under the various PBP systems was about
383,500 in 2009 and represented 19% of the roughly 1.9 million federal employees
(1,970,529 excluding the U.S. Postal Service as of March 2009). Because these numbers do not include PBP programs in the intelligence community and fhe Nafional
Geospatial Intelligence Agency whose numbers are not available, it is safe to say that
in 2009 about 1 out of 5 federal employees were covered by some type of PBP
Since a 1991 report by the National Research Council of the National Academy of
Sciences (Milkovich & Wigdor, 1991) that failed fo deliver “a blueprinf for linking
pay to performance in the federal sector,” 0PM has followed many of its recommendations by deregulating performance appraisal, allowing a variety of different
approaches, and approving a second generation of PBP demonstration projects.
Merit Pay Challenges
The myths and realities conceming merit pay were summarized by Heneman (2002),
as shown in Table 1 above.
While research has shown that PBP can be an effective recmitment and retention
tool, there are problems with many merit pay plans in practice. Lawler cites two key
reasons for the negative effects of merit pay systems: (a) performance measurement.
Public Personnel Management 42(3)
which is intended to serve as the foundation of PBP and (b) pay delivery. Ofthe two,
performance measurement, with overall performance management, appears to be the
greatest challenge when it comes to successfully implementing and conducting PBP
programs. Conducting performance appraisals is one ofthe most disliked management
tasks because it involves an employee’s self esteem. Any system that communicates
that an individual is not above average is likely to be resented by employees, especially in a culture with increasing grade inflation in schools and universities. According
to a classic research study by Meyer, 80% of employees view themselves as above
average (Meyer, 1975).
Merit pay has traditionally been used with exempt and managerial employees and
is most suitable when employees work independently and control their own performance outcomes. When should merit pay not be used? According to Heneman (1992),
PBP should not be used under the following sets of circumstances: (a) The budget is
too small or economic conditions are too tight to allow the granting of large increases
to good performers; (b) employees value leisure, recognition, or some reward other
than pay increases, or they prefer the allocation of rewards on the basis of equity,
seniority, or some basis other than merit; (c) institutional arrangements are such that
ratings of employee perfonnance do not capture performance valued by the organization. Durham and Bartol (2003) cited four situations where merit pay is not indicated:
(a) employees are leaming; (b) employee performance can be easily monitored and
supervisors can direct employees and provide ongoing feedback; (c) other motivators
are sufficient or compensatory (interesting work, autonomy, desirable location, and
benefits meet needs); and (d) an organization is unionized. Union contracts tend to
constrain employers’ pay policies so that collective bargaining agreements and PBP
are incompatible; desired incentives are usually for groups to encourage cohesion versus competition. The third criterion overlaps with Heneman’s second (employees
value other factors more than pay).
Despite arguments against the use of PBP, it continues to be used by most privatesector organizations in some form. An extensive review ofthe PBP research by Rynes
and her colleagues (2005) shows that the evidence on PBP is generally positive. But
they point out some very important caveats: “Pay is not the only important motivator
in organizations, and PBP programs can yield serious, unintended negative results.
Nevertheless, it can also deliver powerful improvements in performance.” (p. 581)
Who Favors Merit Pay?
Early research cited by Lawler (1971) revealed that employees high in advancement
and responsibility needs seemed to prefer merit systems; those with strong security
needs did not. Overall, Lawler’s research indicates that workers are less favorably
disposed toward merit pay plans than managers. Among managers, less-educated
managers were less in favor of having their pay based on performance than more
highly educated managers. Other researchers have found that PBP is more attractive to
those higher in academic achievement, need for achievement, and self-efficacy (Bretz,
Ash, & Dreher, 1989; Cable & Judge, 1994; Trank, Rynes, & Bretz, 2002). Heneman
Schay and Fisher
(2002) uncovered similar results and found that the following groups tend to favor
merit pay: males, white-collar employees, high performers, achievement-oriented
employees, and those who already work under a merit plan where performance differences are emphasized and teamwork is not diminished (Heneman, 2002).
Given these individual differences in favoring PBP, are there consistent cultural or
subcultural differences that could explain attitudes toward merit pay? In the federal
govemment, PBP has been tested for more than three decades and supported by
Republican and Democratic presidents. Other civil service systems that have implemented merit pay, often along with broad-banding, include Great Britain, Canada,
New Zealand, and Australia. Besides sharing an Anglo-Saxon heritage, is there anything else these countries have in common?
The interaction between organizational and national cultures has been studied by
cross-cultural researchers around the world since Dutch researcher Geert Hofstede
(1980) first identified the four dimensions of culture in his 1980 study of national work
related values: power distance, individualism versus collectivism, masculinity versus
femininity, and uncertainty avoidance. The dimension most immediately relevant to
merit pay is individualism-collectivism.
Employees in individualist cultures like the United States are expected to act
according to their own interest, and work should be organized so that this self-interest
and the employer’s interest coincide. Hofstede found that individualism correlated
positively with national wealth, as measured by GNP per capita, and that all wealthy
countries scored high on individualism while nearly all poor countries scored low. In
terms of organizational reward practices, employers in individualist countries more
often paid for individual performance and gave stock options.
Hofstede sums up the contrast between an individualist and a collectivist orientation as favoring equity over equality (Hofstede & Hofstede, 2005). While management
in individualist cultures is management of indi …
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