We use the principal-agent model as a focal theoretical frame for synthesizing what we know both theoretically and empirically about the design and dynamics of the implementation of performance management systems in the public sector. In this context, we review the growing body of evidence about how performance measurement and incentive systems function in practice and how individuals and organizations respond and adapt to them over time, drawing primarily on examples from performance measurement systems in public education and social welfare programs. We also describe a dynamic framework for performance measurement systems that takes into account strategic behavior of individuals over time, learning about production functions and individual responses, accountability pressures, and the use of information about the relationship of measured performance to value-added. Implications are discussed and recommendations derived for improving public sector performance measurement systems.
The use of formal performance measures based on explicit and objectively defined criteria and metrics has long been a fundamental component of both public and private sector incentive systems. The typical early performance measurement system was based largely on scientific management principles (Taylor, 1911) promoting the careful analysis of workers’ effort, tasks, work arrangements and output, establishing work procedures according to a technical logic, and setting standards and production controls to maximize efficiency. Assuming the benchmark level of performance reflected the relationship between worker effort and output, workers could be paid according to a simple formula that included a base wage per hour plus a bonus rate for performance above the standard.
The basic concepts underlying this simple compensation model—that employees perform better when their compensation is more tightly linked to their effort or outputs, and organizational performance will improve with employee incentives more closely aligned with organizational goals—have since been broadly applied in the design of private and public sector performance measurement systems. Richard Rothstein (2008) presents a wide-ranging, cross-
national and historical review of such systems, including Soviet performance targets and incentives for enterprise production; performance indicators in the U.S. Centers for Medicaid and Medicare Services and Britain’s National Health Service; incentive systems for bus drivers in Santiago, Chile; and thegrowing use of performance accountability systems in public schools.
Bertelli and Lynn (2006, pp. 28–29) suggest that the early technical focus of public sector performance measurement systems was congruent with a prevailing “scientism in political science,” orientating toward descriptive analysis of formal governance structures and processes rather than attention to the dynamics of system incentives and their consequences. Almost a century later, public managers still have relatively little leeway for basing employees’ pay on their performance, although the U.S. Civil Service Reform Act of 1978 sought to remedy this by allowing performance-contingent pay and increasing managers’ latitude for rewarding performance. The ensuing development and testing of “pay for performance” systems for both personnel management and public accountability is ongoing, albeit research suggests that public sector applications have to date met with limited success, primarily due to inadequate performance evaluation methods and underfunding of data management systems and rewards for performance (Rainey, 2006; Heinrich, 2007).
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Incentives And Their Dynamics in Public Sector Performance Management Systems
