Material de Apoio | Pay flexibility country overview

Pay flexibility country overview - CHILE
Pay flexibility country overview - CHILE 1
Data summary
DESIGN FEATURES
A. Performance-related pay
1. Performance-related pay (PRP) is widely extended in Chile’s central administration
at the institutional, working-group and senior manager level. There are schemes
which apply to most central administration institutions (across-the-board schemes), and
there others which were created for specific institutions. Most institutions in the central
administration are part of the across-the-board PRP schemes, instituted over 10 years ago
and authorized by law. These schemes include PRP at the institutional, working group
and, in the case of senior managers, also at the individual level. Rewards for these PRP
schemes are paid during the following year in four installments. Senior Executive Service
(SES) PRP scheme is paid monthly (they also get the institutional and the working group
every three months, but their own performance related allowance is paid on a monthly
basis).
2. Broad-based Institutional level PRP: PMG and the Award for Institutional
Excellence. There are two main PRP mechanisms at the institutional level in Chile’s
public sector. The Management Enhancement Program (or PMG), has been active since
1998, and represents a maximum of 7.6% of annual base pay. It is paid based on the
institution’s achievement of annual objectives in pre-defined areas, negotiated with the
Budget Office of the Ministry of Finance and with the line ministry supervising the
agency. The second PRP scheme at the institutional level is the Annual Award for
Institutional Excellence, awarded by the Civil Service National Directorate (DNSC) since
2004 and equivalent to 5% of base pay. Only those institutions which have achieved
100% of their PMG objectives the previous year can apply, and since 2008, three
institutions receive the award following a competitive process, instead of one.
3. Broad-based Working Group level PRP: Collective Performance Agreements.
Collective Performance Agreements for working groups within ministries or agencies are
active since 2003, and can represent a maximum of 8% of base pay. The objectives are
determined by each institution and are signed off by the line minister.
4. Broad-based Individual level PRP: Senior Executive Service (SES) and performance
appraisal at the individual level for all staff. At the senior manager level there is a PRP
scheme for the senior executive service cadre which is based on the individual
performance agreement of each executive. This scheme is active since 2004 and can
represent up to a maximum of 100% of base pay (percentage varies per agency, see
section on pay differentiation below) with a cap of the SES undersecretary’s salary. The
individual PRP for all staff based on performance appraisal and awarded to the top third
of performers in each agency was introduced in 1998 and discontinued in 2003. The
quota system was perceived to be ineffective: most if not all employees were appraised as

“excellent” and managers started to rotate the third of the employees which received it
every year.
5. In addition to the general PRP schemes, some individual agencies or groups of
agencies have differentiated PRP schemes. For example, institutions with a mandate
linked to tax collection (Internal Revenue Service and the Treasury, among others)
receive an institutional-level bonus based on the tax revenues achieved. Other
institutions, such as the Civil Registry, receive a bonus based on customer satisfaction.
Table No. 1: PRP Chilean Style - Key design features of each scheme
Main
Chilean PRP
Schemes
Key design features
Assessment of performance
Definition of
the pool of
available
funds
Mechanism for
defining the
bonus
Distribution of
the
performance
pay across staff
Individual
level: Senior
managers
Annual performance appraisal of Senior
Executive Service cadre members.
Evaluation led by immediate supervisor
and based on targets established at
individual results agreement (3 years).
Annually, the
Budget
Office
defines an
overall
envelope for
personnel
expenditures.
Achievement of
all objectives:
complete bonus
(size varies by
individual
contract). From
80 to 99%: of
objectives 50%
of bonus1
In 2011, all SES
members
received the
complete bonus2
Working-
group level:
within public
organizations
Line minister or head of agency divides
his/her institution by groups and defines
annual goals and performance indicators
for each of them. The internal audit unit
evaluates annually the level of
accomplishment.
Achievement of
75% to 90% of
objectives: 4% of
base pay; ≥ 90%:
8%
In 2009, 98.7%
of the personnel
received the
PMG incentive.3
Institutional
level
PMG: focuses on enhancement of critical
areas, such as human resources, planning
and management control, among other.
Each institution defines its action plan in
agreement with Budget Office and line
ministry. Institution self-evaluates
accomplishments of previous year and a
group of experts validates the report.
Achievement of
75% to 90% of
objectives: 3,8%;
≥ 90%: 7,6% of
base pay
In 2009, 98% of
the personnel
received the
PMG incentive.4
B. Differentiation
6. Take-home pay for a civil servant in a similar job varies across public entities, for
different reasons, leading to the general perception that there are “low-pay” offices
and “high-pay” offices. First of all, there is a difference between pay scales and pay
schemes available among public agencies or groups of agencies. Secondly, heads of
agencies or ministers have the discretion to remunerate a small number of individual staff
with highly demanded scarce skills (critical functions) at a much higher level. Thirdly,
1
Law 19882
2
Source: Civil Service Directorate. See World Bank (2012b)
3
Source: Ministry of Finance
4
Source: Ministry of Finance

the performance bonus for the SES cadre referred to earlier, varies in size according to
the ministry or agency. Finally, and as happens in most public administrations, individual
pay for a similar job also varies in terms of factors such as location, overtime, seniority,
and academic qualifications, among other.
7. Differentiation exists, first of all, at the supra-institutional level: staff working for
the so called “controlling institutions” (Superintendence of Pensions,
Superintendence of Health, Superintendence of Casinos, among others5
) or the
“finance sector institutions” (Treasury, Budget Office, etc.) have a higher pay scale
than other public entities. This pay differentiation policy was introduced in the early
1980’s, with the objective of attracting and retaining better skilled personnel in key areas.
These sets of institutions have differentiated pay scales applicable to all their staff.
8. Differentiation at the individual level is exercised through a special allowance called
“critical functions”, a substantial top-up amount up to 100% of gross salary given to
individual contrata or planta staff within a ministry or agency. Each institution
receives a budget envelope for the “critical functions” allowance from the Budget Office
to distribute among their staff, deciding who receives the benefit and how much the
selected person receives, up to 100% of their remuneration (total remuneration cannot
exceed the sector’s undersecretary’s pay). This allowance is normally used to increase
pay of middle-management positions (for example, a Budget and Planning Manager for a
line ministry), which for legal reasons must follow the permanent staff pay scale and
cannot be hired as advisors through daily fees (a contract which would provide the
vertical flexibility needed to attract and retain highly skilled individuals).
9. Differentiation at the senior executive service occurs through the size of the
performance bonus. While the size of the maximum performance bonus for SES
members can reach 100% of base pay (with the salary of the undersecretary as a cap), its
magnitude is determined by the Budget Office of the Ministry of Finance together with
the Civil Service Directorate and the Sector Ministry based on market conditions and an
assessment of the level of pay needed to attract and retain suitable candidates. For
example, the bonus tends to be closer to 100% for the head of a hospital in a
geographically remote location or for a head of a highly specialized agency that performs
an activity highly remunerated in the private sector, but can represent less than 30% for
other SES positions.
10. Finally, pay differentiation is also exercised to compensate for factors such as
location, seniority and academic qualifications, among other. The most common
person-specific pay component is the seniority allowance, calculated as 2% of base pay
for every year of service, with a maximum of 30%. The “Zone Assignment” and
“Extreme Zone Assignment” varies from 10% to 100% of base pay. A family allowance
is also paid to personnel in the lower grades.
5
Other institutions include the superintendences of Bankruptcy, of Values, of Energy and Fuels, and of the
Environment. In addition, other organizations within the controlling institutions include: the central public
procurement office “ChileCompra”, the Unit for Financial Analysis, the Institute for Industrial Property and the
Defense of the Competition Agency (see Laws 18.091 and 19.301)

C. Delegation
11. Pay bargaining is conducted centrally, and is not delegated in other public entities.
Pay bargaining is conducted centrally and on an annual basis, and a general pay increase
is defined for the entire public sector. All public sector staff associations come together
for this purpose. The negotiation focuses on the percentage increase in base pay. Once the
pay adjustment is agreed between staff associations and the Government it is sent to
Congress to be approved by Law. When an agreement is not reached, the Government
must propose a pay increase in Congress.
12. However, a certain degree of pay delegation exists in the Chilean central
government: the head of each agency can decide how much to pay and in which
category to hire a contracted employee (also called contrata), which comprise the
majority of the public sector workforce. Each public entity hires contrata employees
discretionally (no official selection process), defining arbitrarily their grade in the pay
scale and thereafter modifying this grade as needed, with the only limitation that the
grade of the contrata employee cannot be higher than the highest permanent staff grade
defined for each organization by law.6
As of 2011, 60% of the workforce consisted of
contrata personnel with one-year contracts, but their average tenure was over 10 years.7
Therefore, de-facto, managers do have discretion to modify pay and grading of a large
part of their staff.
IMPACT
A. Individual
13. Since the percentage of staff receiving the performance-related pay exceeds 98%, it
is very difficult to differentiate behavior at the individual between the workers who
receive the incentive, and those who do not. In fact, there is anecdotal evidence that
honoraria workers (with daily fee contracts) which do not receive any kind of
performance-related pay, receive the same amount of total remuneration than contrata
(one year contract linked to a grade in the permanent staff pay scale) working the same
amount of time as the other public servants, because the last ones just include all
performance-related pay as part of their fixed salary. Since PRP tends to be based on self-
imposed targets and verification of these targets, the main behavior generated by PRP in
employees is the strong pressure from staff associations to agency authorities to ensure
that targets are achievable and that no portion of “variable” pay is at risk. This tends to
generate perverse effects on PRP, reflected in the public sector performance literature.8
6
For example if the highest “professional” permanent staff in an agency is classified as grade 5, then no
professional contrata can exist in 4th
grade or 3rd
.
7
See World Bank (2012)
8
Talbot (2010) provides a comprehensive list of these effects, including Ratchet effects (low targets); cherry-
picking (choosing the easiest targets); output tunnel vision (targets are the only focus of performance), etc.

14. The achievement of the full bonus by all senior executives has not helped to increase
retention levels on this cadre (50% of them leave every year).9
There is some
evidence, which suggests that the managers appointed to these jobs possess the
appropriate skills and experience, but may feel frustrated with the strong bureaucracy and
the difficulties to change the organizations they have been recruited to manage. Several
left voluntarily after the government’s change and others have been fired.
15. On the other hand, retention of permanent (planta) and contracted personnel
(contrata) has not been an issue although no correlation seems to exist between PRP
and retention since turnover rates do not seem to have differed from the past. About
7% of planta and contrata left the central government in 2008 and 2009 for different
reasons, the majority of them taking advantage of the voluntary retirement package
(64%). Previous years’ turnover rates were closer to 5% or 6% (2003-2007). And
turnover rates before the introduction of PRP were below 5%. No statistics are available
in terms of differentiating between the number of planta and contrata leaving the service.
Graph No. 1: Chilean central government personnel turnover rate
Source: Chile’s Budget Office
16. There is a perception that the implementation of the “critical functions” allowance
has permitted ministries and agencies to attract and retain highly skilled personnel
in key posts in all institutions, which otherwise would have been impossible, or would
have led to practices similar to the ones uncovered with the corruption scandal in 2002.
While the impact of this measure on agency performance is not clear, the fact that these
individuals accept positions at the public service and remain in their posts gives the
impression that it has contributed to improve public sector performance. This is,
however, extremely difficult to prove, as critical functions are very scant and are used
very differently within agencies.
9
See World Bank (2012). According to Civil Service’s National Direction (average tenure is two years and two
months)
4%
5%
5%
5%
5%
6%
4% 4%
5%
6% 6%
5%
5%
7% 7% 7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
TURNOVER RATE (PLANTA AND CONTRATA)

B. Agency
17. At the agency level, there is the perception that institutions which have more
competitive pay scales thanks to pay flexibility mechanisms are more attractive and
can retain better their skilled staff than institutions with lower pay scales.
Controlling agencies are one example of this type of institutions with higher level of pay
scales. Another example is the Internal Revenue Service, which also has a different pay
scale and has been characterized as the most successful public service institution in Chile
receiving different awards in the last 10 years. According to interviews in the context of
this survey, these are the only agencies that can compete in the market for the best talent
coming out from local universities. However, further data is needed to confirm this
perception.
18. The introduction of PRP across the board led to requests for more PRP schemes in
other agencies. For example, the customer satisfaction performance bonus for the Civil
Registry staff was introduced as a result of a negotiation with the staff association, which
considered the agency’s staff had lower salaries compared to other agencies – a product
of the rigidity of the staff structure determining the number of positions allowed per
grade, which can only be modified by law.
19. Pay flexibility practices such as PRP have been used to produce change in terms of
pay levels, but not in terms of organization or functions, and only superficially in
terms of performance. The fact that performance indicators linked to pay have been
consistently achieved by practically all Chilean public sector institutions seems to
indicate that this has been the politically viable way to grant pay increases to specific
agencies above the general pay increases linked to inflation.
C. Public sector wide
20. The implementation of PRP combined with a reduction in GDP increased the wage
bill from 4 percent of GDP to 4.5 percent in 1999. As can be seen in Graph No. 2, the
first year with PRP payments, 1999, the wage bill increased considerably as a percentage
of GDP. During the period 2000-2006, sustained economic growth averaging almost 5
percent drove this percentage down to 3.5 percent. Since then, pay increases, an increase
in the workforce and the global financial crisis has made the indicator to reach 4.5
percent of the GDP. The policy to manage the wage bill remained the same during the
period, with the Budget Office defining an overall envelope for personnel expenditures
on an annual basis, calculated in terms of expected revenues and organizational needs.
No system wide reforms to pay have been introduced since the implementation of PRP in
1998.

Graph No. 2: Chilean central government personnel expenditures as a percentage of GDP
Source: Chile’s Budget Office (http://www.dipres.gob.cl/572/propertyvalue-15494.html)
Other
21. Promotions are very rigid for planta staff, and career development appears to be the
main reason why planta personnel puts their position on hold and accepts contrata
contracts. Planta employees are promoted in order of seniority. Formally, contrata are
not promoted. Instead, whenever a contrata employee is required for a higher position
he/she is given a new contract for that new position. The new grade is assigned at the
discretion of the hiring authority.
22. There is no common service-wide policy or system for recruiting contrata personnel,
which represents 60% of the workforce. It is a matter of each agency, whether the
applicants come from internal or external sources. Some of the agencies have advertised
contrata positions through a centralized web portal called “Public Employment”10
or
even in their own organizational websites. However, it is not necessarily a transparent,
open or meritocratic process.
23. Third-tier positions are selected prioritizing planta public servants; secondly a
contrata personnel is considered, and if there is no suitable candidate, then a public
competitive process is prepared. The Civil Service law establishes that third-tier
positions must be planta positions (internal), and that institutions should first aim to hire
them from planta staff. If no suitable candidate were to be found, contrata are authorized
to participate. Finally, if there are no suitable candidates, a public competitive process is
organized.
24. There is an open competition for Senior Executive Service positions, which are first
and second levels, allowing internal and external applicants to apply, increasing the
chances of attracting talent. Although there is a relatively big share of external
applicants (59%), in the end only 19% of the SES positions are filled by them.11
The
recruitment process for the rest of the positions in the public sector is not as open as for
Senior Executive Service positions, decreasing the chances of hiring the ideal candidate.
10
See: www.empleospublicos.cl
11
Source: Interview to Carlos Williamson, Head of the Civil Service Agency, in El Mercurio newspaper, September
23, 2012 (Economía y Negocios section, page 7).
3,0
3,5
4,0
4,5
5,0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

25. Annual performance appraisal is not forced to any use any quotas, and almost all of
the employees receive the highest possible rating during the annual performance
appraisal. This is mainly because the Civil Service Law determines that only staff in this
highest performance group (List 1 “excellent”) can apply to promotions, and establishes
that any employee in List 3 (“conditional”) for two consecutive years or in List 4
(“elimination”) in one year can be dismissed for poor performance after completing an
administrative process. Unsurprisingly, an insignificant number of staff are included in
List 4, and an extremely low percentage is included in List 3 (see Table No. 2 below).12
Table No. 2. Evolution of Performance Appraisal of Permanent Staff in Chile’s
Central Government Institutions (2004-2010)
Year
List 1
Excellent
%
List 2
Good
%
List 3
Conditional
%
List 4
Elimination
% Total
2004 53,965 97.7 1,221 2.2 61 0.1 6 0 55,253
2005 58,281 98.1 1,084 1.8 55 0.1 2 0 59,422
2006 58,556 98.5 857 1.4 46 0.1 6 0 59,465
2007 60,124 98.7 722 1.2 38 0.1 5 0 60,889
2008 61,360 98.5 923 1.5 42 0.1 0 0 62,325
2009 67,266 98.5 959 1.4 47 0.1 5 0 68,277
2010 68,979 97.1 1,989 2.8 80 0.1 16 0 71,064
Total
2004-
2010
428,531 98.1 7,755 1.8 369 0.1 40 0 436,695
Source: Civil Service Directorate
26. There is no information available in terms of pay compression in different agencies.
12
A relatively recent initiative by the Ministry of Finance, the Management Unit, is encouraging agencies to
differentiate between employees’ performance within List 1 as a first step towards a more effective performance
appraisal system.

Case study and interpretation13
THE CHANGES MADE AND THEIR CONTEXT
1. In the last three decades, the Chilean government has implemented several policies
directed at increasing pay flexibility in the public sector. Chile introduced pay
differentiation mechanisms in the early 1980’s, which were later followed by
performance-related pay (PRP) incentives in the 1990’s and 2000’s. Pay delegation exists
for determining the remuneration for contracted personnel at the individual level, for
whom agency heads have the discretion to decide on their equivalent pay and grading
level. This is not minor since contracted personnel accounted for almost 60 percent of the
public sector workforce in 2011. These three pay flexibility policies have been widely
implemented across the central government.
2. Chile introduced pay differentiation for staff working for the so-called “controlling
institutions” during the military dictatorship in December of 1980. While that same
government had introduced a Single Pay Scale in 1974 as one of its first measures (three
months after taking office), after market reforms were implemented in the late 1970’s the
government probably saw the need to attract and retain talented staff in key government
institutions in charge of regulation, as well as in other organizations to ensure a stricter
control over the public sector. These so-called “controlling institutions” included the
Comptroller General’s Office, the Superintendence of Pensions, the Directorate of Labor,
the newly created Fiscalia Nacional Economica (in charge of safeguarding fair
competition) and the Customs Service. Over time, differentiated pay scales or special
allowances for other key institutions such as the Ministry of Finance, the Internal
Revenue Service, the Treasury Service and the Budget Office were also added. One
example is the allowance related to net tax revenue, payable to the Treasury Service,
Customs Service, the Budget Office, and the Internal Revenue Service, among other
institutions (Pardo, C. and Orellana, P. 2009).
3. Chile has experimented with performance-related pay mechanisms across the public
sector since end of the 1990’s, introducing them at the institutional, working-group
and individual levels, both across the board and for specific agencies. In 1998, almost
a decade after regaining democracy, the Chilean government faced both challenges of
state modernization and strong pressures for increasing public servants’ remunerations.
These pay increase pressures were generated in part by the country’s sustained economic
growth in the previous decade (averaging 7.9 percent per year), but also due to a
perception of relatively lower salaries compared to the private sector. The government
was willing to increase public sector remunerations, but in exchange for actual increases
in public sector performance (World Bank 2008). At that time, international trends
showed the implementation of variable pay as a positive innovation in the public sector,
13
This case study was prepared by Mariano Lafuente, Senior State Modernization Specialist at the Inter-American
Development Bank, and Magdalena Rojas Wettig (Columbia University). The authors are extremely grateful to the
inputs received from Amaya Fraile (Adviser, Ministry of Finance, Chile) and the guidance received by Nick
Manning and Zahid Hasnain.

and there was a perception that the pay scale with only fixed components was not
working well (Undurraga, I. and Rojas, M. 2010).
4. The government and the public servants’ association reached an agreement and the
first institutional and individual PRP mechanisms were implemented in 1998 (Law
19.553). The Chilean government designed and launched the Management Enhancement
Program (PMG), based on performance targets at the institutional level, monitored
centrally by the Budget Office within the Ministry of Finance. The program aimed at
improving and standardizing basic management functions (financial management, audit,
human resources management, planning and procurement, among other) across most of
Chile’s central government 200 agencies. While some of the PMG areas have changed
over time, the bonus is still equivalent to 7.6 percent of base pay for those institutions
achieving over 90 percent of their annual targets, and 3.8 percent of base pay for those
institutions achieving between 75 and 90 percent of their annual targets. Any agency
below 75 percent of its targets does not receive the PMG bonus.
5. Individual PRP was introduced in 1998 but was later discontinued after
experiencing implementation issues. The Chilean central government authorized a
bonus of up to 4 percent of base pay to the top third of the public servants in each of the
ministries or agencies, based on their annual performance appraisal. A board led by the
institution’s authorities and staff’s representatives is responsible for assigning these
qualifications. The first problem in the implementation of this scheme was that the board
refused to differentiate between public servants, and finally gave all of them the
maximum score. Additionally, many public managers decided to “share” the incentive,
by giving the bonus to a different group each year, independently from their performance.
This system was discontinued in 2003, with the implementation of a PRP mechanism at
the working group level.
6. Important state modernization initiatives, including pay flexibility reforms, were
approved in 2003 as part of a state modernization legislation package which
responded to a deep political crisis. At the end of 2002 the Chilean government was in
the middle of a credibility crisis, triggered by a corruption scandal. An investigation
uncovered regular deviations of public funds to finance top-up payments for several
public servants within the Ministry of Public Works, and a former minister was
prosecuted. This generated a window of opportunity at Congress for passing the New
Deal Law (No. 19.882) and other relevant legislation, which included a series of
measures on state modernization. These policies included: (i) the Collective Performance
Agreements or PRP at the working group level; (ii) the Annual Award for Institutional
Excellence as another institutional level PRP; (iii) the introduction of “critical functions”,
a special allowance at the individual level aimed at stopping the need for illegal top-ups;
(iv) the Senior Executive Service, which decreased the number of politically appointed
public managers ensuring a selection based on merit, and established an individual PRP
scheme for this cadre; (v) the creation of the Directorate for the Civil Service, which did
not exist as an autonomous agency; and (vi) the creation of many provisions that helped
to prevent arbitrary decisions related to the public servant’s remunerations (Navia and
Stefoni 2003).

7. The Collective Performance Agreements, the working group level PRP within each
institution, were introduced across the administration starting in 2004. The annual
bonus can reach 8 percent of base pay for those working groups achieving over 90
percent of their targets, and 4 percent of base pay for those working groups achieving
between 75 percent and 90 percent of their targets. The performance goals are established
by the head of the agency in coordination with its internal managers, and must be signed
off by the responsible minister. The institution’s internal audit unit is the responsible for
evaluating the target’s achievements.
8. The second institutional level PRP, the Annual Award for Institutional Excellence,
recognizes the three best agencies on an annual basis. The Directorate for the Civil
Service is responsible for awarding this institutional incentive, which represents 5 percent
of base pay. Only those institutions which have achieved 100 percent of their PMG
objectives in the previous year can apply and, within those, three institutions receive the
award following a competitive process. Since 2008, there are three institutions awarded
per year, instead of one as it was the practice in the past.
9. The “critical functions” allowance, probably the most relevant tool for pay
differentiation at the individual level, was also approved that same year (Law 19.863
2003). This substantial top-up of up to 100 percent of gross pay is given to individual
contracted or permanent staff within a ministry or agency at the discretion of the minister
or head of the agency. Each institution receives a budget envelope for the “critical
functions” allowance from the Budget Office to distribute among their staff, deciding
who receives the benefit and how much the selected person receives, reaching up to 100
percent of their remuneration. This allowance is normally used to increase pay of middle-
management positions (for example, a Budget and Planning Manager for a line ministry)
or procurement positions, which for legal reasons must follow the permanent staff pay
scale and cannot be hired as advisors through daily fees (a contract which would provide
the vertical flexibility needed to attract and retain highly skilled individuals). The
allowance can be removed at any time by the head of the agency or minister.
10. Starting in 2004, individuals recruited through the Senior Executive Service (SES)
have been remunerated following a PRP scheme, and the size of the bonus is used as
a pay differentiation tool between agencies. The PRP scheme for SES is based on the
achievement of the annual targets in the individual performance agreement of each
executive. The annual bonus can represent up to a maximum of 100 percent of base pay,
but the percentage varies per agency. The maximum size of the bonus per individual is
determined by the Budget Office of the Ministry of Finance together with the Civil
Service Directorate at the time of launching the selection process, based on market
conditions and an assessment of the level of pay needed to attract and retain suitable
candidates for that post. For example, the bonus tends to be closer to 100 percent for the
head of a hospital in a geographically remote location, or for a head of a specialized
agency that performs an activity highly remunerated in the private sector, but can
represent less than 30 percent for other SES positions.

SES cadre and PRP
remuneration
system for senior
managers
implemented
Civil
Registry
Incentives
Civil Registry
Customer
satisfaction
bonus
introduced
11. Finally, other PRP mechanisms and special allowances were introduced for specific
agencies, in particular between 2003 and 2009. These policy changes were introduced
following pressure from staff associations of these agencies and Congress approval,
which is required for any changes having to do with pay (Annex 1 provides a list of some
of these pay flexibility measures). Figure No 1, below, shows a chronological evolution
of the main PRP initiatives in the Chilean Central Government.
Figure No. 1: Evolution of main PRP initiatives in the Chilean Central Government
INTERPRETATION OF THE IMPACT
12. The myriad of pay flexibility policies implemented in Chile’s central government
since the early 1980’s seem to have had an impact on behavioral changes at the
individual level, agency level and at the broader public sector. While pay
differentiation, PRP and, partially, pay delegation, have made sense in theory for Chilean
politicians and the public opinion, their implementation has generated different
perceptions of success.
Several public entities started to implement
“special regimes” (the IRS for example) to
pay special allowances related to performance
in their own public organizations.
Institutional and individual
incentives related to
performance.
Creation of the Civil Service Directorate, SES
cadre, “critical functions allowance”, working
group level PRP, Annual award for excellence
institutional level PRP and discontinuation of
individual level PRP.
First
PRP
systems
IRS
Special
Regime
New SES
incentives
New
Deal
Law
1998 1999 2003 2004
Credibility
Crisis
2002
Corruption scandals,
involving illegal top-
up remunerations -
Opportunity
window
2009

13. Pay differentiation seems to have been the most effective mechanism within pay
flexibility policies in Chile. Pay differentiation did create “high-pay” and “low-pay”
offices, consciously maintained by the successive governments to ensure the former
could recruit and retain staff more easily than the rest, being able to compete with the
private sector for the best talent. These agencies, which include several superintendences
and the Comptroller General’s Office, are perceived to be among the strongest
performers in the public sector together with other institutions with special pay regimes
such as the Internal Revenue Service and the Treasury Service. While the impact of pay
differentiation at the individual level on agency performance may be less clear, the
“critical functions” allowance has permitted ministries and agencies to attract and retain
highly skilled personnel in key posts in all institutions, which otherwise would have been
impossible, or would have led to practices similar to the ones uncovered with the
corruption scandal in 2002.
14. The PMG, which implemented PRP at the institutional level across the board, is
perceived to have achieved some of its objectives in the first few years, but that since
then its usefulness has been eroded. While at the beginning of the program there was a
perception that management capacity was being strengthened in most institutions
implementing the PMG, its “variable” pay portion was perceived more and more as
“fixed”, with 92 percent of the institutions (and 98 percent of the staff) receiving the full
bonus in 2009 (see Graph 3, below).14
Graph No. 3. Evolution of Accomplishment of PMG (1998-2009)
Source: Budget Office, Ministry of Finance, Chile (2010)
15. Once basic management capacity was installed across the administration, the main
behavioral change generated by the institutional incentive or PMG seems to have
been gaming activities. Targets were mainly process-oriented as opposed to output or
outcome-oriented, and were self-imposed and self-evaluated by each agency or ministry.
The Budget Office negotiated the targets and supervised the achievement of these goals
14
See World Bank, 2008 and 2011 for a detailed analysis of the PMG and PRP incentives
83%
94% 92%
66%
80%
75% 75%
85%
78%
81%
87%
92%
38%
55% 56%
47%
57%
49% 48%
61%
44%
48%
60%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
%ofServices
involvedinthePMG
Institutions with 100% of institutional incentive
Institutions with 100% of achievement

centrally, but could not possibly know and control hundreds of institutions in different
sectors. Gaming negatively affected the program’s credibility among public officials,
turning the annual bonus into a quasi-entitlement.15
16. There is a similar perception regarding the Collective Performance Agreements, the
working group level PRP.16
The main difference was that these objectives were set
within each organization (ministry or agency), with no participation from the Budget
Office. Thus, the main behavior generated by this PRP scheme was a strong pressure
from staff associations to agency authorities, to ensure that targets were achievable and
that no portion of “variable” pay was at risk. 17
In 2009, over 98.7 percent of employees
received the full 8 percent bonus.
17. The institutional level PRP scheme for the Civil Registry, based on net customer
satisfaction as measured by an independent source each year, did improve the
objectivity of performance measurement. The competitive process to select the source
(university or consulting firms) is led by the Ministry of Justice, the head of the sector.
This practice, established by law, replaced the agency’s self-assessment of customer
satisfaction. Within the agency’s customer satisfaction unit there is a perception that the
bonus has been very helpful to improve staff performance. Originally, the bonus,
established in 2009, was designed in a way that left aside some key factors of the
experience of service, such as the waiting time of the citizen (World Bank 2011), leading
to net satisfaction levels of 90.8 percent in 2010. However, according to the Civil
Registry, the survey has started to measure waiting time as well as other factors,
including the experience with the on line services platform.
18. With the exception of agencies such as the Internal Revenue Service or the Customs
Service, where the individual work is more easily measured, PRP at the individual
level did not appear to generate a stronger engagement or work effort by general
staff or even by senior managers. As discussed above, the implementation of individual
PRP for the top third public servants based on performance appraisal for all staff failed
and was discontinued. The PRP scheme for the Senior Executive Service is more a fixed
component of pay than a variable one based on performance. All SES members receive
the full bonus consistently each year. Even with this bonus, the turnover rate in the SES
cadre averaged 50 percent in 2004-201018
. In other words, the half of the senior managers
leaves every year. This situation can be represented as a sign of the difficulty in attracting
and retaining staff with scarce skills. However, there is some evidence, which suggests
15
Many public entities set objectives which were too low, and the organization could easily achieve them, without
any effort. For more information see: Portales, C. 2009
16
Average group size is 45 employees. The law establishes a minimum of 5 employees and in some cases working
groups exceed 400 employees.
17
This perceived pressure, according to several interviews held in Chile during the preparation of World Bank
reports on performance management and human resources management, tends to translate into the typical gaming
effects of PRP schemes. Talbot (2010) provides a comprehensive list of these effects, including Ratchet effects (low
targets); cherry-picking (choosing the easiest targets); output tunnel vision (targets are the only focus of
performance), etc.
18
According to DNSC (average tenure is two years and two months)

that the managers may feel frustrated for the low levels of flexibility and delegation, and
several left voluntarily after the change in government and others were fired.
19. Finally, pay delegation for contracted personnel did provide some flexibility for
managers, who have the ability compensate better or promote those staff with better
performance, not available in the rigid career system. There is no established process
to hire or promote contracted personnel, being defined arbitrarily by the minister or head
of the agency. This flexible way of contract has been widely used among the central
administration, with permanent staff leaving their positions using leave without pay and
being re-hired as contracted employees. Since 2007, contracted personnel represent over
50 percent of the workforce (Graph No. 3).
Graph No. 3: Percentage of central administration personnel per type of contract
Source: Based on information of the Budget Office
(Dirección de Presupuestos del Ministerio de Hacienda 2011)19
20. The following chart presents a summary of the perceived effects of Chilean public
policies related to pay flexibility.
19
It does not include congressmen, or military forces.
0%
10%
20%
30%
40%
50%
60%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Planta
Contrata
Honoraria
Permanent laborer

Table No. 3: The overall picture - key variables and proxy measures
Pay
Flexibility
Mechanism
Main Chilean pay flexibility
policies
Main effects
Performance-
related pay
1. Individual level: Senior
managers and special
allowances in specific
agencies
2. Working-group level:
within a public entity.
3. Institutional level
1. Individual level: For senior managers not
variable in practice, main effect is on
attraction and retention rather than on
performance; special allowances appear to
have been positive in specific cases (IRS)
2. Working-group level: No perceived change
on performance (sense of entitlement -
gaming). Vehicle for pay delegation.
3. Institutional level: In across the board
systems once accomplished basic goals, no
perceived change on performance (sense of
entitlement - gaming); in specific agencies
with objective measurement better results
Pay
differentiation
1. Different pay scales per
type of agency
2. “Critical functions”
allowance
1. Perception that pay differentiation has
contributed to some public entities to become
more attractive than others and more
competitive in labor market.
2. Critical functions crucial for attraction and
retention of highly skilled staff.
Delegation 1. Pay and promotion
delegation for contracted
personnel to head of agency
or minister
2. Pay delegation of Collective
Performance Agreements
(working group level bonus)
1. No evidence that increased flexibility to hire
and promote has brought better work effort
thanks to sense of better potential for
mobility and career advancement.
2. While percentage of working groups not
obtaining the bonus is minimal, the fact that
some groups may not get it may have
generated incentives to work harder or to
lobby harder to ensure low performance
targets.
Source:Authors
PREDICTED PATH FROM HERE
21. The center-right coalition which took office in 2010, well aware of the challenges
brought by the implementation of PRP schemes, has made efforts to modify Chile’s
performance management system. For example, it promoted a better control from
supervising ministries to agencies within their sector for setting and evaluating
performance targets. It also modified the PMG in two ways: (i) giving more weight to
actual results rather than processes; and (ii) encouraging agencies to set higher targets by
recognizing the partial completion of targets as opposed to the previous approach of full
achievement or no achievement.

22. However, making that a more reasonable percentage of staff receive the
performance bonus would mean a de-facto pay reduction for employees, making it
politically impossible and perhaps even illegal to implement. Eliminating these
schemes and folding these bonuses into base pay would have important fiscal
consequences through their impact on the calculation of other allowances and would
require a new law. With municipal elections scheduled for 2012 and presidential
elections in 2013, no changes in pay flexibility policies in the public sector are foreseen
in the short-term. Finally, these “variable” performance bonuses could even be
considered an entitlement or acquired right by the General Comptroller’s Office or by the
courts following an appeal from employees, given the fact that the great majority of
employees have been receiving them on a quarterly basis for the past several years.
23. In the medium term, given the difficulty to improve the existing across the board
PRP schemes, further changes could come from: (i) policies applicable to specific
agencies; and (ii) the PRP of the Senior Executive Service. With GDP increases of
over 6 percent in 2010 and 2011, and economic growth rates close to 5 percent expected
for the next years, there will be pressures to increase public sector workers pay above the
inflation level. For politicians in general but especially in Chile, pay increases are better
sold to public opinion in exchange for improvements in “productivity” from public sector
workers. These “productivity” promises have normally been structured into PRP
schemes. Considering the “fixed” nature of most PRP bonuses, staff associations are
likely to agree with this approach and to lobby to influence their design. Agencies with
stronger impact on the public’s perception of how the government works and with
stronger lobby power are likely to be prioritized. Finally, in terms of the SES, the
significant turnover of managers and its poor performance appraisal system combined
with the high selection cost is likely to draw political attention and consensus for reform.

References
Congreso Nacional de Chile. 1998. CONCEDE ASIGNACION DE MODERNIZACION Y
OTROS BENEFICIOS QUE INDICA (texto Original).
http://www.leychile.cl/Navegar?idNorma=93381&tipoVersion=0.
———. 2003. Sobre Remuneraciones De Autoridades De Gobierno Y Cargos Criticos De La
Ddministracion Publica Y Da Normas Sobre Gastos Reservados. http://bcn.cl/4wv8.
Dirección de Presupuestos del Ministerio de Hacienda. 2011. “Estadísticas De Recursos
Humanos Del Sector Público 2001-2010.”
Dirección de Presupuestos del Ministerio de Hacienda. 2005. “Estadísticas De Recursos
Humanos Del Sector Público 1995-2004.”
Navia, P., and C. Stefoni. 2003. “Modernización Del Estado y Financiamiento De La Política:
Una Crisis Que Se Transformó En Oportunidad.” Chile 2004: 1833–2003.
Pardo, C., and Orellana, P. 2009. “Otros Reg menes Laborales Especiales.” In Un Mejor Estado
Para Chile: Propuestas De Modernización y Reforma, 489–524. Consorcio para la
Reforma del Estado.
Portales, C. 2009. “Estudio Sobre Estatuto Administrativo, Remuneraciones y Calificaciones En
El Personal Del Gobierno Central De Chile.” In Un Mejor Estado Para Chile:
Propuestas De Modernización y Reforma, 353–401. Consorcio para la Reforma del
Estado.
Talbot, C. 2010. "Theories of Performance" Oxford University Press, Oxford.
Undurraga, I., and Rojas, M., eds. 2010. “Personas En El Estado acia Un Pa s De Clase
Mundial”. Consorcio para la Reforma del Estado.
http://www.reformadelestado.cl/media/archivos/20101104103747.pdf.
Valladares, J. 2011. “‘Los Equilibrios’ De Las Políticas Salariales y Laborales En Sector Público
Durante La Concertación.”
World Bank. 2008. “Estudio De Evaluaci n En Profundidad Del Programa De Mejoramiento De
La Gesti n (PMG).” Unidad de Gestión Pública para América Latina y el Caribe.
———. 2011. “Incentivos Para La Mejora Del Desempe o nstitucional En El Sector P blico
Chileno Propuestas Para El Fortalecimiento De La Rendici n De Cuentas En La Gesti n
y De La Eficacia De Los Incentivos Salariales.”, Unidad de Gestión Pública para
América Latina y el Caribe.
______. 2012. "Hoja de Ruta para la Modernización de la Gestión de los Recursos Humanos en
el Sector Público", Unidad de Gestión Pública para América Latina y el Caribe.
______. 2012b. "International Experiences with Senior Executive Service Cadres", Public Sector
Performance Global Experts Team.

ANNEX 1: SPECIAL REMUNERACION SYSTEMS.20
SINGLE PAY SCALE
Special allowances
Law Year (and
modifications)
Name Details
Executive Order
1166 (Year
1975) and
Executive Order
2969 (Year
1979)
1975 - 1979 Allowance for
exclusive
dedication
For the exclusive dedication
of Treasury Department staff.
45% of base pay.
Article 1, Law
19.538
1997 - 2003 - 2010 Shift allowance for
military
Overtime for military
personnel
Article 10, Law
19.646
1999 - 2003 Monthly allowance
for public judicial
defense
Defense Board staff.
Article 11, Law
19.646
1999 Allowance for
senior management
Defense Board management
staff
Article 11, Law
19.041
1999 Special allowance Budget Office staff
Article 4, Law
19.538
2003 - 2010 Allowance for
Correctional
Officers
Permanent Correctional
Officers
Article 2, Law
19.538
2003 Special bonus Permanent staff, officers and
contracted personnel of
Correctional Offices.
Article 12 Law
19.041
2008 Allowance for net
tax revenue
Treasury Service, State
Defense Board, National
Customs Service, Budget
Office, and the Internal
Revenue Service and Civil
Service’s National Direction
staff.
20
Based on Pardo, C., and Orellana, P. (2009) and www.leychile.cl

Article 3, Law
20.300
2008 Special allowance
for the function.
National Forestry Corporation
staff.
Article 5, Law
19.851
2010 Allowance for
major gendarme
Major gendarmes of 9th
grade
Performance-related allowances
Law Year (and
modifications)
Name Details
Article 11,
Executive Order
531
1974 Chilean Nuclear
Energy
Commission
Staff working on this
commission
Article 2, Law
19.999
1990 Performance
incentive for
Foreign Relations
Ministry
All staff working in this
Ministry
Executive Order
with force of
law 1 from 2002
(Finance
Ministry)
1993 Performance Bonus
for State Defense
Board staff
All staff serving on the Board
Executive Order
with force of
law 1 from 2002
(Finance
Ministry)
2002 Allowance for goals
achievement related
to collection of debt
in arrears
All Treasury Service staff
Law 20.213 2007 Annual
performance
incentive
All National Association of
Child Care staff
Article 31, Law
20.313
Article 4, Law
20.300
2008 Management
performance
incentive
Management of Cooperation
Service and National Forestry
Corporation staff
Article 1, Law
20.300
2008 Allowance for
institutional
efficiency
National Forestry Corporation
staff

Law 20.342 2009 Customer
satisfaction bonus
Civil Registry staff
CONTROLLING INSTITUTIONS REMUNERATION SYSTEM
Special allowances
Law Year (and
modifications)
Name Details
Article 17, Law
18.091
1981 - 1994 Variable Allowance Superintendence of Banks and
Financial Institutions,
Superintendence of Securities
and Insurances,
Superintendence of Social
Security, Superintendence of
Electricity and Combustible,
Economic National District
Attorney's Office,
Superintendence of Sanitation
Services, Public Procurement
Unit, Financial Analysis Unit,
Superintendence of Casinos,
Superintendence of pensions
Article 7, Law
19.646
1999 Supervision
allowance
Internal Revenue Service
Article 2, Law
19.663
2000 Responsibility
allowance
General Comptroller's Office
Article 1, Law
19.663
2000 - 2003 - 2007 Control allowance General Comptroller's Office
Article 33, Law
19.718
2001 Public criminal
defense allowance
Criminal Advocacy staff
Articles 12 and
14, Law 19.479
2003 - 2007 Shift allowance Customs Service
Article 8, Law
20.212
2007 Special allowance Superintendence of Banks and
and Insurances,

Attorney's Office,
Performance-related allowances
Law Year (and
modifications)
Name Details
Article 5, Law
19.528
1997 Individual
Performance
Incentive
Superintendence of Banks and
and Insurances,
Attorney's Office,
Article 2, Law
19.646
1999 - 2001 - 2003 -
2008
Special allowance
for diminishing
evasion and
collective incentive
Internal Revenue Service
Article 32, Law
19.718
2001 Modernization
allowance
Labor Directorate, Public
Criminal Advocacy
Department, General
Comptroller's Office
Articles 12 and
14, Law 19.479
2003 - 2007 Customs Service
Performance Bonus
Customs Service
Article 1, Law 2004 Service's Quality Labor Directorate

19.994 allowance
Article 9, Law
20.212
2007 Institutional
efficiency allowance
Superintendence of Banks and
and Insurances,
Attorney's Office,
Superintendence of Pensions.
Additionally, the National Congress has a special remuneration system since 1994; and the
Chilean Police since 1991 (Executive Order 412, Title III from 1991, Ministry of National
Defense, Personnel's Statute from the Chilean Police).

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