Performance Management in Transitional Administration:
Introduction of Pay-for-Performance in the Estonian Civil Service
University of Tartu, Estonia
The article analyzes the problems of incorporating performance management techniques into a
transitional administration. Critical factors for the success of pay-for-performance are identified,
which form the basis for the Estonian case study. It has been demonstrated that although the
common problems of pay-for-performance in Western countries are also present in the Estonian
context, they are supplemented by specific issues related to transitional administrations of CEE
such as poor policy analysis, deficient accountability and co-ordination mechanisms, insufficient
management experience and underestimation of democratic values, which altogether make the
development of ambitious performance management tools in CEE even more questionable than
in the West.
Performance Management in Transitional Administration:
Introduction of Pay-for-Performance in the Estonian Civil Service
Since the early 1980s, public sector worldwide has been under constant pressure to improve its
performance in pursuit of more efficiency and effectiveness, and to revive the shrinking trust in
public institutions. Consequently, public service performance has received more attention than
ever from politicians, civil servants and citizens alike. New Public Management with its
“economic rationalism” and managerialism has influenced public management initiatives in
many countries. Emphasis on using private sector management instruments in the public sector,
decentralized managerial and financial control, as well as the fostering of “performance culture”
or “performance orientedness” have resulted in a growing use of performance management tools
such as pay-for-performance (PFP). The option of linking pay increments to performance is
applied in Belgium, Denmark, Finland, Germany, the Netherlands, Sweden, the United
Kingdom and the United States, while several other countries are considering the adoption of
more flexible and performance-oriented pay policies (Bossaert et al., 2001). The diffusion of
PFP in Central and Eastern European (CEE) countries is less researched. However, the SIGMA
study (1999) demonstrates that all CEE countries apply a unified salary system in their civil
services. No overly decentralized, individualized or flexible pay systems appear to exist in CEE.
Individual CEE countries also use various supplements to the base salary such as fringe benefits,
allowance for the civil service experience, the “13th month’s salary”, management allowance
and, increasingly, PFP (SIGMA, 1999).
Performance management has been considered a powerful instrument to encourage high
quality performance of civil servants and reward best officials based on their merits. Murphy
and Cleveland (1995) demonstrate several ways how performance management can help
organizations. Performance management can enhance the flexibility and quality of
organizational decisions, ranging from reward allocation to training, promotions or layoffs. It
provides a set of tools for organizational diagnosis and development as well as for suggesting
avenues for change. Performance management can also improve the quality of individual
decisions, ranging from career choices to more particular decisions on where to invest one’s
time and effort. An organization that does a good job in performance management is likely to
help build and cement commitment and satisfaction of staff. Performance management
processes have also been viewed as a means for improving organizational communication
(Murphy and Cleveland, 1995). An important value added here is expected to be the greater
contact between management and staff, involving increased clarity in setting the goals and a
more careful review process, including feedback. Finally, Shoop (1991) acknowledges that there
is also some public relations value in performance management. To the public and its
representatives performance management symbolizes the fact that public managers care about
the performance of their staff and that civil servants are receiving a fair return for their efforts,
thus contributing to the legitimacy of public sector.
The concept of performance management looks so intuitively appealing that it seems almost
ridiculous to disagree with. However, Ingraham (1993) demonstrates that although the use of
PFP has been often linked to successful private sector practices, in fact, a great deal of private
sector research documents the difficulties inherent in creating the necessary linkages between
performance and reward. Therefore, private sector experience does not represent an unqualified
success story with clear lessons for public organizations. As much as the recent public sector
reforms demonstrate private-to-public sector diffusion, they also reflect cross-national lesson-
drawing. This is particularly the case in the CEE countries which tend to look up with “blind
admiration” to their Western counterparts and, themselves lacking proper capacity for policy
analysis, copy uncritically the (often unsuccessful) initiatives of the West.
Critical factors for the success of pay-for-performance
Previous studies have identified plenty of problems related to the adoption of various tools of
performance management, including PFP, in the public sector (Lawler, 1981; Deming, 1986;
Rainey, 1990; OECD, 1992; Halachmi, 1993; Ingraham, 1993; Kellogh and Lu, 1993; Murphy
and Cleveland, 1995; Marshall, 1998; Radin, 1998; Kellough and Nigro, 2002). These analyses
are useful in understanding the problems resulting from inaccurate assumptions and
implementation difficulties. None of the benefits of PFP automatically flow from the mere
presence of any performance management system, yet an organization that does a good job at
performance management might benefit from it. The section at hand attempts to identify and
categorize the various factors responsible for previous failures and, accordingly, state the
preconditions for a successful adoption of PFP.
1. PFP as part of strategic management. Several authors (Lowery and Petty, 1995; Radin,
1998) have also demonstrated the importance of linking PFP to strategic and annual
plans. Any PFP scheme should not only constitute an integral part of the general pay
policy but also of broader public management strategies and tools. However, Ingraham
(1993) argues that the common practice of adopting PFP schemes without broader
reforms to support them suggests that these techniques have often been viewed as mere
adjustments of the base, rather than fundamental revisions of existing management
2. Managerial roles and abilities. The incorporation of performance appraisal and PFP into the
strategic management process assumes very much of individual managers including their
commitment, ability and initiative. Ingraham (1993) demonstrates that public managers
must not only be able and willing to change but must be willing to do so in the face of
rather serious systemic disincentives including the limits of legal and political
environment of public service. Highly formalized PFP systems may force managers to
make distinctions that are not realistic or simply put them in an uncomfortable role.
Gerhard and Milkovich (1992) note that managers are often unwilling to distinguish
between good and poor performers. Halachmi (1993) claims that in order to maintain
harmony and good working relations with civil servants, managers tend to exaggerate the
positive and minimize the negative aspects of the accomplishments. When almost
everyone receives a similar performance-based pay increase, the message communicated
to civil servants may be interpreted to mean that the organization does not really care
about performance. Finally, development of PFP schemes is likely to bring extra
responsibilities to managers requiring a considerable amount of paperwork, extra time,
resolution of conflicts and lengthy appeals processes.
3. Performance measurement. Financial rewards are a function of measured performance,
rather than performance itself. Perry (1990) claims that the primary problem managers
encounter is not one of knowing who are the best performers, but rather that of
measuring and documenting performance differentials accurately and completely. There
is little if any agreement on the standards and measurement of performance used to
appraise civil servants. Several authors (for example, Allison, 1980; Kellough and Lu,
1993) have drawn attention to the greater diversity and intangibility of objectives and
performance criteria in the public sector, which may make the objectives vague, difficult
to follow and hard to evaluate quantitatively. In addition, Murphy and Cleveland (1995)
argue that appraisal systems often send mixed messages about what aspects of job
performance are considered respectively the most and least important.
4. Fairness of PFP. The research of Lawler (1981) demonstrates that it is important for the
employee to perceive the appraisal process to be fair and objective. The fundamental
issue here is whether decisions about pay should be based (partially or fully) on job
performance. A strictly performance-based system may ignore several factors that are
believed to be relevant to compensation (e.g. job demands, skills of officials, situational
constraints, performance of the organization) (Gerhart and Milkovich, 1992; Lawler and
Jenkins, 1992). A common problem, argued by Murphy and Cleveland (1995), is that
links between performance and pay may pressure raters to distort performance ratings
upward. The quality of assessment has a role in perceptions of fairness or unfairness,
legitimacy and rationality regarding a wide range of organizational practices. Civil
servants who believe that an organization’s decisions are irrational, arbitrary or unfair
are unlikely to develop any strong commitment to the organization. Poor communication
of results may add to the negative perception of performance appraisal. However,
attempts to make performance evaluations completely objective have met with little
success (Milkovich and Wigdor, 1991).
5. Teamwork and system variables. Deming (1986) has argued that individual appraisal and
PFP are dysfunctional because they interfere with teamwork, create unhealthy
competition and dissension between employees, foster mediocrity, focus on short-term
outcomes, and overemphasize individual differences in performance. Deming also
suggests that most of the meaningful variation in performance is due to system
characteristics rather than to person characteristics since individual performance depends
on the nature of the job, the organization, and the product or service. Halachmi (1993)
claims that when the organization is accused of incompetence, negligence, or of being
unresponsive, recognition for one’s hard work does not mean much. Several authors (e.g.
Murphy and Cleveland, 1995; Radin, 1998) demonstrate that the tools of performance
management often fail to consider the role of situational variables in determining
performance. The ever-changing political environment in its turn influencing the public
sector makes the situational variables particularly significant.
6. Size of reward. An important factor governing the success of PFP is the total amount of
money available for performance-linked increases. Researchers (Milkovich and Wigdor,
1991; Kellough and Lu, 1993) argue that for PFP schemes to operate effectively, the
rewards offered need to be large enough to provide motivation to individuals and/or
groups. Armstrong (1993, p. 91–92) claims that although usually PFP accounts for 3–
5% of base salaries, it should in fact constitute at least 20% of base salaries if the aim is
to motivate employees. Ingraham (1993) shows that an even more significant issue lies
in the fact that the managers and executives of public organizations do not control their
financial resources and, therefore, often cannot guarantee that an adequate reward will be
available in any given year.
7. Costs of PFP. Halachmi (1993) claims that most organizations do not have a clear idea
about the actual (tangible and intangible) costs they incur in connection with performance
management. Tangible costs include, among other things, the expenses for designing the
system and for training managers to carry out the evaluation properly; the productivity lost
in diverting the time and effort used to compile the assessment; the expenditures to update,
develop, test, and keep inventories of the instrument(s) used for the appraisal, as well as the
expenditure for keeping records of performance results and dealing with complaints.
Armstrong (1993, p. 84) argues that instead of bringing more flexibility, PFP increases the
formality in organizations, and thus requires extra time and resources, and leads to the
increasing workload for civil servants. Moreover, low-quality performance management
practices could be harmful for both individual civil servants and the organization. The equity
theory of motivation (Adams, 1963) suggests that the inflated evaluation of employees
generates other costs in terms of the loss of good will, morale, loyalty, motivation and
attitudes toward work and the organization. Ingraham (1993) argues that no evidence
supports the view that PFP systems save money (at least they do not do so initially). Rather,
in their early years, effective systems may cost more than the more traditional practices they
The following case study of the introduction of pay-for performance into the Estonian civil
service will take these critical factors as a basis for analysis. Before that, a brief overview of the
development of Estonian public administration will be provided.
Development of Estonian public administration
The Republic of Estonia has currently 1.4 million inhabitants, dispersed over 45,000 square
kilometers. Together with the other Baltic States, it is considered the most successful part of the
former Soviet Union since regaining its independence in 1991 as a parliamentary democracy
with a President, Prime Minister, and a 101-seat unicameral Parliament, the Riigikogu. Ten
different governments have been in office during the period of 1991-2002. The success of the
democratic and economic reforms in the 1990s has recently been rewarded with the invitation to
join the European Union in May 2004.
In Estonia, it is not possible to talk about long historical traditions of the state and the gradual
emergence of modern forms of government. The development of the public service has for
centuries meant the dominance of the states occupying Estonia – Germany, Denmark, Sweden,
Poland and Russia. The exceptions are the two comparatively brief periods of independent
statehood, 1918-1940 and 1991 to the present. The present article focuses on the development of
performance management systems since 1991. However, since several authors (Drechsler, 1995;
Lauristin, 1997) have pointed that Soviet bureaucracy and its public disrepute have caused many
of the problems that the Estonian civil service is facing at present, it will be necessary to briefly
analyze the Estonian public administration under the Communist rule.
The Republic of Estonia was occupied by and annexed to the Soviet Union in 1940. The fact
that the allocation of all resources and the policy-making process took place in Moscow instead
of Estonia laid the basis for an extremely centralized administration. It also meant that the
domestic civil service was deprived of any experience of policy-making prior to 1991. Several
authors (Vihalemm, Lauristin and Tallo, 1997; Bercík and Nemec, 1999; Jasaitis, 1999) have
described the Communist administrative systems as over-politicized: political loyalty had high
priority and strict ideological control was exercised over personnel and decisions. In the
Communist cadre system, secretive selection prevailed – open competitions and competitive
examinations were unknown. The civil service was not “professional” in that it did not value
specialized training and competence, and professional qualifications did not usually matter in
promotion and salary allocations. Performance appraisal was merely symbolic and was based
mainly on an assessment of ideological matters. Civil servants were subjected to the general
Labor Code which offered them neither specific status nor social guarantees. However, job
security was very strong: it was almost impossible to fire an official because of poor
performance. Sootla and Roots (1999) argue that a variety of other reasons were used for
dismissing officials, such as divorce, marriage to a foreigner and church attendance. Staff
depended to a large extent on their supervisors, whose opinions were sometimes known to
override legal norms, which, in turn, entailed a selective implementation of legislation. The civil
service system offered a clear example of a patronage system with no regard for merit principles.
On 20 August 1991, Estonia declared its independence from the Soviet Union. It was
necessary to build up the state, its political, legal and economic institutions virtually from
scratch. Developments in the 1990s were influenced by the aims of introducing merit principles
into Estonian public management and abolishing the patronage and politicization of the civil
service. This has led to the gradual development of a modern civil service system in which
comparative merit or achievement governs each individual’s selection and progress, and in
which the conditions and rewards of performance contribute to the competency and continuity
of the civil service. Replacing the Communist civil service with merit principles relies not only
on the adaptation to the democratic legal framework but also on a fundamental change in the
values, attitudes and beliefs of politicians, public service executives, individual civil servants
and all citizens. The following table illustrates the challenges of grafting a merit-based civil
service onto the foundations laid in the course of the Communist regime.
Communist civil service Modern civil service
Loyalty to Communist Party Loyalty to public interest
High level of politicization of civil service Distinction between political and
Based on spoils, patronage and nepotism Based on merit principles
“Administration of the working class” Administration of professionals
Closeness, access to critical positions Open to different groups in society,
depends on Party membership competitive exams
Secrecy of decision-making Transparency of decision-making,
personnel policies and their
Personal favoritism of managers Written and universal procedures
No stimuli for high performance Effectiveness and efficiency are highly
Accountability is not specifically addressed Well-developed accountability
Labor Code determines work relationships Separation of public and private
in both public and private sectors spheres, adoption of a Civil Service
Selective implementation of legislation Rule of law
On 1 January 1996, when the Estonian Public Service Act came into force, all employees
working in public administration institutions became public officials without passing any
examinations or other selection mechanisms. The Public Service Act provides for the abolition
of the patronage system and the introduction of recruitment and promotion on merit, competitive
examinations, regular performance appraisal, as well as common grading and salary scales
throughout the civil service. The Public Service Act leaves recruitment open for all posts in the
civil service, open competitions for senior positions in which are publicly announced. Civil
servants are recruited on a permanent basis as a rule, fixed-term contracts being used for
temporary staff only. Human resource management in the civil service is, to a large degree,
decentralized in Estonia. Every ministry and executive agency is responsible for the recruitment,
probationary periods, training, performance appraisal, promotion and organization of work of
their officials; only senior civil servants are appointed, evaluated and promoted centrally. Job
security is high, dismissal is rare and puts remarkable financial pressure on public organizations.
The civil service commands relatively low prestige, and the level of remuneration of officials
during the 1990s has not been competitive compared with the salaries in the private sector.
However, the situation has slightly improved recently.
Changes have occurred among the civil service personnel. The number of civil servants has
slowly increased, reaching 20,472 in 2000, despite the government’s declared intention to reduce
it. Many officials have left the service, with new staff being recruited during the reorganization
of ministries, as well as in the course of frequent changes in government. The number of young
officials has grown rapidly as the Soviet civil service experience has proved in conflict with the
needs of democratic government. According to the Avaliku Teenistuse Aastaraamat (2001), 54%
of civil servants were less than 40 years old, and 76% had worked in the civil service for less
than 10 years in 2000. Labor turnover slowed down at the end of the 1990s, being 10-20% a
year starting 1997.
However, several authors (Ridley, 1995; Hesse, 1996; Verheijen, 1998) have observed that
the political and economic reforms of the transition period have left the civil service reform in
the cold not only in Estonia but in most CEE countries as well. Moreover, Drechsler (2000)
claims that the underdeveloped public administration has started to act as a brake on continuing
reforms, furthering stabilization and joining the European Union. Indeed, the development of
the Estonian public administration in the 1990s was neither rational nor consistent as the
political will for structural administrative reforms was deficient. Although the democratic
governments of the 1990s were able to change the general legal framework of the civil service,
they met with but limited success in reshaping the administrative culture and performance at
large. Little attention has been paid to systematic in-service training and conscious development
of civil service culture at a time when both politicians and civil servants have found themselves
under constant pressure to build up state institutions and develop new functions of the
Introduction of pay-for-performance in the Estonian civil service
In order to understand the environment where the PFP scheme was launched, attention has to be
paid to the existing salary policy and personnel appraisal in the Estonian civil service. The State
Public Servants Official Titles and Salary Scale Act (adopted in 1996) defines a uniform salary
scale for civil servants ranging from 7 to 35. The Act, however, leaves a relatively large amount
of discretion for every government organization to determine the salary rank for each particular
job. As a result, salaries differ considerably between government organizations, and the salary
system cannot be characterized as consistent or transparent, as ranks are not defined clearly and
individual institutions try to find ways to motivate their employees, e.g. by paying for extra tasks
or differentiating salaries within ranks. In addition to their salaries, civil servants have a number
of monetary benefits depending on their seniority, academic credentials and proficiency in
foreign languages. None of the laws passed in the domain of civil service has specifically aimed
to link civil service pay to performance, however, the Public Service Act foresees the possibility
to allot occasional monetary rewards or valuable gifts for exemplary individual performance, or
promoting an individual employee to a higher salary rank.
Performance appraisal was introduced to the Estonian civil service by the enforcement of the
Public Service Act in 1996. The Act set the start of regular evaluations to 1998-2000. The idea
of regular evaluations was highly “mechanistic”, first and foremost perceived as threatening by
providing, for example, for dismissal in cases of unsatisfactory performance, and disregarding
such classical aims of performance appraisal as feedback, personnel development or training.
Such a scheme was largely caused by the transitional character of the Estonian civil service – as
all state employees became automatically civil servants in 1996, regular evaluations were
initially seen as a tool for “cleaning up” the civil service. However, the government did not
succeed in starting with regular personnel evaluations in 1998.
The 1998 amendment to the Public Service Act added to the idea of formal evaluations the
process of regular performance interviews. Therefore, the performance appraisal system consists
of two parts. First, the formal evaluations which take place once in every three years and are
carried out by the Competition and Evaluation Committee led by the administrative head of each
agency. Performance evaluations may result in declaring an official to be either suitable or
unsuitable for the post, leading respectively to proposals of further training, assignment to
higher salary rank, promotion, demotion or dismissal of the official concerned. Secondly,
performance interviews are carried out annually by immediate supervisors and form a basis for
formal performance evaluations. Performance interviews offer a “softer” approach to personnel
policies by laying greater emphasis on feedback and motivational factors such as personnel
development. Performance interviews may also result in a proposal to raise an official’s salary
rank, or to pay extra bonuses within an existing salary rank provided the agency has sufficient
financial resources. The concrete application of performance appraisal (e.g. the methods used
and results obtained) depends on each government agency. In sum, performance appraisal is not
directly linked to civil service pay policies, as pay is handled separately from other human
The idea to introduce PFP into the Estonian central government developed in the Ministry of
Finance during the preparation of the 2001 annual budget. Consequently, the approved state
budget earmarked 5% of existing civil service payroll as funds for PFP. Therefore, internal
financial sources or so-called “reserves” were used to introduce the new scheme. Thereupon, on
24 January 2001 the government adopted a Regulation establishing PFP, which came into force
retrospectively as of 1 January 2001. Although most ministries had earlier made critical remarks
on the draft of the Regulation, mainly concerning the need to determine performance criteria
before the evaluation period, the majority of ministerial amendment proposals were disregarded
by the Ministry of Finance which was charged with the preparation of the Regulation.
According to the Regulation, the allocation of funds for PFP was to be carried out in accordance
with the annual Action Plans of each government agency. The respective Action Plans were to
be submitted by 15 February 2001. The same deadline was set for each Minister to establish a
Committee for the evaluation of results. The Regulation prescribed that at the end of the
performance period set by the Minister (usually 1–4 a year), each agency must issue a
performance report. Then, the Committee would report to the Minister on the performance of
each agency working under the Minister, who in turn would allocate the PFP funds for each
institution. The Regulation did not determine how the respective funds were to be allocated
within each agency, leaving that entirely to the discretion of the agencies.
The explanatory note accompanying the Regulation determined the goals of the PFP scheme.
In addition, the initiators of PFP from the Ministry of Finance expounded these widely in the
mass media. For example, the biggest business daily Äripäev (2000) reported extensively on
varying expectations related to the PFP scheme. When Janno Reiljan, a Member of Parliament,
submitted a formal request of clarification regarding the use of PFP funds, Prime Minister Mart
Laar further elaborated the aims of this new initiative (Riigikogu, 2001). In sum, PFP was
• help to achieve better results at no extra cost
• recognize and motivate individual agencies in their striving for greater efficiency and
• improve teamwork within public organizations
• forge a better link between individual performance and institutional goals
• increase public sector transparency
• increase the attractiveness of the public sector in the labor market
• reduce the number of civil servants and cut back personnel costs
• improve public sector planning
• cut red tape
The PFP scheme has not yet been in operation long enough for a thorough assessment. However,
the short experience with PFP in the Estonian civil service has been relatively well studied and
documented. In early 2002, the Estonian State Audit Office carried out a performance audit to
assess the success of the first year of PFP (Riigikontroll, 2002). The author of the article served
as an expert on the audit team. Four ministries together with their agencies (both central and
regional ones) were selected for the audit: Ministry of Justice (35 agencies), Ministry of Finance
(8 agencies), Ministry of Defense (43 agencies) and Ministry of Highways and Communications
(22 agencies). The analysis of the ministries involved a thorough study of their formal
documents (strategic plans, Annual Plans, Action Plans and performance reports), as well as
procedures and processes related to the allocation of PFP funds. The study of formal documents
was supplemented by in-depth interviews with altogether 53 civil servants. In addition, the
actual achievement of stated goals was checked in 62 cases. The results of the study will be
analyzed on the basis of the critical criteria of performance management discussed earlier.
PFP as part of strategic management
The PFP scheme lives its own life in the Estonian civil service. Systemic problems were
encountered already in the design of the scheme as the development of PFP did not occur in
conjunction with other civil service functions. Instead, the Regulation established PFP
independently, adding it mechanically to the existing pay, appraisal and planning processes. This
can be observed best in the preparation of the various plans. Firstly, Action Plans as main tools
of PFP did not necessarily follow the ideas of long-term strategic plans. Secondly, different
Annual Plans were used for the preparation of the annual state budget. Each agency was left to
decide on the connections between Annual Plans and Action Plans. Most interviewees claimed
that although these plans were often quite different, substantial overlapping occurred. In
addition, the introduction of PFP did not cause any changes in the existing pay or appraisal
policies. There is little indication that the PFP scheme was viewed as anything other than a mere
technical management tool that can easily be grafted onto an existing management system.
Managerial roles and abilities
Managerial problems can be identified on both macro- and micro-level of the PFP system. On
the macro-level, designers of the system clearly overrated the commitment and management
skills of ministerial leadership, heads of agencies and mid-level managers by leaving them
considerable discretion without any support mechanisms. On the other hand, individual
managers did not feel the “ownership” of the new initiative. This may have been conditioned by
the fact that government institutions were under pressure to introduce PFP or because a number
of critical amendments proposed by the ministries in the draft Regulation were not seriously
considered. However, even under the deficient system, top leadership of the studied ministries
could have done much for the success of PFP. Instead, all ministries and agencies revealed
problems with working out rules and criteria for the allocation of PFP; in some cases no
organizational procedures were ever settled. The leadership of ministries did not care how
individual units of their organizations allocated PFP, which led to ranking subordinates without
any appraisal mechanisms, and the subsequent pay decisions. None of the researched institutions
used performance interviews or any other kind of two-way communication between raters and
ratees. Civil servants were not told why they received, or did not receive, PFP. The results also
indicate that neither the Committees deciding on the allocation of PFP funds for agencies nor
individual managers were able to differentiate between agencies, units or civil servants, or to
make any other “unpopular” decisions.
Performance measurement took place on two levels: firstly, ministries evaluated their agencies,
thus determining the amount of PFP funds allocated to each agency, and secondly, each agency
allotted the money to its employees. It was not known to the agencies which criteria where
considered by the ministerial committees in the allocation of PFP funds. The amount of the
funds depended largely on the number of civil servants in each agency. Such approach obviously
did not help to distinguish between good and bad performers and was at odds with the general
aim of the scheme to motivate good performers. While the formal decision-making procedure
had been set on the macro (ministerial) level, the allocation of PFP funds within agencies was
rather chaotic. On the one hand, in most cases no clear performance criteria were set either on
unit or individual level. On the other hand, a few agencies tried to work out rather complicated
mathematical models with different weights and coefficients (with regional Probation Offices
resorting to geometric progressions), which rendered the appraisal process a highly mechanistic
one. In all cases, appraisal was a top-down process, with civil servants being neither consulted in
designing performance criteria nor given appropriate feedback.
The allocation of PFP helped to recognize problems with setting goals both on agency level as
well as in terms of agency units and individual civil servants. As the Action Plans were drafted
during less than a month, the goals of institutions often represented the mechanic accumulation
of tasks indicated in job descriptions or of individual goals (e.g. to graduate from a university).
As a result, goals and means got mixed, and many Action Plans mostly listed means (e.g. the
number of judges trained). The preparation of performance reports involved a starkly “black-
and-white” approach in evaluating whether a stated goal was reached or not, with no attention
paid to the quality and other indicators of results (e.g. the concepts of equity and equality or
even the protection of vulnerable groups). Finally, the entire PFP process was overshadowed by
time pressure. For example, although the new scheme started already in January 2001, the
Ministry of Justice only managed to define the number of performance periods in June, the
Ministry of Finance had not settled its performance criteria by September, and both the Ministry
of Justice and the Ministry of Defense changed the number of performance periods during the
year. The agencies which decided to establish performance criteria, only worked these out a
short time before the end of a performance period. Performance criteria also varied in different
Fairness of pay-for performance
Although the direct aim of the study was not to assess the fairness of PFP, it is important to note
that the majority of respondents did not perceive any link between performance and reward.
Indeed, the variation of PFP was symbolic in most cases, and an unwillingness to differentiate
between agencies or civil servants prevailed. It appeared that all agencies under the studied four
ministries received PFP funds as there was no real attempt to compare agencies with each other
or to give an independent evaluation to their achievements. Generally, the PFP funds constituted
5% of the payroll of each agency. Interestingly enough, PFP funds were also allocated for
unfulfilled tasks. For example, the Ministry of Finance decided that agencies which had fulfilled
their Action Plans to 75% would receive 4.5% of their payroll as PFP funds. Similar inflated
approach appeared in the evaluation of eighteen regional units of the Tax Board. The directors of
regional units who received an evaluation “below the average”, still secured PFP ranking
between 30-50% of their base salaries. The Ministry of Finance allocated PFP to 100% of its
employees, 80-90% of civil servants received the reward in the Ministry of Defense and the
Ministry of Highways and Communications. The only ministry to use any differentiation was the
Ministry of Justice which allocated PFP to about a half of its staff. In a few cases (e.g. the
Customs Office), PFP was distributed simply as a percentage of the employees’ base salaries. In
addition, a strong positive correlation appeared between the amount of the base salary and the
PFP (the Ministry of Defense and the Ministry of Highways and Communications even used a
formal system of coefficients in correspondence with organizational hierarchy).
In the allocation of PFP to individual civil servants, Action Plans were often not considered at
all (e.g. in the Ministry of Highways and Communications). The Tallinn Prison distributed its
PFP funds even before issuing a performance report. In a few cases (e.g. the Highway
Administration), performance reports appeared invalid by showing the achievement of targets
which were actually not reached. Such examples did not contribute to the satisfaction of civil
servants, in fact, the opposite is true – most interviewees voiced their dissatisfaction with the
implementation of the scheme. Finally, not only were civil servants not informed of the reasons
underlying their respective PFP rewards, but the overall scheme did not include any appeals
procedure either on agency or individual level.
Teamwork and system variables
In theory, the Regulation establishing PFP provides for both collective and individual allocation
of rewards, thus trying to offset one of the main criticisms of PFP – its individualistic character.
However, the actual implementation of the PFP scheme indicated that the collective dimension
of the scheme remained marginal, as all agencies received PFP funds. Within agencies, PFP was
allocated on an individual basis, as the PFP funds of each sub-unit were more or less
mechanistically calculated on the basis of the number of civil servants on the payroll of the
respective unit. The Ministry of Justice was an exception here, proving capable of differentiating
between different ministerial units. As there was little differentiation between civil servants, no
unhealthy competition between staff members was reported (organizational climate was rather
influenced by the perception of unfairness of such a practice in general). As for other system
variables, there were several cases were a goal was deemed not achieved because, for example,
the relevant law was not adopted by the Parliament (in the case of the Ministry of Justice), or a
public procurement process was delayed (in the case of the Highway Administration). But this
did not influence PFP either, since the Action Plans were not seriously considered in the
appraisal of individuals, and all agencies were able to secure their PFP funds.
Size of reward
In the case of the Estonian civil service, the source of PFP should be considered before
analyzing the size of reward. As the money for PFP was subtracted from the overall payroll of
governmental institutions (5%), it influenced the whole process of implementing the scheme.
Agencies perceived the situation as if “something rightfully theirs had been taken from their
budgets”, and therefore, felt justified in receiving the same sum back as PFP fund. Such an
environment put ministerial committees in a difficult position in terms of distinguishing between
agencies. On the individual level, the average PFP was, therefore, 5% of the individual annual
salary which, according to many interviewees, was not enough to motivate civil servants to
improve their performance. Officials of the Ministry of Highways and Communications claimed
that it would be easier to pay occasional performance bonuses to well-performing officials than
go through the bureaucratic procedure of PFP at an only marginal benefit. Although the
differentiation between civil servants was very limited, a few top managers secured a substantial
reward, for example, the Ministry of Justice disbursed a very high PFP bonus (48% of the
average annual salary of the ministry) to one senior official.
Before examining the overall costs (and benefits) of PFP, attention must be paid to a few other
factors which have not been discussed before but can be considered important variables in the
analysis of PFP in the Estonian civil service.
• Time pressure. The scheme was introduced under great time pressure, which did not allow
any thorough analysis or preparation of relevant documents and processes. The decision
on the introduction of PFP was made before the actual designing of the system, which
later led to serious implementation problems. Government institutions did not have
enough time to prepare their managers and civil servants for the introduction of the new
• Poor analysis of previous practice. The initiators of PFP were able to convince decision-
makers and the public that PFP schemes had succeeded in private sector and in foreign
public services. However, there are many reasons to believe that the design of the PFP
scheme proceeded essentially in isolation from the experience of other countries
(although the explanatory note refers to a study of the Finnish experience). It also
disregarded previous implementation problems in both private and public sectors and
overlooked scientific literature with numerous case studies.
• Absence of support mechanisms. The introduction of a new policy did not involve any pilot
studies, there were no guidelines prepared or training provided to support the
development of Action Plans, the measurement of institutional or individual performance
and preparation of performance reports. Despite insufficient preparatory work, ministries
were under pressure to introduce PFP immediately in the first year with the Ministry of
Foreign Affairs being the only one which did not follow the established PFP process.
• Problems with the general framework of plans. The existing framework of plans (strategic
plans, Annual Plans) was not changed by the introduction of PFP scheme. Instead,
Action Plans were introduced which, to a large extent, overlapped with existing Annual
Plans. On the other hand, contradictions were reported between Annual Plans and Action
Plans. As no guidelines were given for the development of Action Plans, these appeared
in widely different forms and qualities, which made it very difficult to use them for the
intended purpose. Accordingly, performance reports based on the evaluation of Action
Plans varied a lot, and could not serve as a good basis for making decisions on PFP
• Absent monitoring. The Ministry of Finance as the initiator of the PFP scheme and drafter of
the Regulation, distanced itself completely from the implementation of the scheme. No
monitoring was carried out, neither was the implementation of the PFP scheme
evaluated. As a result, the same Regulation (with insignificant modifications) was
introduced for the year 2002 despite severe criticism that it received from the State Audit
• Developing administration. Several agencies found it difficult to adequately plan and
measure performance due to their structural reorganization. In addition, interviewees
developed concerns about the comparability of different performance periods, which can be
difficult in a fast developing administration. The introduction of PFP scheme also identified
broader problems in transitional public administration such as poor accountability and
control systems, as well as frequently changing political priorities.
Costs of PFP
The explanatory note to the Regulation introducing PFP in the Estonian civil service did not
foresee extra costs related to the new initiative, since money for PFP was supposed to come from
the ministerial “reserves”. The explanatory note stated that some extra time could have been
spent on the development of Action Plans, performance reports and decision-making processes,
but the respective costs were considered to be minimal. Indeed, there were no major tangible
costs related to the PFP scheme. The process was very cost-efficient (no costs related to the
analysis, training or preparation of support materials), yet on the other hand, it was not
accompanied by any greater effectiveness of the civil service either.
Compared the outcome to the original goals of the PFP scheme, it is difficult to identify any
major achievements. Moreover, several intangible costs became apparent. None of the ministries
and agencies reported better performance than in previous years. Instead of motivating agencies
and individual civil servants to improve their performance, dissatisfaction with the scheme was
reflected during the interviews. As PFP was limited to the individual level, it did not affect
teamwork in organizations, nor did it forge any better links between individual performance and
institutional goals. Absence of performance criteria and vague decision-making processes within
agencies did not contribute to making the public sector more transparent. There is no evidence of
increasing public sector attractiveness or cutting the number of civil servants and personnel
costs. In fact, the number of civil servants increased slightly during 2001. All respondents
reported increased paperwork and other problems related to new complicated procedures and the
variety of plans. It is difficult to judge the influence on organizational climate. However,
considering the fact that all government institutions lacked clear criteria and procedures of
evaluation, two-way communication and appeals procedures were missing and PFP was often
considered unfair, there is sufficient reason to believe that if PFP had any effect on
organizational climate, it was negative rather than positive. As a result of the first-year
experience, the Ministry of Culture and the Ministry of Social Affairs decided not to continue
with PFP in 2002.
The most positive effect of the first-year experience concerned learning from mistakes on
both central and organizational levels. The government recognized the need to improve the
general salary system of civil servants and the planning framework, eliminating overlapping and
contradictory requirements. In addition, managers claimed that the PFP exercise made them
aware of different problems in their organizations. It was already evident in 2002 that many
government institutions had improved their institutional planning and personnel appraisal
practices as well as the salary systems. The need for the development of better control and
accountability mechanisms was also realized.
Lessons for Central and Eastern Europe
The findings of the introduction of the PFP scheme in the Estonian civil service system form a
twofold basis for broader conclusions. Firstly, they provide further support for previous critical
studies of PFP reported in Western countries. However, there are also additional problems in
transitional administrations, making the development of performance management tools even
more questionable than in the West. Secondly, the findings allow us to trace broader conclusions
about the complexities and specifics of public policy processes in transitional administrations,
particularly in CEE.
Several authors (e.g. Verheijen, 1998) have observed that the implementation gap between
formal acts and procedures on the one hand and their actual implementation on the other
represents a far-reaching problem in most CEE countries. This, in turn, has made it difficult to
introduce new management tools in the public sector. The development of modern public
management initiatives remains a challenge not only in the law-drafting endeavors but, first of
all, in the real implementation processes of the enacted policies and laws at every administrative
level. Whereas most CEE countries, including Estonia, were involved in the development of a
legislative framework to their civil services in the middle of the 1990s, more attention has been
paid to the managerial, or “softer”, issues of public administration since the end of the 1990s.
The legalistic approach to public administration has gradually been balanced by an increasing
focus on management problems that have been encountered during the implementation of new
Deficient accountability and co-ordination mechanisms
In CEE countries, many new organizations, structural units and individual jobs have been
created during a short period of time and thus often without necessary prior analysis. This has
led to unclear hierarchical relationships, overlapping functions, duplication of duties and various
problems related to accountability. When the base of the organization is weak, other
management techniques have a poor and unreliable foundation to build on. The case study of
Estonia supports earlier work by Verheijen (1998), demonstrating unusually poor accountability
and co-ordination mechanisms in CEE public services. The lack of co-ordination mechanisms
has probably been inherited from the Communist regime, under which responsibility for the
integration of policies and for controlling their implementation used to lie mainly with the
Communist Party. Very little was done to develop new mechanisms for integration, co-
ordination and control during the 1990s. This, in turn, allowed individual ministries or even
structural units of ministries to come up with fragmented policy proposals that did not fit the
larger framework. Furthermore, the parliaments of CEE countries, being overloaded with the
preparation of legislation, have proved unable to exercise their powers of control of the
executive. Even if they had the time, the lack of experience on the part of many MPs, coupled
with the lack of resources, would limit the scope and depth of parliamentary scrutiny.
Consequently, it is important to get the basics right and to be able to control inputs before
introducing ambitious management techniques revolving around outputs and outcomes.
Poor policy analysis
The case study above demonstrates how poor policy analysis and policy-making process may
affect the actual results of introducing PFP. Verheijen (1998) has demonstrated that a lack of
capacity in policy-making is a serious problem in most CEE countries. The development of
democratic institutions has formally taken place, however, new political parties are yet unable to
carry out adequate policy analysis. This leads to a situation where politicians are unable to set
strategic goals, which, in turn, engenders conflicting policies and symbolic objectives. This
process may even accelerate in the context of frequent political changes and the generally
unstable political environment in CEE. As both politicians and civil servants have a decade of
experience in elaborating a great many new policy proposals, there is as yet no general culture
which would require serious analysis to precede the adoption of a new regulation or policy. In
addition, as the whole society is undergoing a number of rapid and radical changes, it has been
relatively easy for all social groups (including political parties and civil service) to accept new
initiatives without any major criticism. Such an “activist” approach has left less resources to the
implementation and evaluation of new policies. The challenge for all CEE countries is to move
from the practices of early transition years, where new institutions and policies had to be
adopted immediately, to more thorough preparation and analysis of new policy initiatives.
Insufficient management experience
Performance management is one of the most sophisticated areas of public management.
Therefore, public sector managers in CEE who often have insufficient managerial experience (or
irrelevant management experience from the Communist period) should be aware of its problems
and failures. Managers with too little experience may take the slippery road and overquantify
performance indicators as these are easier to measure and may look more objective, transparent
and understandable than qualitative data (Mintzberg, 1994). By working out complex
mathematical models, the technique may easily come triumph over the purpose of administrative
operations. Managers with poor experience are likely to also have low self-respect, leading to
the fear of making mistakes, achieving goals at any cost, and self-justification instead of open
learning process. Performance management can succeed only if public sector managers receive
training and strong methodological support in introducing new management tools. In addition,
appropriate control and monitoring mechanisms should help to avoid problems with
decentralization and high managerial autonomy.
For many public sector executives, managing of public agencies means applying rules and
regulations (Ingraham, 1993). The complexity and thoroughness of legal acts surrounding the
working conditions of civil servants may reduce managers to passive and reactive followers of
the rules rather than proactive developers of management instruments and facilitators of their
implementation. Although this is also a problem in Western countries, it is a much bigger issue
in CEE, due to the poor experience of managers. Moreover, additional CEE-relevant problems
such as inadequate trust between managers and civil servants are liable to arise because of the
high level of politicization in the region (Verheijen, 1998), which may make the performance
management process less “counseling” and more a controlling exercise.
If the performance management schemes want to improve the actual performance of civil
servants, managers in CEE should be ready to invest a significant share of their time and thought
into the development and implementation of a performance management scheme. This would
mean the development of better communication and feedback practices instead of forcing a rigid
ranking order on civil servants – in a word, the change of a whole management culture.
Involvement of civil servants in the design of performance criteria and decision-making process
is the first step towards a change from the “legalist” to a “managerial” approach to performance
Fairness of management practices
There is still a long way to go in CEE countries in introducing procedures and policies designed
to ensure fairness of organizational practices. People’s perceptions of fairness reflect at least two
features of the situations they find themselves in: the actual outcomes and the processes used in
arriving at these outcomes. When establishing new management practices in CEE, a lot of
attention has been paid to particular techniques, for example, the development of very complex
performance appraisal techniques in some Estonian agencies. Focusing on techniques may easily
leave the process in the background. Inevitably, civil servants sometimes feel that a decision or
procedure is unfair. Here formal appeal procedures offer one avenue for civil servants to voice
their concerns and seek solutions. However, appeal systems are reactive. They focus the
attention and energy of disputants on the past and represent a formalized process of designating
an injured party, blaming someone or something for the injury and claiming a remedy.
Therefore, public sector managers should also think of developing proactive approaches to
ensure fair treatment including, for example, well designed and implemented performance
appraisals, frequent informal feedback, clear discipline policies, regular surveys to monitor civil
servants’ attitudes and perceptions, as well as good communication practices in the organization.
Democratic versus technocratic values
And last but not least, performance management is not a valueless exercise. Public sector goals
can work at cross purposes if they combine values which, when implemented in concrete policy
proposals, reveal themselves as contradictory. For instance, several “democratic” goals such as
representativeness, transparency, equal opportunities, access to public services, fair procedures
and citizen participation in decision-making may conflict with more “technocratic” or “rational”
goals such as efficiency, effectiveness, value-for-money or fast decision-making. This kind of
contradiction can be especially hard to solve in CEE countries, where the above-mentioned
democratic principles are not as deeply held and broadly accepted as in the countries with long
democratic traditions. The situation will be more complicated where civil society organizations
are weak and where limited resources may bring pressure to bear on governments to follow
“technocratic” goals. The foregoing also relates to the problem of mixing means and ends.
Halachmi (1993) argues that public managers may not realize that by initiating a PFP scheme
they may be starting a ritual that will eventually turn means into ends and take on a bureaucratic
life of its own. Carelessly designed performance indicators may subvert the wider goals of an
organization, and detract from the intended policy outcome. Therefore, decision-makers of new
democratic countries should be particularly careful in focusing on “democratic” goals and
quality of public services.
The findings of the study do not support many of the assumptions that surrounded the initial
adoption of PFP in the Estonian civil service; instead they demonstrate that many of the untested
and frequently stated assumptions held by initiators of PFP scheme were built on quicksand.
Consequently, there was, and continues to be, a significant gap between the rhetoric (“public
sector pays for performance”) and reality.
The fundamental question remains, why do governments, including the Estonian one, keep
adopting PFP if the substantial amount of the research as well as the negative firsthand
experience show that PFP does not work as advertised. Several reasons provided by Kellough
and Lu (1993) such as the symbolical and political attractiveness of the concept of PFP, business
stereotype, managerial orthodoxy, political control, sunk costs and perceived implementation
failure are also present in Estonia. The main reason for persisting of the Estonian PFP scheme is
a symbolic response to public perceptions of bureaucratic inefficiency and demands for
accountability, which is reflected by the political support to PFP because of its symbolic rather
than instrumental value.
The central dilemma in this field seems to be whether there is a failure of theory or of
implementation of PFP schemes. The response of the Estonian government to the unsuccessful
first-year experiment proves that difficulties with PFP are considered the product of
implementation “glitches” rather than fundamental problems with the basic concept of PFP. As
the analysis of the more general issues of public policy-making in CEE countries demonstrates,
deficient accountability and co-ordination mechanisms, poor policy analysis, insufficient
management experience, unfair management practices and underestimation of democratic values
provide sufficient evidence to raise serious questions about the wisdom of developing PFP
schemes in transitional administrations, and more specifically, continuing with this model in
Estonia. The belief that current troubles are merely the product of implementation difficulties
needs to be supplemented by critical analysis of the overall concept of PFP by raising
fundamental questions concerning the viability of the underlying idea, including the suitability
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