ANN ROSSITER
“CONSIDER INCENTIVES AND RISK”
Incentives matter: this is one lesson that the public sector must absorb if innovation and experimentation are to become routine practice. Effective organisations provide workers with some return on increased effort (financial or otherwise) and have effective mechanisms for dealing with poor performance. Nowhere are these challenges more acute than in the civil service. Despite the new civil service reform agenda, which aims to increase performance management, the link between effort and reward is still too weak.
At the organisational level resource allocation remains tied to resource use, rather than to success. In many cases (but not all) attempts to drive efficiency through targets and monitoring are running against the grain of embedded incentive structures.
The use of incentives within organisations is closely tied to responses to risk. The culture of the civil service is one which gives few rewards to those who seek to innovate, something which necessarily involves taking risks. However, for those who risk little, the threat of redundancy is small and jobs are strongly protected. In other words, the response to risk taking in the civil service is hugely skewed. So much so that risk aversion has become a cultural feature.
Historically, there have been several significant steps towards a more results-driven culture. The US was at the forefront of offering incentives for good performance – for example, the Civil Service Reform Act of 1978 required that 50% of any pay increase be variable depending on performance. In the UK, several parts of the civil service now operate as trading funds. They remain part of the public sector but are increasingly market driven in their pursuit of output, efficiency and individual responsibility, often with impressive results. However, it was New Zealand that was in the vanguard of innovation in public service provision. It was among the first to introduce fixed-term, performance-based contracts for departmental heads.
It also requires them to have signed annual performance agreements with their respective portfolio ministers. Models to improve the incentive structure in the civil service and promote a more risk-taking attitude will bring continuous improvement to service users. In well-managed private sector organisations, the market provides a mechanism to ensure that production processes become more efficient over time. However, the traditional system of resource allocation and the culture of risk aversion have prevented this from happening in the civil service. This must change. Without incentives, innovation in the civil service will always be subject to the limitations of bureaucratic oversight. With new incentive structures a dynamic civil service can be created.
Ann Rossiter is Director of the Social Market Foundation think-tank
Top three public sector innovations
1 FIXED-TERM PERFORMANCE-BASED CONTRACTS New Zealand’s introduction of fixed-term performance-based contracts for departmental heads.
2 THE CIVIL SERVICE REFORM ACT (1978) A US initiative, which required that 50% of any pay increase be variable depending on performance.
3 TRADING FUNDS The UK’s move to operate several parts of the civil service as trading funds, which means they are increasingly market driven.
