- 1 -PROBLEMS WITH THE IMPLEMENTATION OF PERFORMANCEMEASUREMENT SYSTEMS IN THE PUBLIC SECTOR WHEREPERFORMANCE IS LINKED TO...
- 2 -AbstractAccording to Robert Kaplan and David Norton, (1992; 1996; 2001; 2004), the finallinkage from high-level strat...
- 3 -INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONThere has been a substantial body of literature on performance measur...
- 4 -• Quality, which examines an output or the process by which an output isproduced. Quality is indicated by attributes ...
- 5 -Balanced scorecardThe balanced scorecard was developed by Norton and Kaplan, (1990-1992), toinclude both financial me...
- 6 -The Performance Pyramid (SMART)Cross and Lynch, (1992), have recognized the hierarchical levels that exist within ano...
- 7 -PERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMENT INENT INENT INENT IN THE PUBLIC S...
- 8 -• recruitment and advancement on merit• a make-up that reflects our society ”It was also stated that emphasis is plac...
- 9 -Many scholars have referred to profit maximization as the main difference betweenthe private and the public sector (e...
- 10 -problems can be classified under two main categories, one related to an economic approachand the other to a psycholo...
- 11 -•Pupil progress.•Wider professional effectiveness (two dimensions).•Teaching and assessment (three dimensions).•Know...
- 12 -relating to clinical outcomes was evident in Goddard’s et al., (2000) study on PerformanceAssessment Framework, whic...
- 13 -been applied unfairly in practice causing de-moralization (Kimble, 2005). In the InlandRevenue, it was added that de...
- 14 -performance measurement and rewards with the aim of highlighting their contribution toperformance measurement and re...
- 15 -(Marsden, 2004, p.357)In studying the effect of PRP on employees’ behaviours in four different localauthorities in t...
- 16 -Moreover, in the follow-up study conducted by Marsden and French in the InlandRevenue in 1996, a significant rise in...
- 17 -…Having worked as a professional paramedic for 18 years before goinginto general management I have never been motiva...
- 18 -nature of public services is changing from one where employees were seen as serving thecommunity to one where all pa...
- 19 -A central element to reviewing performance measurement systems is the nature ofthe public sector. Many scholars have...
- 20 -ReferencesAnderson, N. and Schalk, R. (1998) “The Psychological Contract in Retrospect and Prospect”,Journal of Orga...
- 21 -http://www.andromeda.rutgers.edu/~ncpp/cdgp/teaching/brief-manual.html [accessed 10 July2005].Chamberlin, R., Wragg,...
- 22 -Goddard, M., Mannion, R. and Smith, P. C. (1999) “Assessing the Performance of NHSHospital Trusts: the role of ‘Hard...
- 23 -Kaplan, R. S. and Norton, D. P. (1996a) “Using the balanced scorecard as a strategicmanagement system”, Harvard Busi...
- 24 -Moullin, M. (2003) “Perspective on Performance”, Performance Measurement Association, Vol.2, No. 2, pp.1-25.Mullins,...
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  1. 1. - 1 -PROBLEMS WITH THE IMPLEMENTATION OF PERFORMANCEMEASUREMENT SYSTEMS IN THE PUBLIC SECTOR WHEREPERFORMANCE IS LINKED TO PAY: A LITERATURE REVIEW DRAWNFROM THE UKMIRAL METAWIEPhD student in Industrial RelationsKBS AnnexUniversity of Kent at CanterburyTel: 01227 82-3375E-mail: mm248@kent.ac.ukDR. MARK GILMANSenior Lecturer in Industrial Relations/HRMKBSUniversity of Kent at CanterburyCT2 7PETel: 01227 823797Fax: 01227 761187E-mail: m.w.gilman@kent.ac.uk3rdConference on Performance Measurements and Management Control (NiceSeptember 22-23, 2005)
  2. 2. - 2 -AbstractAccording to Robert Kaplan and David Norton, (1992; 1996; 2001; 2004), the finallinkage from high-level strategy to day-to-day actions occurs when companies linkindividuals reward programs to the Balanced Scorecard. The objectives of this linkage are,first, to focus employees attention on strategic priorities, and second, to provide extrinsicmotivation by rewarding employees when they and the organisation reach their targets.Performance related pay (PRP) which has been widely introduced especially in the publicsector holds out the promise of providing such a link. Yet, in practice performancemeasurement in the public sector has been a problematic area with PRP. This paper willattempt to address the problems of applying performance measurement systems (PMS) inlinkage to pay systems in the public sector through reviewing the literature of the UK.An extensive portion of the literature on PMS has been concerned with the economicbenefits of the application of such systems as strategic control systems to increaseproductivity through monitoring employees’ activities and influencing their behaviours(Kaplan and Norton, 1996b; Neely, 1995). This however, brings attention to two issues thatraise doubts in the lucidity of this literature and the validity of using, mainly, economictheories to assess the benefits of PMS. The first is that though one can note that the mostimportant element influencing organisational performance is the human factor, economistsand scholars have mostly referred to the success of performance measurement (PM) andincentive systems in terms of productivity, which though incorporating both financial andnon-financial measures still ignores employee relations and organisational behaviourtheories. In fact if we look at the assessment of PRP systems in several industries within thepublic sector (e.g. Civil Service, Local Government, and Nationalized Industries) we come tothe conclusion that whilst it may be successful in generating increased productivity;, itsimpact on employees’ behaviours, such as motivation, has been proved negative in mostresearch. The second is that while there is a logical link between PRP and PMS, in practicesuch links seem less coherent than suggested in the literature (e.g. Kaplan and Norton,1992; 1996b). Yet there is a lack of research on what might be the cause of suchincoherence, even worse, there is a lack of research on the strength of such link. In otherwords, overlooking the link between rewards and PMS, leads to neglecting the problemsinherent in measuring the performance of the public sector and the difficulties in findingunproblematic performance measures.By looking into different fields namely industrial-psychology, sociology andeconomics this paper will identify problems of performance measurement when performanceis linked to pay (PRP). For the purpose of this paper, a literature review of the UK publicsector is conducted in order to highlight gaps in the research area of PRP and PM.
  3. 3. - 3 -INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONThere has been a substantial body of literature on performance measurement in boththe public and the private sector. Though there have been some differences of interest inresearching both sectors – in the fact that while more clear examples of application andsuccess have been reviewed in the private sector very few are found in the public sectorwhere it has been reported more problematic – most papers assessing the work onperformance measurement and performance measurement models have been mainlypresented in the management accounting literature. Historically, PMS have, therefore, beenrestricted to the traditional financial accounting measures such as Return on Investment,Earning per Share, and Economic Value Added [Kaplan and Norton, 1992; Morisawa, 2002;Neely, 1995; Ballantine and Brignall, 1996], and to the use of frameworks and theoriesprimarily drawn from the discipline of economics (Otley, 1999).This approach, viewed as successful in the past; has proved more deficient in today’srapidly changing environment driven by political, economic, technological, and social forces.Politically the increasing importance of corporate governance has held organisationsaccountable for not only its economic performance but also its social performance whichaffects the wider external environment. In other words, there has been a shift from adoptinga shareholders approach where performance measurements are concerned with theprofitability of the business to a stakeholders approach. Due to the growth of the importanceof the human resources of organisations, there has also been an increased emphasis on thebehavioural aspects of management accounting though still through an economic approachoften related to the agency theory (Otley, 1999) – i.e. assessments of the impact ofaccounting systems on employees’ behaviours such as increased effort, distortion of results,and productivity rather than the softer aspects such as motivation, commitment, and jobsatisfaction. Similarly, economically, there has been a growth in the importance of thehuman factor as a calculative receptor, and hence in the need to affect its daily activitythrough a management control system. Consequently, since the early 1990s more balancedapproaches incorporating multi-dimensional performance measures were developed. Theseinclude the balanced scorecard developed by Kaplan and Norton (1990-1992), theperformance pyramid (the SMART system) developed by Cross and Lynch (1992), theresults/determinants matrix (Fitzgerald et al., 1991), and the Performance Prism (Neely etal., 2000-2001).Before a brief review of these approaches is presented it is important to turn attentionto defining performance measurement. In order to identify the problems of PMS, thefollowing section includes a review of the definition of performance measurement, therationale behind its implementation and a brief review of the advanced approachesmentioned above. The focus is on the balanced scorecard which has received moreattention in the literature, is the most frequently used across sectors, and has also beenused for reward reasons.PERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMENT: DEFINITIONENT: DEFINITIONENT: DEFINITIONENT: DEFINITIONThough the term performance measurement has been used since the late 1970s,there has not been a universal definition for the term. The Government Accountability Office(GAO), 1980, defined performance measurement as “an assessment of an organisation’sperformance, including the measures of:• Productivity, which quantifies the outputs and inputs of an organisation andexpresses the two as a ratio. Generally, the ratio is expressed as output to input.• Effectiveness, which determines the relationship of an organisation’s outputs towhat an organisation is intended to accomplish.
  4. 4. - 4 -• Quality, which examines an output or the process by which an output isproduced. Quality is indicated by attributes such as accuracy (or error rate),thoroughness, and complexity.• Timeliness, which evaluates the time involved producing an appropriate output.(Citizen-Driven Government Performance, 2004)The most commonly used definition of performance measurement is that of Neely,(1998): “the process of quantifying the efficiency and effectiveness of past actions throughacquisition, collation, sorting, analysis, interpretation and dissemination of appropriate data”(as cited in Moullin, 2003, p.3). Though this definition has not stated what the nature of thedata collected should be (i.e. financial vs. non-financial) it seems to be concerned with theprocess itself of measuring performance in the management accounting field rather than itspurpose, and restricted to quantitative measures rather than qualitative ones. Hence,Moullin, (2002), defines performance measurement in terms of its purpose emphasizing theassessment of how well organisations are managed and the value they deliver forstakeholders.Based on the above and using a contingency approach, particularly as in the publicsector uncertainty lies in the problems of linking the means (inputs) to the ends (outputs)(Johnsen, 2000), it will be highlighted that performance measurement is a contextuallydefined phenomenon in that similar measures may have varying importance and meaning indifferent organisations (Euske et al., 1993). Hence, scholars tend to focus on issuesassociated with the design of PMS (e.g. Neely et al., 1995), the values and characteristics ofperformance measurement (e.g. Newcomer, 1997), the identification of the measures thesystem should include in different industries (e.g. Haktanir and Harris, 2005, in the hotelindustry; Goddard et al., 1999; Ballantine et al., 1998, in the public health services) and thedevelopment of new performance measurement frameworks.It has been widely argued that organizations using balanced PMS report betterperformance than those that do not (Lingle and Schiemann, 1996). PMS have undergoneconsiderable changes in the last twenty years with a number of different models developingto help organisations define an appropriate set of balanced – financial and non-financial –performance measures. Yet the most popular model is that of Kaplan and Norton, (1990-1992), the balanced scorecard. The following section, hence, provides a brief review of themost commonly used balanced frameworks as well as the latest developments, highlightingboth their strengths and weaknesses, which, in turn, will help identify problems of usingthese models in determining pay.PERFORMANCPERFORMANCPERFORMANCPERFORMANCE MEASUREMENT MODELSE MEASUREMENT MODELSE MEASUREMENT MODELSE MEASUREMENT MODELSPerformance measurement has received considerable criticisms in the 1980s andearly 1990s for being restricted to financial measures and robust accounting methods inevaluating the performance of organisations or more specifically their profitability. Mostly, itis argued, that these measures ignore the softer less measurable performance indicators aswell as the relationship between different business units and their variable objectives (Euskeet al., 1993; Ghalayini et al., 1997; Jagdev et al., 1997; Kaplan and Norton, 1992; Nanni etal., 1992; Neely, 1995). Many researchers have also referred to the number of problems thatarise from relying on such systems such as short-termism (Crawford and Cox, 1990;Ghalayini et al., 1997; Hill, 1995; Kaplan and Cooper, 1998; Neely, 1995). In response tothese criticisms and dissatisfactions with the traditional system new performancemeasurement frameworks have developed, out of which, the most well-known andcommonly used is the balanced scorecard.
  5. 5. - 5 -Balanced scorecardThe balanced scorecard was developed by Norton and Kaplan, (1990-1992), toinclude both financial measures that report the results of actions already taken andoperational measures on customer satisfaction, internal processes, and the improvementactivities – operational measures that are drivers for the future financial performance (Kaplanand Norton, 1992, p.71). More specifically, the balanced scorecard is based on thecombination of four key perspectives in performance measurement: financial perspective,customer perspective, internal business processes, and learning and growth. Evidently,unlike the traditional systems the balanced scorecard puts strategy, vision andcommunication in the centre rather than control.Figure 1. balanced scorecard four key measures(Source: Paul Arveson, 1998 accessed, 24/06/05)Evidence on the success of the balanced scorecard has been reported across manyindustries and within the public sector in the US (Hepworth, 1998). Though, attention wasdrawn to the complexity of the system and the need for commitment towards accepting it forthe success of its application, and many pitfalls and problems were identified in practice(Kaplan and Norton, 1996b), no failures of the concept were identified (Hepworth, 1998).According to Ghalayini et al., (1997, p.209), the main weakness of the balanced scorecard isthat it is primarily designed to provide senior managers with an overall view of performance;thus, is not intended for, nor applicable, at the factory operations levels. Moreover, as amulti-stakeholders approach, the balanced scorecard has been criticized for not consideringthe interests of all stakeholders, such as suppliers, competitors, regulators, and community(Neely et al., 1995; Ghalayini and Noble, 1996; Atkinson et al., 1997). Brignal and Modell,(2000), further argue that the balanced scorecard literature has neglected the relativebargaining power of different stakeholders in determining whose interests will predominate inan organisation and the consequent effects on what aspects of performance are measured,reported and acted upon.
  6. 6. - 6 -The Performance Pyramid (SMART)Cross and Lynch, (1992), have recognized the hierarchical levels that exist within anorganisation and thus provided a link between the performance measures at each of thosedifferent levels so that each function and department strives towards the same objectiveswhich they placed on the summit of the “pyramid”. This model shows recognition for theimportance of the human resources in achieving the company’s vision by placing four keyoperational measures (quality, delivery, cycle, and waste) at department and workcentres ona daily basis at the bottom of the pyramid. The middle level indicators which bridge the gapbetween the top level indicators and the day-to-day operational indicators include customersatisfaction, productivity, and flexibility. Although this model considers layers between thebusiness units and individual business activities, and hence integrates corporate objectiveswith operational performance indicators it also combines financial, non financial as well asoperational and strategic indicators. It does not, however, provide any mechanisms toidentify key performance indicators, nor does it explicitly integrate the concept of continuousimprovement (Ghalayini et al., 1997). It should be also noted that the system has not beenempirically tested.The Performance PrismThe performance prism is considered the latest development in performancemeasurement. As the result of noting that none of the existing frameworks broadly focusedon stakeholders, Neely et al., (2001), recognize the importance of taking a holistic approachto stakeholder management in today’s culture of involvement. Its advantages are that itexplicitly addresses all stakeholders – not only investors but also customers, employees,suppliers, regulators and communities (Powell, 2004). According to the performance prismvision one of the fallacies of performance measurement is that measures should be derivedfrom strategy. Yet to derive measures from strategy is to fundamentally misunderstand thepurpose of measurement and the role of strategy. Hence performance prism starts itsprocess by thinking about the stakeholders and what they want. In fact out of the five facetsof the performance prism the first is stakeholders’ satisfaction. The other four includestrategies, processes, capabilities, and stakeholders’ contribution. By calling it prism, Neelyet al., recognize the complexities surrounding performance and its measurement. Thoughthis model has only been developed recently, it has been tested in few cases (e.g. DHL,London Youth, and the House of Fraser), where feedback has been overwhelmingly positive(Neely et al., 2001). However, given that the attention is placed on the process of finding theright strategies that performance measurement should be based on, performance prismtends to neglect issues such as how the performance measures are going to be realized,hence, little concentration is given to the process of designing the system (Tangen, 2004).At this stage it should be noted that although there are numerous balancedperformance measurement frameworks, few researches have looked into their effectivenessand the economic benefits they yield (Neely et al., 2002) – with most research focusing onthe balanced scorecard in particular as it remains the most popular measurement framework– and even less have explored the problems associated with their application.This paper highlights the problems that still exist, although rather neglected, in theapplication of current PMS in the public sector when performance is linked to pay. By using avariety of theoretical approaches, not just thos of economics and accounting, it will alsoidentify new problems that were ignored in narrow evaluations of the systems. Given thepurpose of this paper, the following section considers the nature of the public sector, thehistory of performance measurement, and the development of its application in relation torewards across the sector.
  7. 7. - 7 -PERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMENT INENT INENT INENT IN THE PUBLIC SECTORTHE PUBLIC SECTORTHE PUBLIC SECTORTHE PUBLIC SECTORLike the private sector, public sector organisations around the world face pressure toimprove service quality, lower their costs, become more accountable, customer focused andresponsive to stakeholders’ needs. While PMS have long been advocated as successful inthe private sector, it was once, considered impossible to measure performance in the publicsector. The first attempts at the evaluation and review were associated with the failedattempts at large scale strategic planning in the 1970s and it was not until the appearance oforganisational and managerial reforms introduced by the conservative governments in the1980s and 1990s that public sector performance measurement became firmly established(Boland and Fowler, 2000, p.417). It should be noted at this stage that the justification of thispaper for drawing evidence from the UK in particular is based on the fact that New PublicManagement prescriptions have been applied in that country more consistently than in manyother countries over a quarter of a century (Cutler and Waine, 2005).Over time there has been change in the form of PMS in the public sector in the UKwith most systems moving towards a balanced scorecard approach. In a review of the use ofperformance systems across the UK public sector, Goddard and Mannion, (2000), concludethat there have been clear shifts from collecting data on a narrow range of dimensions ofperformance to a broader range of performance indicators based on the assessment of theactivities of the organisation. Additionally, shifts are also clear in the use of performanceinformation; instead of being used for internal purposes they are now used for externalcontrol and accountability. There have also been shifts away from informal performanceassessments to formal peer reviews, as well as linking PMS to financial rewards (Propperand Wilson, 2003).Examples of PMS in the public sector exist in schools where there are two mainsystems for measuring schools performance: OFSTED (Office for Standards in Education)established in 1992, which involves an in-depth evaluation of the school’s processes andoutcomes, and PI (Performance Indicators) which involves the collection and publication ofsummary performance indicators including truancy rates and GCSE pass rates.Furthermore, in the NHS, the government has adopted a balanced scorecard approach intheir measurement system “Performance Assessment Framework” (PAF). As noted in arecent consultation document:“The Performance Assessment Framework … is based on the balancedscorecard approach. The use of the balanced scorecard allows differentorganisations to get more rounded view of performance by identifying differentkey elements of performance and understanding how changes in them may haveimplications for others.”(Department of Health, 2001, p.2 as cited in, Chang et al., 2002, p.350)Similarly, the government modernization agenda has been witnessed in the CivilService Reform. In 2002, Sir Andrew Turnbull, (head of the home civil service) has stated hispersonal vision for the UK Civil Service in 2005 is:“ Be respected as much for its capability to deliver as for its policy skills;Think creatively and operate strategically; Be an organisation that young andsuccessful people want to join and work with; and Create value for the publicand have values of:• integrity and trust• impartiality and readiness to serve all citizens and governments
  8. 8. - 8 -• recruitment and advancement on merit• a make-up that reflects our society ”It was also stated that emphasis is placed on the civil servants’ own personalperformance targets and how these relate to both their departments’ and government’spolicy objectives and outcomes (Stephenson, 2003).Overall, it can be stated that, performance measurement is a central aspect of thepublic sector reform.It is essential to point out at this stage that performance measurement in the publicsector has had several labels differing between disciplines and perspectives; for example “inpublic administration both review, evaluation, cost benefit, and policy analysis are employedas characterizations (Simon, 1947; 1997; Wildavsky, 1966, 1969, 1978); in contingencytheory (Thompson, 1967) labels as search, surveillance and monitoring were used, and inthe resource dependence perspective (Pfeffer and Salancik, 1978) performancemeasurement was termed as benchmarking, environmental scanning, and monitoring”(Johnsen, 2000, p.7).While the term performance measurement has been restricted, in some papers, tothe old financial-based measurement systems in the public sector most PMS are now basedon a balanced scorecard approach (with only few differences) but under different labels (i.e.Performance Assessment Framework, (PAF), in the NHS, and the Office for Standards inEducation, (OFSTED)). Therefore in this paper the terms will be utilized interchangeably.Although, as stated earlier, there is a gap in the literature about a clear and coherentlink between performance measurement and rewards, there seems to be some parallelismbetween the development of PMS in the public sector and their performance indicators andthe development of PRP schemes. For example, in schools, PRP is based on pupils’progress being the key performance indicator. Similarly, in 2002, the government has begunpiloting “value added” school performance data to supplement the raw data that werepreviously based on schools’ scores. Equally, in the NHS, traditionally some basicinformation about the performance of hospitals in England and Wales were made availablefor internal use by hospital managers; however, it was argued that this information was oflittle use because there was no link of the performance to financial rewards. Evidence of thegovernment’s support for a salient role for PRP in public sector performance can be found inthe 1999 White Paper Modernizing Government where it was stated that:“the links between pay and objectives are not always clear. We must useour pay systems – and performance pay in particular – in creative ways toprovide effective incentives to sustained high-quality performance…” (CabinetOffice, 1999, p.21, as cited in, Cutler and Waine, 2005, p.78).Arguments in favour of the use of scorecard rewards include focusing employees’attention on strategic priorities, providing extrinsic motivation by rewarding employees whenthey and their organisations reach their targets, minimizing gaming and sub-optimization(which will be covered later) through the inclusion of multi-dimensional performancemeasures.Before trying to lay down some of the problems that exist from linking performancemeasurement to pay it would be helpful to explore the nature of the public sector, whichmight underpin some of those problems.THE NATURETHE NATURETHE NATURETHE NATURE OF THE PUBLIC SECTOOF THE PUBLIC SECTOOF THE PUBLIC SECTOOF THE PUBLIC SECTORRRR
  9. 9. - 9 -Many scholars have referred to profit maximization as the main difference betweenthe private and the public sector (e.g. Boland and Fowler, 2000), and hence the lack of abottom line against which performance can be measured in the public sector. On the otherhand, some argue, that since there still exists an equivalent financial measure to profitabilityin the public sector which is “value for money”, then, there is no considerable differencebetween both sectors (Jackson, 1990). In this respect, it can be argued that difficulties withPMS in the public sector do not lie in the lack of bottom line performance measure but in thecomplexities surrounding its measurements. Notably, however, given a profitability measureand the objective of making a profit, the various levels of a private firm can in principle relatetheir activities to the contribution they make to the firm’s profitability (Jackson, 1986). Thelack of clear objectives for the public sector organisations, on the other hand, makes itproblematic to set intermediate objectives for all levels of employees within the public sector.It should be noted at this stage that a key potential role of performance indicators inperformance measurement in the public sector is clarification of objectives, which becomeseven more important with the presence of PRP and performance management systems suchas OFSTED in schools (Mayston, 2000).According to Dixit, (2002), the one distinguishing feature of the public sector is thepresence of multiple principles which influences the optimal performance measurement andincentive structure. Moreover, as a service provider, the public sector will be faced with thedifficulties of quantifying their main performance measures such as customer satisfaction,and quality of service (Jackson, 1990); which also mainly rely on human resources whobeing calculative receptors have discretion over their effort and hence need consistentmonitoring and directing towards the organisation’s goals (Neely et al., 1995). As mentionedearlier, reinforcing the daily performance indicators of general employees is done throughlinking performance measures to rewards. In fact one of the characteristics of performancemeasurements consistently mentioned is that PM should be derived from the organisations’business strategies and hence can be used as a strategic control system to influenceemployees’ behaviours (Robert and Kaplan, 1992; Neely et al., 1995). This is particularlyrelevant to the public sector where the overall performance is dependent on the humanfactor. In fact, according to Lynch and Cross’s (1992) performance pyramid, the translationof measures goes from bottom up, where the bottom represents the departments and workcentres which are daily monitored against four performance measures. Though Norton andKaplan’s (1992) balanced scorecard ignores the hierarchical relation between factors leadingto the end goal, when defining the measure of internal business perspective, they state thatmanagers should focus on the internal operation from which customer satisfaction is derived.Based on the above, it can be concluded that, first, performance measurement is notan end in itself and unless it can direct efforts towards organisational goals and influencefuture performance it would only represent a tool for measuring past activities. Second, it isby linking performance measurement to rewards that organizations can improve futureperformance. In fact, a recent survey of scorecard implementation in the US found that 70per cent of the respondents already use the balanced scorecard for compensation purposesand 17 per cent actively considering its use for this purpose (Perrin, 1996, as cited in Ittneret al., 1997, p.5). Furthermore, several authors have highlighted the importance of linkingbusiness PMS to rewards (Kaplan and Norton, 1992; 1996; 2001; Eccles, 1991; Neely et al,1995; Moon and Fitzgerald, 1996; Otley, 1999). However, most of the research in this areahas been merely descriptive. For instance, while proponents of the balanced scorecardconcept contend that this approach provides a powerful means for translating a firm’s visionand strategy into a tool that effectively communicates strategic intent and motivatesperformance against established goals, (Kaplan and Norton, 1996), the balanced scorecardliterature provides little discussion of the scorecard’s role in compensation decisions, despitethe fact that the majority of adopters use it for this purpose (Perrin, 1996, as cited in Ittner etal., 1997, p.2). Evidently, this has brought only the potential benefits of the system to theforefront making companies over-enthusiastic about its application. Nevertheless, there aremany problems associated with performance measurement when it comes to measuringindividual’s performance in the public sector and even worse when linking it to pay. These
  10. 10. - 10 -problems can be classified under two main categories, one related to an economic approachand the other to a psychological one. The rest of this paper will, hence, be organized in twosections, the first will review the economic literature and theoretical underpinning forperformance measurement and PRP identifying problems emanating from the use of theeconomic approach; and the second will look into the psychological literature and itsrelevance for identifying problems with performance measurement and pay systems and willpoint at the fact that using the economic literature has rather simplified those problems.PROBLEMS WITH PMPROBLEMS WITH PMPROBLEMS WITH PMPROBLEMS WITH PMSSSS ANDANDANDAND PRPPRPPRPPRP IN THE PUBLIC SECTOIN THE PUBLIC SECTOIN THE PUBLIC SECTOIN THE PUBLIC SECTORRRRECONOMICECONOMICECONOMICECONOMIC APPROACHAPPROACHAPPROACHAPPROACHPrincipal-agent modelThe moral hazard model of incentive design is the main tool economists have used tounderstand the construction of PMS and the provision of incentives (Courty and Marschke,2003). According to economists, in many service professions such as in the public service’sindividuals (agents) have discretion over their effort, hence, being self-interested, will tend toprovide the minimum possible effort that may go unnoticed. Kreps, (1997), states that in thestandard model of Agency Theory, without extrinsic incentives, effort is necessarily at thelowest possible level. Shareholders (principals) will, therefore, act to protect their interestthrough incentive compensation – described by Jensen and Meckling, (1976), as “Agencycosts” – that steers the action of the agent towards the principal’s objectives. Given thenature of the public sector (often serving several principals: tax payers, service users,politicians, and professional organisations with conflicting goals), however, makes itproblematic to identify the right performance indicators, which if not clearly defined andcommunicated, can result for dysfunctional and unintended behaviours.Dysfunctional behaviourIn designing a PRP system principals should put higher incentives towards the tasksthat can be accurately measured so there would be less manipulation on effort and results,however, this might cause agents to neglect the other less measurable tasks and spendmore effort on the high powered rewards. With multi-tasking in the public sector linkingperformance measurement with pay to monitor and influence behaviour captures the notionthat the investment allocation that maximizes performance outcomes does not necessarilycorrespond to the allocation that maximizes value-added (Courty and Marschke, 2003).When individuals respond to performance indicators in a way that maximizes theirbenefits this is known as the gaming response; and may include neglecting unrewardedtasks, and manipulating and distorting results. Examples of gaming exist across the whole ofthe public sector.In the education sector, where performance measures were based on tests scoreschanging students’ grades and “teaching the test” in order to boost the results-basedrewards in schools occurred. Additionally, there was a focus on pupil attainment neglectingsome of the activities that lead to productivity but are not rewarded such as teachingcitizenship, conflict resolution, and interpersonal skills whose development is an importantaim in primary schools (Courty and Marschke, 2003).The recognition of most of the problems mentioned earlier concerning public sectormulti-tasking, multi-principals, and the lack of objectives, was one of the drivers for thedevelopment of a new system entailing additional performance measures includingacademic and non-academic indicators. Under the new scheme, first applied in July 2000,teachers’ performance indicators are assessed against five main criteria:
  11. 11. - 11 -•Pupil progress.•Wider professional effectiveness (two dimensions).•Teaching and assessment (three dimensions).•Knowledge and understanding.•Professional characteristics.Source: (DfES, 2001a)Clearly by placing pupils’ progress on top of the criteria there is a shift to value-addedbased rewards. Little research was conducted to evaluate the impact of the new school PRPsystem on teachers’ effort, based on the economic approach, and concluded that anincrease effort and test score gains were evident (e.g. Burgess and Croxson, 2001; Burgesset al., 2001; Atkinson et al., 2004). However, by only focusing on one criterion (i.e. pupils’progress) there is a lack of data on whether the improved results represented extra effort onperformance as a whole or only on this criterion and, hence, is merely a diverted effort fromother professional activities rather than improved performance. Consequently, in consistentlyfollowing the agency theory approach, it can still be argued that since agents tend toproduce the least effort or the necessary amount that leads to the benefits, then, under thenew system problems of sub-optimization, distortion, and gaming still arise. However, this isonly a suggestion based on a theoretical ground. Hence, more research is needed toevaluate the progress in other criteria such as professional effectiveness, professionalcharacteristics and knowledge and understanding.In respect to the gains in the test scores and improved pupil performance anotherproblem arise which is the sub-optimization of the educational outcomes compared to thewider social goals and misalignment of performance measurement objectives with theobjectives of reward. Sub-optimization occurs when there is a lack of congruence betweenPRP measures and the global objectives of the organisation. Mayston, (2000), argues thatone of the measures valued by society is student satisfaction. The current priority given topupil’s progress and maximizing the reported examination results may lead students toexperience additional stress and pressures from further increasing their examination resultswhich will consequently reduce their satisfaction and sense of fulfillment from theeducational process itself. Even worse the drop in students’ satisfaction, in turn, may impairtheir examination performance (Mayston, 2000).Moreover, given that, PRP operating in schools is an individual-based scheme,where teachers are assessed individually against the performance measures and are givenan incremental progression up through a scale of nine increments which once reachedbecome permanent in their salaries two hypothesis can be derived. The first is that, sincePMS in this case are school-based as opposed to teachers’ individual assessment, there is amisalignment of the objectives of PRP and PMS. The second is based on the fact that sincereward increments go into teachers’ permanent salary meaning that even if performancedrops the salary will remain the same, then, performance measurement in linkage to paywould only be a tool for monitoring past performance and controlling the wage bill rather thanimproving future performance.Evidence on unintended responses and dysfunctional behaviours is also apparent inthe health sector. Goddard et al., (2000), found evidence of gaming concerning efficiency,where respondents were reluctant to produce improvement in costs for fear that the followingyear’s efficiency targets would be set at a higher level. He also noted that “financial regime inwhich Trusts operate encouraged Trusts to fail to meet their financial target as these wereoften “bailed out” by the region” (p.105).Clearly the performance assessment framework being based on a balancedscorecard approach includes wider performance measures based on financial, clinical andpatient-care indicators for hospitals (Popper and Wilson, 2003). Yet, the lack of measures
  12. 12. - 12 -relating to clinical outcomes was evident in Goddard’s et al., (2000) study on PerformanceAssessment Framework, which they called tunnel vision. In the same study, two otherproblems were reported. It can be assumed that the first one which is misrepresentationcorresponds to distortion of data in the educational sector. Distortion and misrepresentationof data can exist in the appraisal process itself where agents (teachers or clinical staff) canonly focus on the positive sides of their achievement (Forrester, 1998) since many of thedata used to measure performance are under the direct control of those staff (Goddard et al.,2000). Similar to the reasons of gaming in the health sector, misrepresentation of data cansometimes be negative, extending waiting times because again there is tendency to provideadditional funds to Trusts who fail to meet their objectives (Goddard et al., 2000). In thisrespect, selecting performance measures that optimally trade off the desire of controllabilitywith the need of goal alignment are argued to be crucial for the success of PRP [Baker,2002].Subjectivity and perception of fairnessTo avoid the problems associated with basing pay on more or less objectivemeasures such as misallocation of effort by the agent, gaming, misrepresentation anddistortion, and short-termism principals have to weaken the power of incentives on the moreaccurately measured tasks (Burgess and Ratto, 2003). This, however, gives rise to issuessurrounding the difficulties of determining the relative weights to place on various measureswhen determining rewards. Evidently the flexibility in weighting quantitative performancemeasures against qualitative indicators will result in the introduction of subjectivity into thereward process. Consequently, problems such as inequity, unfairness, and mistrust willarise.The issues of equity and fairness have been addressed by different theories,reciprocity theory, equity theory, and relative deprivation theory.According to equity theory (Adam, 1963; Adams, 1965) people compare the ratios oftheir own perceived work outcomes to their own perceived work inputs to the correspondingratios of a comparison with others (as cited in Greenberg, 1990, p.400). If employees’investments are not proportionate with the rewards given, inequity arises and employees willattempt to restore the balance, which in turn, results in a range of undesired outcomes. Infact, recent research supporting the predictions of equity theory shows that neglectinginternal comparisons of fairness may have a deleterious impact on the health of thepsychological contract since inequity is associated with job satisfaction (Perry, 1993; Ago etal., 1993; Witt and Nye, 1992; Berg, 1991; Summers & Hendrix, 1991; Moorman, 1991;Covin et al., 1993, as cited in Balkin et al., 1998), absenteeism and turnover (Geurts,Schaufeli, & De Jonge, 1998; Iverson &Roy, 1994; Van Yperen, Hagedoorn, & Geurts, 1996as cited in Taris et al., 2002; Covin et al. 1993; Weiner, 1980, as cited in Balkin et al., 1998),and lack of organisational commitment (Schaufeli, Van Dierendonck, & Van Gorp, 1996 ascited in Taris et al., 2002). Though it is difficult to argue with the basic principle: “that it isequitable to reward employees according to their contribution” (Thompson and Milestone,2001, p.35), there is a large behavioural literature arguing that treating employees differentlyfrom each other is detrimental to employee morale (Baker et al., 1988). In their evaluation ofPRP in the NHS, Richardson and Dowling, (1997, p. 354), further argued that the inclusionof qualitative data in performance measurement produced frequent scepticism, both on thepossibility of measuring the job performance of NHS managers at all properly, and on thelikelihood of subjective judgments .While it was stated in that study that only a minority, 24 per cent felt that theirappraisal interviews were not conducted appropriately, 26 per cent did not understand howtheir performance was measured, 30 per cent felt that their performance was not measuredfairly, 67 per cent thought that there was a significant degree of subjective judgment in themaking of PRP awards. Stronger evidence of unfairness is also apparent in the researchconducted in BT (British Telecom) where only 6.5% of the respondents said PRP at BT hadbrought an improvement in managerial performance, while as many as 63% believed it had
  13. 13. - 13 -been applied unfairly in practice causing de-moralization (Kimble, 2005). In the InlandRevenue, it was added that de-motivation also arose from perceiving the whole concept asunfair. In order to maintain trust and effective working relationship with their peer groupmanagers tend to distribute the pot of PRP fairly between the team rather than reward highperformers. This, nevertheless, raised doubts in operating PRP fairly in a cash limitedenvironment like the public sector. In respect to subjective performance measurementLawler, (1971), concludes that “pay plans based on subjective criteria have little chance ofsuccess” because employees don’t trust superiors to accurately evaluate their performance.He, further, argues that, “the more subjective the measure, the higher the degree of trustneeded, because without high trust there is little chance that the subordinate will believe thathis pay is really fairly based on performance.” (p.171, as cited in Baker et al., 1988).It should be noted that the notion of fairness not only exists in the appraisal processbut also in the process of negotiating the contract. It is the reciprocity theory that postulatesthat agents prefer a condition of fairness in their exchange relationship with the principal. Inthis respect, the perception of fairness of a contract is an important element of thepsychological contract, which helps predict the kind of reward employees are expecting inexchange for their level of effort invested in the company (Hiltrop, 1996). However, oncemore, standard agency models tend to rather simplify this type of interaction between theagent and the principal (Herpen, et al., 2003).Based on the above it can be hypothesized that by ignoring the psychologicalinteraction in the process of performance measurement economists tend to ignore issuessuch as social comparison, equity, and trust.Though equity has been treated within the economic literature, little attention hasbeen placed on equity as one of the variable leading to motivation, thus more attentionneeds to be paid to the psychological consequences of systems such as performancemeasurement on behaviours.PSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROACHCHCHCHAlthough agency theory has been used by most economists as a theoreticalunderpinning for PMS and incentives, economic literature has largely neglected the variouspsychological effects of monetary rewards on behaviour and thus on effort (Frey, 1997).Similarly, evidence of increased effort and productivity in the public sector is apparent inmany of the studies based on an economic approach (e.g. Burgess and Croxson, 2001;Burgess et al., 2001; Atkinson et al., 2004) as well as a psychological approach (Richardsonand Dowling, 1997; Marsden and French, 1994; Heery, 1996; Marsden and French, 1998);hence PRP systems were sustained. Yet, impact of these systems on employees’ behavioursuch as motivation has been negative (Thompson, 1992; Marsden and French, 1998;Marsden and French, 1994; Richardson and Dowling, 1997; and Marsden, French andKubo, 2001).Despite the fact that agency theory contributes to understanding the behaviour ofagents and provides a rich fund of practical implications for the design of incentive contracts(Pfuff and Kunz, 2002), evidently, economists have taken a clinical approach to humanmotivation, meaning that the behaviour of agents is assumed to be rational (Herpen et al.,2003). Employee resistance towards pay for performance systems in the public sector maytherefore be little understood by economists, given the perceived potential benefits of tyingpay to performance. Industrial organisational psychology, organisational behaviour, andsociology, on the other hand, have paid greater attention to the complexities of the conceptof motivation, looking at both, intrinsic and extrinsic motivation, thus, providing alternativeexplanations for why monetary rewards may be counter-productive.The following section will draw attention to the importance of the psychological, socialpsychological, sociological, and organisational behaviour theories and their relevance to
  14. 14. - 14 -performance measurement and rewards with the aim of highlighting their contribution toperformance measurement and reward studies.Problems with motivationThough economic arguments for the introduction of PRP, based on agency theory,are often flawed, motivation is always referred to as the main reason for the increased levelof efforts. Consequently, the rationale and objectives of PRP have been mostly reported asto better motivate staff by basing salary on performance rather than seniority. Hence, mostempirical researches have tested the impact of PRP on employees’ motivation in the publicsector through the lenses of two main theories; expectancy and goal-setting theory.According to the expectancy theory motivation is affected by three factors. Thefirst is expectancy which concerns the individual’s perception that effort is positivelycorrelated with performance. The second factor is instrumentality, which concerns anindividual’s expectation that this reward is closely tied to his performance; and the third iscalled valence and is a measure of the degree to which an individual values a particularreward. Although expectancy theory has been criticized for being based exclusively onextrinsic rewards, ignoring the role played by other intrinsic incentives in motivatingindividuals, it should be noted that the theory indicates that money can act as a motivatoronly if it is perceived as a means of achieving goals in the presence of a clear link betweeneffort and reward. Thus, the emphasis is on the intrinsic motivation of the perceivedrelationship effort and good outcome for effort incentives (Sloof and Praag, 2005).It is argued that the second and third factors of the model can be translated into theagency model, where instrumentality is given by the incentive intensity in the agency model,while valence refers to the arguments that appear in the agent’s utility factor – i.e. wage andeffort (Sloof and Praag, 2005, p.8). The only factor that differentiates the two theories isexpectancy which might explain the agent’s reaction to the pay-performance sensitivity whenthey select their level of effort. Though it was found that levels of efforts are invariant toexpectancy (Sloof and Praag, 2005), and thus productivity increased regardless of thatfactor, motivation was reported as negative (Thompson, 1992; Marsden and French, 1998;Marsden and French, 1994; Richardson and Dowling, 1997; and Marsden, French andKubo, 2000).From the above it is evident that imperfect performance measurement remains oneof the central reasons for employees’ disenchantments with PRP in the public sector. In fact,Marsden, (2004), maintains that the quality of appraisal which plays a central part in bothexpectancy and agency theory is the key independent variable for the perceived incentiveand divisiveness of PRP.Murnane and Cohen, (1986), claim that PRP works best where there are clearlymeasurable outcomes, which, does not apply to the case of the service sectors [Chamberlin,et al., 2002, p34]. In the public sector jobs, where measurable outcomes are unclear, wherePRP has been introduced, no evidence was reported of improved motivation. Marsden,(2004), provides summary evidence on employees’ responses to PRP in six areas of hepublic sector: Inland Revenue, (1991 and 1996), the Employment Service, two NationalHealth Service Trusts Hospitals, and head teachers in primary and secondary schools intable 1.
  15. 15. - 15 -(Marsden, 2004, p.357)In studying the effect of PRP on employees’ behaviours in four different localauthorities in the local government, Heery, (1996), concludes that:“… PRP schemes of the kind operated in local government tend to havea rather limited impact on workers’ behaviour. The process of work in the fourauthorities, it seems, runs along its established course and PRP has beeninsufficient to jolt it down a radically new path… PRP in this respect appears tobe something of a damp squib” (p. 219).Similarly, in their study conducted in the Inland Revenue, Marsden and Richardson,(1994), concluded that:‘The positive motivational effects of Performance Pay . . . were at mostvery modest . . . Even worse, there is clear evidence of some de-motivation’ (p.253).
  16. 16. - 16 -Moreover, in the follow-up study conducted by Marsden and French in the InlandRevenue in 1996, a significant rise in the reported adverse behavioural effect with thesystem was evident, indicating that familiarity with the system do not generate moreapproval (Richardson, 1999). Similarly, in the Employment Services, Marsden and French,(1998), found that most staff did not believe it had raised their own motivation, and hence,concluded that the net effect of performance pay on motivation has been negative. Echoingthe above results are teachers’ responses to the effect of PRP in two schools, wheremotivation has been reported negative (Marsden and French, 1998).Contrary to the above, however, is the study of the NHS, where there weresignificantly higher percentages of reported motivation; though not higher than 30 per cent,this number is still significant given that the rest of the respondents did not report de-motivation but rather no effects (Richardson and Dowling, 1997). It should be noted that,appraisal systems, in this case, operated in light of the goal-setting theory, which might setthe explanation why the scheme appears to be more motivating to managers.Goal-setting theory places less emphasis on rewards and stresses the motivatingpower of defining appropriate work goals and engaging employee commitment to them(Marsden, 2004, p.354). A number of studies have attempted to examine the relationshipbetween goal-setting and performance. It was found that the majority of evidence suggestsstrong support for the theory. In fact, it is where managers were not sure of their objectives,doubts into the credibility of the system evolved. Marsden, et al., (2001), found that whenemployees thought PRP had led managers to set targets more clearly (because they have toappraise them afterwards), and if they thought their last appraisal fair, then they were morelikely to experience positive incentive effects (p. 11). Additionally, evidence on the fact thatPRP helps setting goals more clearly was apparent in the Inland Revenue and the NHSwhere the clarification of objectives, that the scheme had introduced, was seen as moreeffective motivator than money and was seen as one of the main pillars of the success of thescheme (Marsden and French, 1998).Inevitably, however, some contrary findings are especially evident when identifyingperformance dimensions by using a goal-setting theory is followed by another set of issuesconcerning how these dimensions and goals can be measured [Mullins, 1999]. In the InlandRevenue, there was no evidence that clearer goals helped motivation towards betterperformance particularly that the majority of individuals felt that they were already working attheir maximum level of effort. Similarly, in 1996, research conducted in a multi-divisionalcompany in Ireland argued that, despite the fact that 87 per cent of managers consideredthat their set objectives were clear and specific, 78 per cent still ranked measurement ofperformance as one of the top three disadvantages with the system, indicating that clearand specific objectives do not necessarily result in an adequate measure of performance(Kelly and Monks, 1996). Additional difficulties with the measurement of performance werealso evident in the comments which reflected the problems involved in defining andmeasuring goals, especially for managerial positions: True goals are hard to clarify andharder still to judge (manager, 1996, as cited in Kelly and Monks, 1996).Once more, the role of clear measures and fair performance measurement system isapparent in need for a successful reward system as a motivator. Moreover, extrinsic rewardswere not perceived as the prime motivator given the nature of the public sector (i.e. servingthe community). In fact, it was claimed that PRP contradicts the personal standards or theethos of the NHS, as one manager stated (Dowling and Richardson, 1997):Pay in the NHS is definitely NOT a motivator. Most of my colleagueswork far in excess of their contracted hours for little or no financial rewards.
  17. 17. - 17 -…Having worked as a professional paramedic for 18 years before goinginto general management I have never been motivated I believe by financialreward and this continues to be the case in general management. My motivationis to get the job done to the best of my ability. (p. 356)From the above statement there is clear evidence that managers are moreintrinsically motivated by the desire to produce public value from which the community willbenefit.Moreover, it is argued that setting financial rewards based on performance mayactually be counter-productive in that it may send the signal that the relationship between theworkers and the organisation is a pure market relationship (Burgess and Ratto, 2003, p.10).Yet economists have tended to exclusively use the agency theory to analyse the linkagebetween and working of performance measurement and reward system, neglecting theimportance of providing a balance between intrinsic and extrinsic motivation, and it was notuntil recently that attempts have been made to insert psychological approaches in economictheory (Frey, 1997; Frey and Jegen, 2001; Osterloh and Frey, 2000).The basic idea that extrinsic rewards may have a deleterious effect on intrinsicmotivation stems from the psychological theory called cognitive evaluation theory (Deci,1975) which argues that individuals strive to fulfil two basic needs: self-determination andcompetence. Subsequently, Deci, (1975), argues that providing financial rewards, placesemphasis on the extrinsic motivation driving the focus away from the intrinsic one. Moreover,he differentiates between two aspects of every reward, a controlling and an informationalone. If rewards place emphasis on the control factor, feelings of self-determination andcompetence decrease in light of restricting the individual’s action and hence, diminishintrinsic motivation; contrastingly, emphasizing the informational aspect can increase theintrinsic motivation since it provides individuals with information about their level ofcompetence and self-determination (Kunz and Pfaff, 2002). Recently, the concept of intrinsicmotivation has enjoyed increasing popularity in the economic field. The integration ofpsychological theories in the economic theory, consequently, resulted in the development ofthe motivation crowding theory (Frey, 1997), which is closely related to the cognitiveevaluation theory. The crowding theory by suggesting that monetary incentives will crowdout intrinsic motivation opposes the economic view held by the agency theory that levels ofeffort will be affected by the level of incentives. Although, Frey, (1997), states that themotivation crowding theory explores the psychological effects of monetary rewards and effortin order to treat the weakness of economic theories which only considered the absolutemonetary incentives and strategic benefit, more empirical research need to be done in thatarea in order to examine the effectiveness of performance measurement and rewardsystems and their impact on employees’ behaviours particularly on the long-term.It is worth mentioning at this point that from an agency theory perspective, it might beargued that the negative motivational impact and the divisiveness of PRP reported in thepublic sector could simply be the result of employees’ resentment to the system sinceaccording to the agency theory such systems oblige employees to produce more effort. Byarguing that there is only a minority of employees in the public sector who would “shirk”because of high levels of organisational commitment among public servants Marsden,(2002), implies questioning one of the factors presented in the agency theory and itsrelevance to the public sector: providing minimum level of efforts. However, with recentstudies referring to new employment relation and the changing state of the psychologicalcontract in the public sector (Anderson and Schalk, 1998; Millward and Hopkins, 1998;Rousseau, 2000; Hecker et al., 2002; Rousseau, 2004) one should reconsider measuringthe state of commitment among public servants. In fact, Le Grand, (1997), argues that the
  18. 18. - 18 -nature of public services is changing from one where employees were seen as serving thecommunity to one where all parties are self-interested. On the other hand, this change in thenature of the psychological contract can be argued to be the result of more flexiblemeasurement and pay systems, as it is noticed that this change only came about at thesame time that rewards were transformed from being based on seniority to one whereemployment contracts lack security given a reward based on performance.CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSIONPerformance measurement systems, which assess an organisation’s performanceagainst its performance indicators, have been widely applied in the public sector after themodernisation agenda characterised under the heading “Public Sector Management”.Although performance assessment is not a new phenomenon to the public sector,performance measurement has undergone considerable changes over the past decade withan increasing emphasis on the use of a combination of financial and non-financialperformance measures following the extensive criticism traditional systems have received forbeing short-term and lacking a link to business strategy. One of the central aspects of thischange and a central defining feature of the New Public Management is linking themeasurement of the public services’ performance to financial rewards. In fact, severalscholars have highlighted the importance of linking performance measurement systems andparticularly the balanced scorecard to rewards. Hence, the past decade has witnessed agrowing body of literature on performance measurement and performance related pay in thepublic sector.Benefits of linking performance measurement to rewards include providing a powerfulmeans of linking and communicating the organisation’s strategy to all levels employees, andmotivating employees by clarifying goals and targets (e.g. Kaplan and Norton,1992; 1996;2001; Eccles, 1991; Neely et al, 1995; Moon and Fitzgerald, 1996; Otley, 1999). However,by reviewing the literature of performance measurement and performance related pay, thispaper suggests that there still remains a gap in the literature concerning three main issues.First, the literature on the balanced scorecard provides little discussion of the scorecard’srole in determining rewards. Thus, companies are left with deciding on the choice of multiplemeasures and their weights with little information on how to create a balance in thecompensation scheme. Second, there is a lack of evidence on the strength of the linkage ofperformance measurement and reward systems in practice. Evidently, by reviewing theliterature of both performance measurement systems and performance related pay systemsin the public sector, this paper hypothesises that there is a misalignment of objectivesbetween both systems. For example, in the education sector performance measurementsystems (OFSTED) produce school-based reports while rewards are based on individualperformances, which is claimed to discourage teamwork. However, few empirical researcheshave evaluated this linkage. Yet, their findings are not consistent. For instance, while Kaplanand Robert, (2004; 2001), show positive effects of using performance measurement indetermining rewards, Ittner et al., (1997; 2003), and Goddard et al., (2002), show that linkingperformance measurement to rewards may result in dysfunctional behaviours, includinggaming, tunnel vision, misrepresentation, neglecting tasks, and short-termism. Moreover, thelevel of subjectivity found in the process of measuring performance has proved to have anegative impact on employees’ behaviour and cause demoralisation when it comes to linkingpay to performance (Marsden and French, 1998; Dowling and Richardson, 1997; Marsdenand Richardson, 1994; Heery, 1996). The third gap arising here is that, though fewresearchers attempt to insert psychological approaches in economic theory most research inthis area has been presented in the economic field and has rather simplified its interrelationwith other fields such as sociology, industrial relations, and organisational psychology, whichin fact draw more attention to the importance of the human resources and hence to thepsychological aspects and consequences of performance related pay on employees’behaviours. Subsequently, again this seems to weaken the linkage between performancemeasurement and performance related pay systems.
  19. 19. - 19 -A central element to reviewing performance measurement systems is the nature ofthe public sector. Many scholars have recognised the differences between the nature of thepublic sector and the private one, referring to the presence of multiple tasks and multipleprinciples as well as the lack of profit maximisation as the main differences and hence themain complexities surrounding the application of performance measurement andperformance related pay systems in the public sector. However, there has been a disregardor rather a simplification of the psychological aspects inherent in the public sector namelypublic service ethos. Traditionally under the notion of public sector ethos employeesbenefited from an open-ended employment contract, which, in turn, created a psychologicalcontract that is relational in nature where employees were motivated and committed toproviding maximum effort and best quality services to the community in exchange for long-term job security. With the New Public Management Reform increasingly importing practicesfrom the private sector in order to improve quality and performance, it is suggested that thepublic sector economy is becoming more market-driven which is suggested may beendangering the public sector ethos (Morgan and Allington, 2003) and changing the natureof the psychological contract (Hiltrop, 1996). It is argued that changing rewards fromseniority based to more flexible rewards based on performance, have affected employees’feelings of job security, and hence, tend to reduce the peculiar commitment and motivationpreviously found among public sector workers.Although, as stated earlier, advocates of the agency theory might argue that theresentment of employees against systems such as performance measurement andperformance related pay is due to the fact that agents are expected to ‘shirk’ and with thestudies suggesting a change in the psychological contract, one would believe suchargument, Marsden et al., (2001), concluded that employee commitment was the main factorsustaining performance related pay systems in the public sector albeit combined with anegative impact on behaviour. It is, hence, important to draw more attention to the level ofcommitment in the public sector, the nature of the psychological contract, and the impact ofsuch systems on not only behaviours (i.e. motivation) but also attitude (i.e. commitment).Finally this means that more attention and investigation is required into the nature of theeffort bargain from multiple perspectives: economic, sociological and psychological, to namebut a few.
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