Question

In a recent CompDoctor you said that some public agencies are

successfully moving to pay for performance systems. You also said that the
shift requires more of a focus on cultural issues than on the design of the
pay system. But you guys are comp guys, right? Cultural issues sounds
more like an organizational development issue. If the success of pay for
performance in the public sector is more about a shift in culture, how do we
do that? What recommendations do you have for preparing our culture for a
move to pay for performance? Oh, and wed like to make the change in the
next six months. Is that possible?

This article first appeared in March 2012 on

WWW.IPMA-HR.ORG

it done in six months, you are not focusing

your attention in the critical areas.

Great question. Actually a fabulous question!

We only wish we had an answer! Just kidding.
If you have read our articles before, you know
we have an answer for just about
everythingat least as it relates to
compensation issues. Actually, we are getting
more and more calls from clients wanting to
revise their performance evaluation systems,
or simply develop them from nothing. They
are all asking about pay for performance. In
most cases they have very little clue about
what they are getting into and have not even
begun to consider the cultural, manager and
employee shifts that will be required. Oh, and
of course, they too want it to be effective in
six months time (or in some cases, if you can
believe it, even less!).

Let us go through a process that we think you

ought to take, regardless of where you think
you are in the pay for performance
development cycle. We are going to start at
ground zero, so if you already have something
in place, you can skip over some of these
steps, because you apparently have already
gotten over these hurdles. On the other hand,
if you are not so sure, it is always a good idea
to start from the beginning and get it right. We
are going to deal with this like a procedure
manual, knowing full well that with anything
that affects humans and pay, such a systematic
way of proceeding is just plain nave. But, like
Don Quixote, onward we will go, completely
blind to such truth.

Now is the time for a reality check. Because

unless you see the process laid out, you and
your elected officials, board members, boss, or
what have you, will think that if you cant get

We think that you ought to engage in a

readiness assessment before you go any
further in your progress toward pay for
performance. This is a short questionnaire

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Step One: Are You Ready?

ARTHUR J. GALL AGHER & CO. | AJG. COM | O CTOBER 2014.

(about 15 questions) that can be administered

to all employees and then the results tabulated.
The results will be enlightening, and in our
experience, will tell you what areas you need
to work on in order to be ready for a pay for
performance program, which well call P4P.
The questionnaire highlights areas of
organizational commitment, supervisor
support, purpose, trust and other issues. In our
experience, if the scores come back indicating
that the organization is not ready for P4P, then
moving to the next step is simply foolish and a
waste of time and money. As we once told a
city council, they wanted a highly tuned sports
car (our analogy at the time was a Jaguar),
when the kids didnt even know how to drive.
Once they understood the situation, the
concluded that maybe a Ford Focus might be a
better choice (at least at the outset) so that
they could actually learn to drive, bang up the
car a bit and then move on to something more
sophisticated when they were better prepared.
An adaptation of this is to get small groups of
employees and supervisors together to discuss
the results of the survey and identify an action
plan for resolving some of the issues.

Step Two: What Are the Necessary

Success Criteria?
Just knowing that you are ready may not be
enough. There are also aspects that you may
need to understand a bit more. So, in keeping
with that theme, here is a quick list of
questions that you should be able to have
answers to before you take the next step,
whether you are ready or not.
1. Do you have top management support?
(That includes leadership plus the
board/council members.)
2. Does the organizational culture accept
change?
3. Have you developed an idea of how you
will link pay and performance and also
address cost of living issues?
4. Do you have a viable salary increase
budget? (Well, who does these days, but
our research shows that while more is
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better, the difference in effectiveness of a

program with one percent of payroll
dollars and five percent of payroll dollars
is insignificant. Hard to believe isnt it?)
5. Do you have an effective performance
management system? (Even a lousy one is
better than none at all, because at least you
have partial building blocks in place.)
6. Do supervisors and subordinates trust each
other? (This is one of those make-or-break
items. You might want to enroll in trust
worthiness school if morale is in the
dumps because of ineffective supervisors.
Poor supervisors will sink you every time.
Our best advice is to fix it.)
7. Are there measurable differences in
performance in the jobs that you are
focusing on? If not, then a P4P program
may not be very effective. (Frankly, some
jobs are either done or not, and there is
little difference in performance that can be
measured. Think airplane pilot; what does
unacceptable performance look like?)
8. Do your managers have the ability and
willingness to distinguish differences in
performance? (If they think all their
employees are wonderful and then some
random week, they want to fire them, you
have a problem that needs fixing.)
9. Is your pay structure competitive and fair?
(If you dont have a solid foundation, P4P
is not going to fix it, and could make it
much worse.)
10. Do you effectively communicate with
employees? (If not now, when do you
think it would be a good idea?)
11. Do you have the administrative resources
to track and administer a program that will
require about as much effort every year (if
not more) than open enrollment?
12. Do you have a policy manual that you can
incorporate a P4P philosophy into? (While
more than a few words, the board should
agree to the statement.)
13. Will there be consequences for managers
who dont want to go along with the

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changes? (One bad apple that is not held

accountable by top management is just as
important to the program as a solid
compensation program. Without this, your
chances of succeeding are minimal.)
As you can see, this is quite a list. And, do
you notice that of the 13 items, only two have
anything to do with compensation? All the rest
have to do with cultural and organizational
development issues.

Step Three: How Is Your Pay

Strategy?
OK, lets say that you are ready and have
passed all the tests. You have looked at Step
Two and are ready to go. When can we
implement? Slow down. We are far from the
finish line.
Do you have a pay strategy that is clear and
incorporates P4P? We didnt think so. Most
public sector organizations (about 70 percent)
have a pay strategy, but about 95 percent of
them do not incorporate P4P. A pay strategy is
a statement(s) of the intent and approach that
you will take in compensating your
employees. Part of that approach is why P4P
is such a big issue. Is it to retain top quality
employees? What are you going to do with
poorly performing ones then? Do you want to
reward employees based on their contribution
to the success of the organization, department,
and/or work unit? Then you need to define
what success looks like and again what you
will do if an employee is not making the
expected contribution to success. This needs
to not only be thought out but spelled out. We
doubt that it can be stated in one or two
sentences in a short pay strategy statement.
So, you may need to engage the board and top
management in a rather intense discussion
about why you pay employees what you pay
them. The answer to that question is not found
in an hour-long lunch meeting.

Step Four: What Do You Want To

Reward?
This may sound like a stupid question, and it
certainly is very directly related to the above
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step, but you need to answer this clearly. Just

to help you out, here are a few things that we
have found that organizations want to reward:

Individual performance
Team performance
Performance improvement
Increasing capacity or competency/skills
Education
Personal/professional development

Interesting isnt it? If you are in a college or

educational environment, professional
development and educational attainment are
highly valued and are usually items they want
to reward. Does that work for you? Or maybe
team performance would be very important to
a road maintenance unit, but not so to a
housing inspector. The point is, it can be a
combination of these things or it can be just
one of them. You have to decide which ones
and how much. And, different departments
may have different things that they want to
reward. No one can give your organization the
formula that works for you. You have to find
it yourself. How is that lunch meeting working
for you now?

Step Five: Is Performance

Management the Same as P4P?
Wait! Isnt pay for performance just the
natural outcome of performance management?
Well, yes, it could be, but for many it is not.
Frequently we ask our clients if they have a
performance evaluation system in place. Most
of them say yes. Then we ask if they pay
based on performance. The answers are
interesting.
Some say yes and some say no. (Well really
guys, what other choices are there?) Those
who say yes then follow up with saying that if
employees dont receive a satisfactory
performance rating, then they dont get a step
increase or a COLA. When asked how many
dont receive one of those kinds of increases
because of an unsatisfactory performance,
they state that they cant remember anyone
who didnt get an increase!

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If this is the case, then you may have a form

and performance criteria, but you dont have a
very effective performance management
system. You need one. And to have one, you
need these things (see Step Two):
1. Measurable differences in performance in
the jobs that you are focusing on.
2. Managers who have the ability and
willingness to distinguish between
different levels of performance. If you
have these, then you have a lot, but if not,
you need to immerse your managers in a
bit of training. To be honest though, some
managers can be fixed and others cant.
You need to figure out what to do with the
latter.

Step Six: How Is Your Training?

If you are this far, you are in good shape. Not
much more to go. When we asked our good
friend, performance evaluation expert Marnie
Green, of Management Education Group Inc.,
what cultural issues she thought were
important, she came back with this answer:
TRAIN, TRAIN, TRAIN!
We dont think she was talking about light
rail. Nope, she basically yelled in our ears
telling us that mangers must have the skills to
give specific feedback to employees and to
clearly convey their expectations for what
good performance looks like. This is the
tough love of management. If you cant tell an
employee that they messed up or did a good
job, maybe you ought to find another line of
work. Because effective managers can get a
lot out of people, but they need to be honest,
and sometimes that means that you need to tell
employees that they did not meet your
expectations.
The difficulty in most organizations is that
work groups are social groups. Managers and
supervisors may have been promoted into
their jobs and they view their subordinates as
their friends. Think about parents who simply
want to be friends with their kids we dont
need to tell you the consequences that could
result from that type of parenting.

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Step Seven: Where Are Your

Employees?
Most managers and elected officials we talk to
think that performance evaluation is the
responsibility of the managers. It is something
managers do to employees at the end of the
year.
Wrong answer. If your performance
management process does not significantly
involve the employee, then you are destined to
fail. Back to Ms. Green; after she yelled in our
ears, she said this:
And, employees need the skill to fully
participate in the management of their own
performance.
What that says to us is that employees need to
be trained as well. After all, they need to be an
integral part of the process. They need to
evaluate their own performance and be on par
with the managers when they talk about
performance expectations. When you treat the
employees as an equal part of the process, you
break down mistrust and the feeling that it is a
subjective process where only the ones who
are liked by the boss get raises.

Step Eight: Do You Hold Managers

Accountable?
Part of being an effective manager, and one of
the criteria for a managers performance
evaluation, is if they have found differences in
performance of their subordinates and if they
have had the willingness to clearly
communicate these differences to employees.
If you dont have this, find a way to get it.

Step Nine: Have You Linked Pay

with Performance?
Even if you dont have much money to play
with, you need to find a metric to link pay and
performance so that the top performers get
more than the ones who are not top
performers. This can be through a set-aside
bonus amount, a link based on placement in
range and performance (merit matrix) or a
percent pay increase factor. Regardless, it
needs to be established and understood.
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Step Ten: Did You Tell Them How It

Worked?
Ms. Green goes on: Communicate the results
of the program so that staff as well as elected
officials can see the impact that focusing on
performance has on the organization. Use
these data to maintain the funding support for
the board and possibly enlist union leaders, if
you have unions.

Step Eleven: Repeat

P4P programs need to evolve. In fact, in our
experience, once you set this up, you will do
rather poorly the first year. You will evaluate
more people as exceeding expectations than
should be (one county we heard of had 93
percent of their workforce exceeding
expectations!), you will set easily achievable
goals, or you will define performance
expectations poorly. Do not be dismayed. The
next year you will be better, and the third year
you will be pretty good. By then you will want
to revise the program! And we think you
should.
So, back to your question. As you can see, this
is mostly cultural, organizational and
employee development. But, if you dont have
the essential underpinnings, you can have the
most elegant merit matrix or bonus plan and
great funding support and it will fall on its
face. And you said you wanted this in six
months? Really?

About the Authors

The Comp Doctor is the team of Jim Fox
and Bruce Lawson of the Compensation
Consulting Practice for the Human Resources
& Compensation Consulting team of Arthur J.
Gallagher & Co. Their practice helps
organizations strengthen the performance of
their organization with sustainable solutions
for compensation, program design, employee
engagement, executive compensation, HR
audits, surveys, training and development,
recruiting solutions and more.
James C. Fox, Ph. D.
Managing Director, Compensation Consulting
Human Resources & Compensation
Consulting
jim_fox@ajg.com
651.635.0976
Bruce G. Lawson
Managing Director, Compensation Consulting
Human Resources & Compensation
Consulting
bruce_lawson@ajg.com
602.840.1070
Consulting and insurance brokerage services to be provided by
Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit
Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a
licensed insurance agency that does business in California as
Gallagher Benefit Services of California Insurance Services and in
Massachusetts as Gallagher Benefit Insurance Services. Neither
Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal,
or tax advice.

So, as Don Quixote said:

Ah, ah, now I understand you,

Sancho! Oh yes, lots of times, and
I feel it coming right now. Get me
out of this pickle, because its
already pretty messy in here!

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