Public Services Management: Doubts in the cult of performance: A new management study casts doubt on the effectiveness of linking salaries with results, reports Martin Whitfield

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

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

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

The study covered organisations employing 20 per cent of the UK workforce, amounting to more than 4.2 million employees. There was a fairly equal split of employers between high-performing private companies, as measured by pre-tax profits over the past five years, public sector organisations and other private companies.

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

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

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

The perceived benefit of those who used PRP was far greater among those who used it as part of a total system rather than as a single policy tool. There was no correlation between the use of PRP and high performance, and it was just as likely to be used by poor performing companies as by the more successful. Only two in three of the organisations monitored their systems.

'The overall picture of effectiveness attributable to performance management techniques is a hazy one,' the report said. And its said the use of performance-related pay was one of the biggest difficulties faced by managers. Often introduced after intervention by a chairman or chief executive, or perhaps by elected members in local authorities, these pay systems in themselves saw mixed results.

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

Good people have a tendency to rise with very little help but the mass of reasonably competent performers need encouragement and back-up to make sure they achieve their potential, the study found, and an unspoken but noticeable agenda of 'weeding out' poor performers by way of low rewards could also lead to more stressful and competitive work, which might be detrimental in the long term.

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

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

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

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

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

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

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

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

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

The reactions to performance measurement in the 140-page document were not entirely negative, however. Public sector management was clear that it has provided a suitable vehicle for helping to bring about a change in climate.

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

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

Performance Management in the UK: An Analysis of the Issues. Published by the IPM; price pounds 35.

This article first appeared in Thursday's Independent

(Photograph omitted)