The dynamic economy of the last decade has presented significant revenue challenges for public sector organizations. Their workforce costs for current employees are largely fixed and significant liabilities are accruing for items such as pension programs and retiree health guarantees. Declining revenues during economic downturns have caused them to attempt to reduce headcount while maintaining service levels, even though this approach may hinder performance into the future. It is critical for them to identify the workforce costs they can gain control of and to formulate strategies that will address the imbalance between revenue and costs but ensure they can fulfill their missions.
The U.S. government for example has long used a step-rate base pay system that advances employee base pay rates on a specified time schedule. This type of system has also been widely used by state, county and city governments. Although the general schedule system still exists for about half of the federal workforce, many agencies have found it to be ineffective in getting and keeping the workforce they need, and have, therefore, exited the system by developing “excepted service” programs. These programs most commonly utilize open pay ranges; merit pay, performance incentives and performance management systems that differentiate based on contribution and look more like systems prevalent in the private sector. And the Office of Personnel Management has experimented with variable pay programs as well. Many state, county and city governments still utilize the time-based approach, as do quasi-governmental organizations. But that is changing in some types of public sector organizations. About one-third of water utilities still use step rate systems, according to the American Water Works Association’s annual Water Utility Compensation Survey. The trend, however, is moving away from basing rewards on longevity, evidenced by the fact that over two thirds of the utilities used step systems ten years ago. But water utilities often operate wit separate boards, since there is a strong argument for running a utility like a business, enabling them to employ different strategies than the counties and cities they serve.
Government and nonprofit organizations need to consider the implications of using private sector techniques as part of their compensation plans, since some practices could potentially have a socio-political impact. For example, if a governmental entity uses merit pay, an employee receiving a smaller increase than a peer often has appeal processes available that can be used to “wear down” managers who do differentiate based on performance. A common argument by employees and unions is that there are no clear, quantifiable metrics upon which to appraise performance, at least at an individual level, so why differentiate. However, this is a weak argument. Subjective criteria are broadly used in private sector organizations to appraise performance and to make decisions about pay increases. But despite this reality it has proven to be very difficult for many public sector organizations to move from time-based pay to performance-based pay and to adopt variable pay programs.
The proper path to follow for a public sector organization should be determined based on external and internal realities, culture and what the organization is charged with going forward. If the competition for critical skills escalates to the point that the entity is unable to get and keep the people necessary for continued viability, then change is no longer optional. But implementing and administering a merit pay or performance incentive program may require skills that do not exist in the organization’s management cadre. And the existing workforce may be so wedded to historic patterns that resistance to change may be monumental. Given these realities the demand for highly skilled HR and total rewards professionals may escalate in the public sector. Dealing with the potential obstacles to change will require expertise and commitment. The human resource function must be staffed with the knowledge and skills to face these challenges. And public sector organizations must recognize the need for, and value of the function.
An excerpt from:“Rewarding Performance in Public Sector Organizations” by Robert J. Greene, PhD
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