Pay for Performance: A simple concept, but difficult to implement
(from Maine Townsman, January 1997)
By Jo Josephson, Staff Writer

Pay for performance, a.k.a. merit pay. It’s being tried out in a number of Maine municipalities these days as they struggle to provide increased services while keeping a lid on property taxes.

Pay for performance is a concept that is grounded in the belief that offering people rewards will cause them to do a better job. It relies heavily on the expectation that if employees believe they will be rewarded with money for better work, they will be motivated to work harder and smarter.

Pay for performance is a far cry from the traditional way municipalities pay their employees. It’s a far cry from the "the longer you work here, the more you earn model". It’s a far cry from "the across-the-board, automatic pay increase" model.

Pay for performance, as you may suspect, is the subject of much discussion and debate, as proponents and opponents draw up their lists of the pros and cons. There is even a popular book devoted to what is wrong with the concept. It’s called "Punished by Rewards". Its author, Alfie Kohn, goes so far as to argue that contrary to popular belief, "money can be a demotivator."

Kohn’s advice to those setting salary is "to pay people generously and equitably. Do your best to make sure they don’t feel exploited. Then do everything in your power to help them put money out of their minds."

Setting salaries is neither a science nor an art; it’s an untidy business. Made so because no one way is the right way. As such, people are continually striving for better ways, more innovative ways, more equitable ways. As such, this article explores a bit about the pay for performance way and some of the variations being tried out here in Maine. First, a brief look at the standard arguments for and against.

The Pros and the Cons

Advocates of the concept of pay for performance argue it:

• Motivates employees to produce more, giving an organization greater "mileage" for its dollars.

• Encourages greater communication and feedback between supervisors and employees, thereby increasing the employees sense of ownership in the organization.

• Forces standards and goals to be a part of the performance appraisal system, thus it puts teeth in the performance appraisal process.

Critics of the concept argue it:

• Requires a total commitment on the part of managers, demonstrated by their willingness to play some tough roles (they argue that managers will take the easy way out and give all employees the same increases).

• Requires more money than is available to distinguish between levels of performance as studies have shown that three to five percent increases - the amounts generally available - are not motivational factors.

• Can act as a disincentive when employees are not rewarded for their efforts.

• Can be inappropriately used by supervisors to make up for deficiencies in the pay scale.

• Is a subjective process which treats employees differently.

Public Sector Realities

It is not the intent of this article to take a side in the debate. But the TOWNSMAN would be remiss if it did not note three things that make the implementation of pay for performance in municipal government a challenge.

To begin with, the presence of unions and their traditional across-the-board approach to compensation usually means that such programs are only applicable to non-unionized personnel. At last count (1989) slightly more than 32,000 public sector employees in Maine were unionized and, unlike the private sector, the numbers were growing.

Second, taxpayers are reluctant to let go of the purse strings in the town meeting form of government, giving the selectmen discretionary use of monies, especially for merit pay.

And last but not least, there is a strong belief that pay is rarely a motivator to public employees. That security is a stronger motivator. That there are intangible reasons why people work for local government. That it is a privilege to work for local government. That they certainly don’t do it to get rich.

That said, it should also be noted that in the process of writing this article, it was discovered that the following municipalities had either implemented or were on the verge of implementing some form of a pay for performance plan or merit pay program: Bangor, Brunswick, Falmouth, Kennebunk, South Portland, Wells, and York.

This article looks at various aspects of the "pay for performance" plans in Wells (pop. 7,081), Bangor (pop. 32,000), and Brunswick (pop. 20,184). All three - to varying degrees - evaluate factors (dependability, initiative, judgment ability, etc.) common to all jobs. They also evaluate how well employees have achieved their own clearly set forth goals and objectives, not to mention how well they have carried out the particular tasks associated with their job. The article also takes a fleeting look at a variation of the concept - called "gainsharing" - that focuses not on the individual but on the whole organization.

Wells: The Need To Increase Capacity

Wells could be said to be the most recent kid on the block to try out the idea; almost two years in the making, it goes on line this year. As Jonathan Carter, town manager in Wells, tells it, the town was ripe for adopting a pay for performance plan. It was experiencing growth and with it a demand for increased services. The construction of time-share condominiums had raised the number of tax bills from 7,000 to 10,000; a customer service plan had the town sending out post cards to remind people to register their cars.

"There was a need to build the town’s capacity to respond to ever increasing demands and ever more complex issues. If the town could not curtail the growth of its labor force, at least it could slow the growth by getting its people better trained and crossed trained," says Carter.

The selectmen figured they could do this if they stopped treating everyone the same and started treating them as individuals. That meant getting them off the existing step plan where every one received automatic pay increases and putting them on a pay for performance plan that would look not only at how the individual was helping the town achieve its goals, but how the individual was helping (improving) himself or herself by meeting their own clearly defined goals.

To develop the plan, the town utilized the services of a consultant as well as an advisory group of citizens who work in the field of personnel administration. The town does not have a personnel director of its own. The consultant was used to help develop job descriptions and set up a pay classification system upon which to build the pay for performance plan.

Critical to the plan are the goals and objectives set annually by the selectmen, by the department heads, and by the individual employees themselves. Among other things, the evaluation takes into account the employee’s progress in meeting those goals and objectives, explains Carter, adding that the system is predicated on a great deal of interaction between the employee and management.

As Carter sees it, the plan helps to take the politics out of the pay. Before the new system was adopted, town meeting voted on each individual (non-union) position. With the pay for performance plan, town meeting merely votes in a "pot of money" to be put into a so-called employees reserve account, to be used at the discretion of the selectmen.

"It is up to the manager and his personnel committee to recommend to the selectmen what merit increases should be made. There should be no surprises, as the employee, working together with his or her department head, will have laid the groundwork for the recommendation," says Carter.

As Carter figures it, the new system, which is to go on-line for the town’s 27 non-unionized employees (mostly department heads and clerical staff) this spring, will not be any more expensive than the old system, but it will go a long way in building the town’s capacity. Or as stated above, it will increase the "mileage" of the town’s tax dollars.

On the verge of putting the plan into action, Carter advises those considering such steps to do so only if you have a strong commitment from the top as it requires "heavy maintenance".

Bangor: Including Unionized Employees

All of Bangor’s non-unionized (220) employees and approximately one-half (150) of Bangor’s unionized workers or five of the nine unions are under Bangor’s 11-step pay for performance plan. Among the unionized workers are the following groups: Public Works Department, City Nursing Facility, Aircraft Mechanics, Weather Observer/Dispatchers, and Police Commanding Officers.

Edward Barrett, city manager of Bangor, notes that the driving force to tie wage increases to employee performance has come from the city council and this objective has been an important segment of the city’s bargaining strategy over the years. As non-unionized employees covered by the plan unionize, the city hopes they will carry the plan into their contracts.

Unionized or not, those covered by the plan are rated on 20 different ‘factors" common to all jobs, be they thoroughness, judgment ability, punctuality, cooperation, or amount of work performed, to name but a few.

Under Bangor’s plan, each of the 20 factors carries with it a possibility of five points. As such, an employee who is found to be "outstanding" in all 20 factor would score a total of 100 points. An employee who scores " superior" or "fully satisfactory" in all factors would Bangor’s pay for performance plan is structured so that the longer you work for the city, the stiffer the requirements are for an increase in salary. While 60 points or more would merit a 2.5 percent increase in pay between steps four and seven; it would not be sufficient to merit an increase between steps eight through eleven. An increase at that stage in an employees work history would require a score of 70 points.

It should also be noted that under Bangor’s plan , an employee must score higher on all factors related to work habits, human relations and quality of work than on all other factors. So, for example, a person with extremely poor human relations score but high on quality of work would not necessarily be ripe for a raise, even if he or she had the needed number of points.

A recent survey of employees under Bangor’s plan indicated that 77 percent of the employees believed the evaluation system reflected their actual performance.

Barrett says such programs are only successful if supervisors are able to objectively evaluate their staff and equally important, if they are able to deal with the fall out that often comes with the results.

Brunswick: A One-Time Bonus

In 1994, Brunswick instituted an alternative to a full-blown pay for performance plan. Unlike either Wells’ or Bangor’s plan, the Brunswick bonus program is not integrated into the town’s step pay plan. That is, if an employee is granted a bonus, it is not figured into their base pay. As such, it is viewed as a "one-time" bonus, paid out at the end of the fiscal year.

As Brunswick Town Manager Don Gerrish sees it, the bonuses are given to those who exhibit work "above and beyond the call of duty". Employees, who achieve an overall rating of "Outstanding", are granted a five percent bonus; employees, who achieve an overall rating of "Exceeds Expectations", receive a three percent bonus. Obviously no bonus is given to employees with overall ratings of "Meets Expectations", "Below Expectations" or "Unsatisfactory".

Gerrish reports that between $10,000 and $15,000 a year has been spent on this program to non-unionized employees since its inception (the program does not cover the town’s five unions). In the first year of the program, 12 of Brunswick’s 26 non-unionized employees received merit bonuses. Most were in the three percent category.

Gerrish says the toughest part is setting up the standards. This is due in part to the fact that a major feature of Brunswick’s evaluation system is its job specific focus. For example, the evaluation of the town clerk’s major responsibilities spells out in detail some 15 major responsibilities, from planning and supervising elections to the sale of various state licenses, to the recording and maintenance of all council meeting records, to the maintenance of charter and ordinance files, to name just a few.

Each of the 15 responsibilities is given one of five ratings. Unlike Bangor’s they are descriptive, not numerical. To guide the supervisor, there are numerous "measurement criteria" or tasks, if you will, that are to be taken into consideration to arrive at the rating for the particular responsibility. For example, under the responsibility of planning and supervising elections, there are 22 measurement criteria, ranging from "secures all ballots in a safe location" to " provides continuous training to staff on current election procedures".

Gerrish says a "good instrument is critical" to the value of the program. Department heads as well as employees must be involved in the development of the evaluation tool; and equally important, says Gerrish, it must be kept current. Bonuses aside, Gerrish says most important is that it gives everyone a clear set of goals and standards for their particular job.

An Alternative: Gainsharing

Critics of the pay for performance system contend that by rewarding individual productivity, the system discourages the real source of productivity: collaboration. They contend that quality performance is often the result of teamwork and group effort. "All of us are better than one of us," they argue, and add when a reward is to be given out, it is to be given to all.

In the private sector, this is called "profit sharing". In the public sector, it is called "gainsharing" because it is based on savings, not profits. It is often called into action in times of fiscal constraint. The savings could come from unexpended monies as well as from unexpected revenues. Normally these monies would go into "surplus". Under gainsharing, a set percentage of the "surplus" would be put into a "performance pool", which - when large enough - would be distributed to all municipal employees.

Such a system, it is argued, would provide employees with incentives to seek out cost savings and ways to increase revenues and to work together for the common good. Such a system, it is argued, would say to employees: "If we all work together to improve our financial performance, the municipality will be in a position to share this improvement with you."

At least two municipalities in Maine are currently practicing some version of this concept. The City of Bangor has recently instituted an "Employee Innovation and Service Recognition Award Program" in which innovations or performances by individual employees or groups of employees resulting in direct savings or increased revenues would be given 20 percent of the annual or-one time savings or increased revenues up to a maximum of $1,000.

East Millinocket recently drew about $15,000 from a surplus fund of $600,000 to pay all of its 26 full-time employees an across the board "bonus" of $500. It did so in lieu of annual pay raises that could not be given because of a cap on the town’s tax commitment, a cap that was the result of an agreement with the town’s largest taxpayer, a cap that was in lieu of a tax abatement.

"The bonus was given to keep up the morale of the employees," Administrative Assistant Peggy Daigle told the TOWNSMAN. "The agreement with Great Northern Paper Co. to reduce the tax commitment by $400,000 over four years is making it necessary for all employees to work together as a team, because they will need to do more with less. It was given to provide a much needed pat on the back to thank them for hanging in there," says Daigle.

Daigle says that the bonus was given in dollars, not percentages because it would have given people at the upper end of the pay scale more money than those at the lower end and the purpose of the bonus was to keep up morale.

Gainsharing is not without its critics. There are those who argue that the "savings" could be manipulated. That as a result of such a system, budgets could be inflated, services could be curtailed. And that last but not least, it would be a demotivator to those who outperform their peers and head the organization down the road to mediocrity.


Performance based pay systems as currently practiced in Maine:

• Are integrated into step pay programs or are supplemental to more traditional pay programs.

• Are particularly useful in municipalities experiencing growth, where you wish to increase efficiency and build capacity.

• Are, for the most part, only applicable to non-unionized employees.

• Are based on strong job descriptions, individualized goals and objectives, and a number of "factors" common to all jobs.

• Require a great deal of employee involvement.

• Require heavy maintenance and therefore a commitment by management.

Resources (sidebar)

Maine Municipal Association Salary Survey. 1996. Not included are municipalities under 2,000 in population without a manager, administrator, or administrative assistant. A compilation of wage and employee benefits reported by population ranges. 279 pages. Distributed free to municipalities participating in the survey. $16 for members. $32 for non-members

Pay for Performance. Information packet from the International Personnel Management Association, 1617 Duke Street, Alexandria, VA 22314. Includes reprints of articles, and materials from municipalities across the country involved in implementing a pay for performance plan. Also includes an extensive bibliography. Available to members of IPMA and upon request from MMA’s Personnel Department.

Punished By Rewards. A 400-page paperback published in 1993 by Houghton Mifflin Company. Author Alfie Kohn challenges our reliance on carrot-and-stick psychology in a provocative indictment of rewards at home, at school, at work. $13.95 at your local bookstore.

The International City Managers Association Performance Evaluation Series. A seven-part training series featuring Felicia Clevenger Logan, Director of Professional Development for ICMA. All seven modules include a videocasette and corresponding written materials, including objectives, implementation guidelines, and topics for discussion. Distributed by Government Services Television Network,1303 Marsh Lane, Carrollton, Texas 75006. For more information, contact Gena Valencia at GSTN, 1-800-284-4786. Discounts for ICMA members. The TOWNSMAN is aware of at least one municipality in Maine - Falmouth - that is using this series in developing its pay for performance plan.

Performance Evaluation: An Essential Management Tool. 200-page paperback explains approaches to performance evaluation and suggests way to use the evaluation process effectively. International City Management Association Practical Management Series. $23.95. 1-800-745-8780 or 301-498-1227.