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SUCCESSFUL DIFFUSION OF A FAILED POLICY The case of pay-for- performance in the US federal government

Seejeen Park and Frances Berry

Seejeen Park Askew School of Public Administration and Policy Florida State University

Tallahassee 32306-2250 USA E-mail: [email protected]

Frances Berry Askew School of Public Administration and Policy Florida State University

Tallahassee 32306-2250 USA E-mail: [email protected]

Abstract

Pay-for-performance (PFP) is a popular

management approach that came out of the

business sector and was adopted as a centre

piece of the 1978 US Civil Service Reform

Act. An extensive set of studies assess PFP

as largely unsuccessful in the federal govern-

ment, and many of the private sector studies

also found problems in PFP in the private

sector. Yet, PFP continues to be adopted by

governments in Europe, the United States

and Australia. Our study examines the

original adoption of PFP in 1978 to assess

why it diffused so readily from the private

sector to the federal government. We find

PFP as a good example of Kingdon’s (2002)

garbage can decision making in which the

policy champions presented PFP as a rational

policy solution to widely perceived perfor-

mance appraisal and reward problems at an

opportune time. The PFP was trumpeted as

an innovative policy but had almost no

systematic evidence of success to support

its use. Indeed, the problems of private sector

PFP were diffused to the public sector. This

case study underscores the lack of evidence-

based decision making on an important

presidential human management agenda,

demonstrates an example of policy adoption

based on myth rather than fact and concludes

that better human resource management

theories built on assumptions and public

service motivation pertinent to the public

sector are needed.

Key words Pay-for-performance, policy diffusion, civil

service reform, public service motivation

� 2012 Taylor & Francis

Public Management Review, 2014

Vol. 16, No. 6, 763–781, http://dx.doi.org/10.1080/14719037.2012.7 0 835 5

INTRODUCTION

Policy diffusion occurs between governments, but also takes place from the private to the public sector. Failed policies as well as successful policies can diffuse if they are perceived to be successful (Abrahamson, 1991; 1996). The study of such diffusion is important because making government business-like typically involves benchmarking business practices which are then imported by policy makers into government. Pay-for- performance is one good example, among many adoptions of private sector practices in federal government, to demonstrate the allure of private sector management practices, the lack of a public service-oriented public sector performance pay model and the practice of garbage can decision making under the banner of rational decision making. The PFP is a system that ‘uses extrinsic monetary incentives to motivate increased or enhanced employee efforts and performance’ (Shafritz, 1998, p. 1613). Pay-for- performance has been on the government agenda since the implementation of the Civil Service Reform Act of 1978 (CSRA) that initiated the system in the federal government of the United States.

Since then, PFP has been widely implemented in governments of both Europe and America over the past thirty years. According to the Performance-related Pay Policies for Government Employees (2005, p. 30) published by the Organization for Economic Co- operation and Development (OECD), PFP has been introduced in the following countries: Spain (1984), Denmark (1987), Netherlands (1989), New Zealand (1988), Sweden (1989), United Kingdom (1985), Finland (1992), Italy (1993), Ireland (1995), Australia and Germany (1997), Switzerland (2000), Hungary (2002), and more recently, France (2004). After the Civil Service Reform Act was enacted, many state and local governments followed the federal case. In 1990, the US General Accounting Office (GAO) identified 23 states that used PFP systems (GAO, 1990, p. 3). About the same time, Streib and Nigro (1993), in their national survey to all municipalities and counties with more than 50,000 residents, found that approximately 36 per cent of the city or county jurisdictions were using PFP.

A number of studies (e.g. Berry and Wechsler, 1995; Bryson, 2010) have noted that the public sector often adopts private sector management practices, and PFP was an early example. The general assumption among policy makers and many managers is that the private sector reforms such as strategic planning, total quality management and performance management have been successful in the private sector and thus are ripe for diffusion. And yet PFP was not widely proven to be successful in the private sector, but it still was highlighted as a centre piece in President Carter’s primary management reform— civil service reform. How can we explain this? The PFP can be characterized as a politically attractive solution to a fundamental civil service problem: how can government reward high performing employees more than average workers? Kingdon’s (2002) Multiple Streams policy theory, which employs a form of garbage can decision making in which attractive known solutions may take precedence over evidence-based policy, helps make sense of the decisions to use PFP in the federal civil service reform process.

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Our study examines this policy decision-making process about PFP in more depth. First, we briefly present the theories and assumptions that underlie PFP and that continue to be prominent to this day. Second, we summarize the early evidence and perspectives on how PFP worked in the private sector before the US federal government’s implementation to determine if the theories were supported and the results were consistently positive. Third, we present a short case study on how PFP was adapted as a cornerstone of the CSRA, and what the results of PFP were in the federal government after adoption of PFP. The paper assesses the adoption process to investigate if the knowledge about private sector PFP implementation was discussed in the hearings on civil service reform. We conclude by discussing why diffusion from the private to the public sector in management reforms takes place, why PFP can be viewed as an example of Kingdon’s (2002) garbage can decision making and why we need a performance appraisal system that incorporates public service motivation (PSM) values as well as extrinsic rewards.

THE THEORETICAL BASE OF PFP

The PFP is based on the logic of Taylor’s scientific management (Fry and Raadschelders, 2008, p. 77) and two major human behavioural theories: Vroom’s (1964) expectancy theory and Skinner’s (1953) reinforcement theory (Heneman, 1984, p. 4). Taylor believed that employees are rational individuals in the pursuit of their self-interest so that their behaviours can be manipulated by financial incentives (Fry and Raadschelders, 2008, p. 78). The PFP is constructed on the same premise that employees can be motivated if properly rewarded for their performance.

Expectancy theory postulates that if employees expect to receive rewards for high performance, they are more likely to increase their efforts to attain a high level of performance than when there is no extra reward for the increased efforts (Pearce and Perry, 1983). In other words, motivation is assumed to be extrinsic, positing that ‘employees will be motivated to the extent to which their calculation of the desirability of rewards, the effort required to perform a task, and the probabilities of successful performance are viewed favorably’ (Shafritz, 1998, p. 1613).

Reinforcement theory asserts that behaviour can be changed by providing ‘positive reinforcement’, which occurs when employees are presented with an attractive outcome based on a desired behaviour (Daft and Steers, 1986, p. 107). The logic behind positive reinforcement is grounded on Skinner’s ‘operant conditioning’ learning theory which treats human behaviour as a controllable response following given stimulus (Duncan, 1981, p. 119). In the context of PFP, employees will be motivated by the consequence represented by financial incentives and will respond by striving to reach the desired behaviour of high performance.

The three theories constitute the theoretical rationale for PFP. Taylor’s scientific management and Skinner’s reinforcement theory provide the basic premise of the

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monetary incentive as a motivator, while Vroom’s expectancy theory predicts the employee’s conscious linkage between effort and its by-product, performance and reward. Accordingly, PFP as a policy is expected to work if these theories are correct in their assumptions about motivation. However, past research has shown that the validity of the theories has been found wanting in practice.

PROBLEMS AND CHALLENGES OF PFP IN THE PRIVATE SECTOR

Is increase in pay a real motivator for performance?

Private sector PFP is based on the assertion that employees will be motivated by extrinsic rewards in the form of financial incentives so that by paying more, management can motivate the employees to increase their performance. Despite the debate over the role of financial rewards on motivation in the past, most companies which implemented the system embraced the classical assumption of pay as a motivator. The majority of studies followed this assumption and focused their research on the administration and outcomes of PFP. However, research before CSRA showed that PFP’s theoretical base was not always supported.

Belcher (1969) argued that a precondition of implementation is identifying whether the employees want more pay. Implementing PFP when some employees are not actively seeking more pay may not be effective. Wood and Lawler (1970), in their laboratory experiment, found that if individuals perceive themselves being ‘overpaid’, they may actually reduce productivity rather than striving to increase performance to balance their perception of job qualification and pay. Thus, giving more pay does not necessarily result in increasing employee performance.

Other streams of research proposed that financial incentives may have a deterrent effect on intrinsic motivation (Deci, 1973; Meyer, 1975). Deci (1973), in his experiment, discovered that a person’s intrinsic motivation decreases when a person becomes reliant on an extrinsic reward for the task completion. He concluded that intrinsic motivation and extrinsic motivation act in opposite directions and are contradictory, thus reward systems should choose between the two. Meyer (1975), citing Deci’s work, argued that many people work harder to fulfil their avocational interests rather than just for compensation. To Meyer (1975), in the instance that compensation is regarded as a major goal, an individual’s interests are usually directed to the goal itself, not on the performance of the assigned task. Pritchard et al. (1977), in their experiment having participants solve a chess game problem, reported findings that support Deci’s hypothesis, ‘contingent extrinsic rewards will decrease intrinsic motivation’.

Lastly, there is a debate on the level of sufficient financial resources for a reward to have a positive impact on employee motivation. Belcher (1969) notes that the availability of resources to reward employees is a requirement for the PFP system to

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work. Although his argument seems to be restating common sense about the organization’s willingness to spend resources on performance rewards, the argument poses an important point. If the organization implements PFP with the same total budget as in the traditional pay system, not all employees will enjoy the benefit of pay increases and some even may receive less pay than in the traditional pay system. And in the public sector, agency merit pay depends on legislative appropriations.

In the case of determining the absolute amount of incentive, Krefting and Mahoney (1977) investigated the issue of the smallest meaningful pay increase (SMPI) and stated that SMPI tends ‘to be a complex function of consumption, normal pay increase, and satisfaction variables’ as part of an employee’s perception. Consequently, the absolute amount of pay increase has a different psychological impact on each employee. Also, they elaborated the possibility of ‘non-meaningful pay increases’ depending on the employee’s perception of a meaningful pay increase. Therefore, a sufficient amount of reward should be distributed to enable the employees to acknowledge the link between pay and performance. Their findings suggest that the level of financial reward to truly motivate a person may vary widely across individuals working in the same organization.

In short, the assumption of pay as a motivator was challenged by examining the precondition of PFP implementation, financial incentive’s contradictory relationship with intrinsic motivation and the determination of a meaningful pay increase. Next, we consider the implementation process.

Implementation of PFP

Although theories supporting financial rewards and extrinsic motivation have been challenged, one nonetheless could accept the premise that financial incentives can motivate employees and then embrace PFP. The implementation process, from performance measurement to appraisal and reward, relies both on the logics of Vroom’s expectancy theory and on the insights from studies of policy and management implementation. Employees predict their expected performance and reward from their effort and will decide to aim for high performance only if the relationship between effort and performance or reward is positive. If the positive relationship is not observable, implementation of PFP is likely to experience obstacles. For that reason, the major issues concerning implementation of PFP in business have been (1) the measurement, subjectivity and inequity in the performance appraisal and (2) establishing the link between pay and performance

Measurement, subjectivity and perceived inequity in performance appraisal

A PFP system is founded on the premise that performance can be measured in an objective manner so that appraisal can be conducted according to standards. In an ideal

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setting where performance is objectively measurable, the supervisor and employees can readily form consensus on the standards of performance evaluation with little or no concerns about unfairness of the appraisal.

In real settings, many early scholars have found this consensual process is challenged because of difficulties in the precise measurement of performance (Barkin, 1970; Burns, 1965; Conant, 1973; Heneman, 1984; Patz, 1975). Patz (1975) conducted more than 70 interviews with 20 top managers and 18 middle managers in 19 companies (1 Dutch, 1 Canadian and 17 USA). He argued that in the appraisal information collection process (although both quantitative and qualitative data might be gathered), objective discernment of difference in employees’ performance was exceedingly difficult because much of the data were qualitative. Accordingly, in most companies he studied, ‘no simple and objective method’ was in place to compare one employee to another. Even for quantitative data, the rating scales were too restricted, ranging from 3 to 5 point scales rather than 8 to 10 point scales, undermining the probability of acknowledging noticeable variation in performance.

The literature also pointed out the existence of subjectivity of evaluators that may cause bias or prejudice in performance appraisal systems in general or in the case of implementation of PFP, in particular (Burns, 1965; Grindle, 1967; Hamner, 1975; Levinson, 1976; Mikalachki, 1976). The researchers contended that appraisal inevitably creates criteria other than objectively measurable outcomes, requiring the supervisor to engage in subjective appraisal.

Another research area that deals with the negative outcomes of performance appraisal concerns perceived self-esteem. In a variety of studies using self-rating, researchers found that the majority of employees consider themselves above-average performers and only a few rate themselves as below-average (Beer and Gery, 1972; Meyer et al., 1965; Parker et al., 1959). For instance, Beer and Gery (1972), in their survey of 500 white-collar clerks and technicians, observed that 58 per cent of the participants rated their own performance within the top 10 per cent among their peers who did similar tasks, but only approximately 1 per cent out of the participants evaluated their performance level to be in the bottom 50 per cent. Meyer (1975) asserted that the results of the studies (Beer and Gery, 1972; Meyer et al., 1965; Parker et al., 1959) showed a clear implication for the merit pay because most employees perceived themselves as an above-average performer and felt that the management underestimated their actual performance.

Examining the problems in performance measurement, one issue is that regardless of the manager’s preciseness in his or her performance appraisal, the employee may not agree with the outcome. First, the difficulties in capturing the multi-dimensions of performance make the validity of performance appraisal difficult to establish. Second, coupled with the measurement issue, subjectivity in the appraisal can result in giving different ratings for employees with similar performances. Hence, with the combination of the supervisor’s weak rationality position, and possible subjectivity, in performance appraisal, the employee may view the appraisal as invalid. Adams (1963), referring to

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Festinger (1957), says that ‘inequity exists for a person whenever his perceived job inputs and/or outcomes stand psychologically in an obverse relation to what he perceives are the inputs and/or outcomes of others’. Adams’ model gained support from other scholars such as Salter (1972) in his study of executive compensation and by Goodman and Friedman (1971) in their review of the empirical evidence for Adam’s theory.

The link between pay and performance

A strong link between pay and performance is a precondition for the successful implementation of PFP because the policy explicitly says that if an employee exhibits high performance, his or her pay should increase accordingly. A number of scholars studying private sector incentive systems have found little support for a positive relationship between performance-related-pay practices. Goldberg (1977) suggests that since most merit-pay programmes are designed to have a normal distribution of performance ratings, the ratings may not always reflect each employee’s actual performance. Normally distributed performance ratings impose a fixed proportion of personnel in each rating category, possibly leading to the result that those employees with very similar performance receive different performance ratings. Lawler (1966), in his survey of more than 600 middle and lower level managers from various organizations, revealed that the managers believed there were ‘virtually no relationship between pay and their rated job performance’. The managers’ perception was that pay varies by their training and experience, not by their task performance. Thus to summarize, the implementation of PFP in business revealed problems in areas such as subjectivity in performance measurement, perceived inequity in appraisal and a weak relationship between pay and performance.

PFP IN FEDERAL GOVERNMENT

Civil Service Reform Act and PFP

Before the enactment of CSRA, the federal government had undertaken efforts to benchmark private sector compensation and reward practices to hire and retain talented employees. Between the Civil Service Act of 1883 (Pendleton Act) and the CSRA which initiated the PFP system, the federal government had used the private sector as a model for comparison in employee compensation and reward. The Federal Salary Reform Act of 1962 (FSRA) and Federal Pay Comparability Act of 1970 (FPCA) intended to make workforce compensation comparable to the market wage.

The FSRA developed ‘comparability with the private sector as the governing principle for determining’ the compensation of employees, using annual surveys of

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salary levels ‘in the private sector for work at the same levels of difficulty and responsibility’ (OPM, 2003, p. 112, 131). The FPCA affirmed ‘the principle of comparability, methodology of surveying salary rates in the private sector, and the president’s authority to set new pay rates for the General Schedule’ and strengthened the president’s authority in determining federal pay by allowing the president to establish new pay schedules by Executive order ‘without the need for Congress to enact a separate law each year’ (OPM, 2003, p. 131).

The Incentive Awards Program Act of 1954 (IAPA) was the first attempt to provide incentives for outstanding ideas or performance in the federal government. It included a government-wide awards programme for Federal employees providing cash and honorary awards as a reward for superior ideas or performance (OPM, 2003, p. 104). However, the Act was a specific programme, not a systematic approach that would be institutionalized like PFP. The CSRA which established the Senior Executive Service (SES) and the Merit Pay System (MPS) resembled the private sector practice of employee incentive systems.

The SES covered the General Schedule (GS) 16, 17 and 18 and was differentiated from the traditional merit system in the aspect of executive status and compensation. SES members were the top executives generally leading a programme just below the level of political appointees. The CSRA reform leaders regarded SES as a service with high prestige, high reward such as compensation incentives and performance rewards and high risk because of the possibility of losing the executive status due to individual and organization performance (OPM, 2003, p. 154). The SES members set their organizational and personal goals annually and were rated by their supervisors based on how well they met the goals, becoming eligible for rank awards and bonuses but at the same time facing the risk of being removed from the SES for ‘less than fully satisfactory’ performance rating (Durant, 2003, p. 1089).

Meanwhile, MPS covered GS grades 13, 14 and 15 supervisors and managers with the intention to link job performance with salary increases rather than seniority. The CSRA eliminated the steps of the managers and supervisors in the target grades in MPS and provided them with annual merit pay increases based on the performance of the managers themselves and their organizational unit.

The unprepared for adoption of PFP as policy diffusion

Almost no research has addressed private-to-public sector policy diffusion that happens frequently when the government promotes business-like management practices. Ingraham (1993) pointed out the implementation of PFP as an example of private to public policy diffusion model. The PFP can be viewed as an important building block and forerunner of the New Public Management (NPM) in the field of human resource management. The PFP represented an effort to be more scientific, and rational, and thus represents a small branch on the tree of scientific management that Frederick

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Taylor planted in American soil. Vigoda (2003) argued that NPM reflects ‘an approach in public administration that employs knowledge and experiences acquired in business management and other disciplines to improve efficiency, effectiveness, and general performance of public services in modern bureaucracies’ (Vigoda, 2003, p. 812). In later years, scholars such as Perry et al. (2009) defined performance-related pay popular in state and local governments in the 1990s and twenty-first century as a by-product of NPM reflecting the NPM’s lens of defining organizations as ‘a chain of low-trust principal/agent relationships (rather than fiduciary or trustee-beneficiary ones) and a network of contracts linking incentives to performance’ (Dunleavy and Hood, 1994; Perry et al., 2009). Indeed, PFP embodied in the 1978 CSRA may be seen as a prototype of later state performance-related pay laws which diffused widely despite the fact that the academic literature frequently criticized the NPM movement for importing business practices and values into the public sector (e.g. Boyne, 2002, Box, 1999).

So how and why did PFP diffuse from the private sector to the Federal government? In 1977, President Jimmy Carter announced that ‘civil service reform would be the ‘‘centre piece’’ of his administration, and appointed Alan K. Campbell as Chairman of the Civil Service Commission’ (OPM, 2003, p. 147). In the same year, the Federal Personnel Management Project (FPMP) was launched to provide plans for civil service reform. Campbell and Wayne Granquist co-chaired the project. The FPMP published the recommendation reports which the Civil Service Commission compiled into legislative proposals for the president for the enactment of CSRA (OPM, 2003, p. 149). The CSRA included two significant provisions related to PFP: the establishment of the SES and the MPS. Although CSRA contained a number of provisions designed to enhance the performance of the federal civil service (Milkovich and Wigdor, 1991), the design was established with very little evaluation about the experience in the private arena (Ingraham, 1993). In addition, the short period (1977 and 1978) between the establishment of FPMP and the enactment of CSRA gave little opportunity for the public administration literature to review such reform.

Alan Campbell’s testimony in the ‘Forum on the Design of the Civil Service Reform Act of 1978’ clearly shows the lack of research and problematic assumptions made with little consideration for applicability in the Federal government. ‘A chief architect of the legislation, Campbell, was asked a decade later why the act had not provided for experimentation and evaluation of PFP prior to government-wide implementation. He replied, ‘‘I saw no need. It was my perception that it worked fine in the private sector’’’ (Ingraham 1993; US Senate, 1988, p. 28). Also, research on consensus building of debates among the proponents and opponents was limited. For example, one of the few comprehensive reports published before CSRA, the Final Staff Report (1977) published by FPMP, was regarded as ‘something of a consensus among academics and practitioners’ that could direct academia and practice (Thayer, 1978).

Campbell’s assumption may have been true in certain aspects since the private sector had a history in systematically rewarding employees according to their performance beginning with the Scientific Management era. However, the presence of a PFP system

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did not necessarily mean PFP works and would produce positive effects in the private sector, let alone in the public sector, as research prior to CSRA had already found Campbell’s assumption not to be fully supported.

Post CSRA policies: The same problems emerged as in the private sector

Post-CSRA research has provided evidence that the implementation of PFP in the federal government resulted in similar problems that PFP faced in the business sector. Not long after the enactment of CSRA, both SES and MPS encountered obstacles in the implementation process. For example, the satisfaction level of SES members regarding their pay fluctuated depending on whether Congress appropriated funds for a bonus (Durant, 2003, p. 1091). Aberbach and Rockman (2000) found that under the Reagan administration, morale among SES members fell from 83 per cent satisfaction in 1980 to 56 per cent in 1983 when the Congress failed to provide sufficient bonus funds, but after a significant pay hike by Congress, the satisfaction percentage returned to initial 1980 levels by 1991. The MPS also faced defects such as ‘inadequate funding, pay inequities between managers and non-managers, and invalid performance appraisals’ (Pearce and Perry, 1983; Perry et al., 1989). In order to overcome the shortcomings, MPS was replaced by the Performance Management and Recognition System (PMRS) in 1984 which sought to develop a centralized performance appraisal system, funding, and disbursement requirements within the whole Federal government. Merit increase and performance awards (bonuses) were the financial incentives. Nevertheless, PMRS was also terminated in 1993 as a reaction to problems, such as the unpopularity of the system among managers, little evidence of improved performance despite the cost and the agencies’ interest in having decentralized pay systems (OPM, 2003, p. 183, 184).

In the next phase, extending to the present, federal agencies’ exemptions from Title 5, which defines the roles and responsibilities of government organizations and employees, were used by agencies to establish independent personnel systems. For example, the Federal Aviation Administration and Internal Revenue Service gained exemption from Title 5 in 1996 and 1998, respectively, and sought to establish flexible compensation systems and to provide incentives to high performers in a flexible manner according to the agencies’ needs. The trend of agencies gaining their own flexible compensation and rewards discretion continued during the George W. Bush administration. Departments such as the Department of Homeland Security and the Department of Defense followed the President’s management agenda of ‘strategic management of human capital’, practicing a business-like compensation system. However, the agencies also experienced problems in the implementation of PFP. In the case of the Department of Homeland Security, the comprehensive plan for PFP created so many productivity problems, legal defeats and discontent among employees that the Department of Homeland Security cancelled the implementation of the system (Bowman, 2010; Tiefer, 2008).

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Implementation of PFP in the federal government

Public service and intrinsic motivation After the implementation of CSRA, the contradictory relationship of extrinsic and intrinsic motivations in Federal government organizations regarding PFP systems was evident in research studies. Public service motivation is defined as ‘an individual’s predisposition to respond to motives grounded primarily or uniquely in public institutions and organizations’ (Perry and Wise, 1990; Rainey, 1982). Perry and Wise (1990), in their work on contemporary theories in PSM, contended that the increasing popularity of financial incentive systems ‘stands in opposition to the view that public service motives energize and direct the behaviour of civil servants’. Perry and Wise (1990) categorized public service motives in three ways: (1) Rational (participation in policy formulation, commitment to a public programme because of personal identification and advocacy for a special or private interest); (2) Norm-based (desire to serve public interest, loyalty to the duty and government and social equity); and (3) Affective (commitment to a programme from a genuine conviction about its social importance and patriotism of benevolence).

Evidence suggests that many people join the public service with the expectation of doing interesting work and making a difference in society rather than maximizing income (Buelens and Van den Broeck, 2007; Perry, 1997; Weibel et al., 2010; Wise 2004). Therefore, although the public sector may need to moderate the differences in the level of compensation between the public and private sector, it should make an additional effort to provide nonmonetary incentives including interesting tasks to maintain high levels of motivation of employees (Francois, 2000; Rainey, 1983; Weibel et al., 2010).

Issues in performance appraisal Research related to the performance appraisal of federal employees after enactment of CSRA also acknowledged similar problems found in the private sector. In 1981, work by Silverman (1981) pointed out several reasons CSRA encountered problems, such as having a complex performance appraisal system, ‘small pay differences between high and low performing employees’, and the MPS being ‘guided by politics rather than hard evidence’ as factors for the failure of the MPS (Heneman, 1984, p. 51). In Pearce and Perry’s (1983) study of GS-13 to GS-15 government managers under MPS after the implementation of CSRA asking for the perception of the managers about the MPS, the merit pay programme was not successful as a motivation system because of measurement problems. The managers indicated that compared to previous ‘time-in-grade compensation policies’, ‘effort is less likely to lead to a good performance rating’ (Pearce and Perry, 1983). The study concluded that the result may have been from the ‘managed’ merit pay increases to meet the mandated distribution of performance ratings. Additionally, lack of pretesting the

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performance appraisal system and insufficient budget for pay increase were considered as other factors faced in merit pay.

A later paper by Perry et al. (1989) produced similar results concerning the implementation of PMRS that replaced MPS. The authors argued that the appraisal system was not effective in discriminating employees by different levels of performance and suggested that there may have been a decrease in the validity of the appraisals. In the recent cases of implementation of PFP after the elimination of PMRS, comparable problems occurred in the Department of Defense, Department of Homeland Security, Federal Deposit Insurance Corporation and Federal Aviation Administration (Bowman, 2010; Mihm, 2003; Tiefer, 2008; Underhill and Oman, 2007). As an example, regarding the Federal Aviation Administration which had 17,987 staff under merit pay, Mihm (2003) in his 2003 survey found most respondents perceived the new system was not fair to all employees (Underhill and Oman, 2007).

Extensive studies since 1990 have evaluated PFP systems in American state and local governments as well as in the federal government. A series of studies in the 1990s (e.g. Kellough and Lu, 1993; Kohn, 1993; Milkovich and Wigdor, 1991) assessed incentive pay programmes and found clear evidence that PFP systems in government are not generally effective. Thus, the evidence continues to mount that PFP, an idea that still receives a positive reception among many elected officials, is not a sound policy for the public sector.

Availability of sufficient financial resources Securing sufficient financial resources to reward high performance can be more challenging in the public sector than in the private sphere. Contrary to private organizations that can flexibly create or manage their own personnel system, rules and procedures of the federal government’s merit system can impede flexible and adequate distribution of the contingent rewards. This phenomenon was discussed by Rainey (1979). Budget constraints for rewards are more intense in the federal government than in private companies which determine the budget according to their profit. In some instances in the implementation of MPS or PMRS, the available budget for merit pay was limited to the same amount of the previous merit system before CSRA. This made effective distribution of monetary incentives almost impossible because, having no new funds for salary increases could result in a decrease of pay for some employees even if they had shown performance improvement. The condition of sufficient financial resources for reward was a precondition for implementation of PFP but it never materialized.

In brief, the federal government PFP implementation process showed similar problems as PFP had encountered in the private sector regarding issues reflecting a conflicting relationship between intrinsic and extrinsic motivation, inaccurate performance appraisal and availability of financial resources for giving merit salary rewards.

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THE DIFFUSION OF FAILURES OF PRIVATE SECTOR PFP

The review in this paper provides strong evidence that the difficulties encountered in the private sector during the implementation of PFP were also encountered in the federal sector. And there is no evidence that the federal government systematically reviewed the actual success of PFP in the private sector prior to supporting its adoption in the federal sector. Two key points can be made from a summary of findings in both the private and public sector PFP research. First, financial incentives were not always a motivator because of the possibility of a contradictory relationship between intrinsic and extrinsic motivation. Second, in the implementation process, perceived inequity, subjectivity of evaluators and performance measurement problems in performance appraisal and the weak link between performance and pay were identified as factors undermining the success of PFP. Therefore, PFP is an unsuccessful policy that diffused from the private sector to the public sector because private sector research presented potential or prevalent problems of PFP in its implementation that also emerged in government.

CONCLUSION

In this paper, we found that PFP in the private sector was already experiencing problems before CSRA, the adoption of PFP in the public sector, was enacted. The PFP was passed with little preparation, and a questionable management policy diffused to the public sector from the private sector. Is success in the original setting a precondition for policy adoption? In the case of PFP, it was not. Possible reasons for the diffusion of PFP are (1) reform in the Carter administration based on the myth of ‘private practices work’, (2) reaction to the public’s dissatisfaction with the bureaucracy (Ban and Ingraham, 1984, p. 2) based on the rationale by President Carter who ‘suspected’ (Carter, 1978; Thayer, 1987) that the public perceived government employees were incompetent and inefficient (Thayer, 1987), and (3) President Carter’s belief that having the majority of federal employees receiving ‘satisfactory’ performance rating was not normal and should be corrected (Thayer, 1987).

Abrahamson (1996) studied management innovations and noted that some innovations are fads, ideas in good currency that do not necessarily serve as a rational end to some predefined goal, but rather are seen as cutting edge practices that others want to adopt. Performance pay in 1978 may have fit this description, though it is harder to explain why its currency continues for the public sector given the bulk of evidence that it does not work. Another explanation for PFP’s adoption in the federal government is related to Kingdon’s (2002) Multiple Streams policy theory in which policy makers faced with problems that need solutions look for available solutions, not necessarily the best solutions. Private sector management practices had been adopted before and were the source of solutions again.

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Accordingly, PFP was diffused based on politics and a false belief rather than scientific research and evidence. The policy diffusion of PFP leaves an important lesson to be learned in the current trend of promoting business-like practices in the government. Many adoptions of private practices occur in the form of management reform which often includes politics, as in the case of PFP. One recent study by Thompson (2006) investigated President George W. Bush’s President’s agenda that promoted strategic human resource management arguing that ‘the management and performance shortcomings of federal agencies are rooted in the political rather than the managerial system’.

Business practices go through the same trial and error process as the public sector does in administration, striving to earn profit and sustain the organizations. The type of policy diffusion discussed here can be found in the private sector in the form of a ‘management fashion’ (Abrahamson, 1996). Abrahamson explains that organizations or managers that are management fashion setters disseminate fashions which are ‘collective beliefs that certain management techniques are at the forefront of management progress’. This concept suggests that the private sector also suffers from adopting management practices without proper evaluation of the objective results of the practices. In the current business literature, PFP has received some positive support for being an effective contracting mechanism between the firm and employee and a sorting instrument to attract and retain the high-quality employees (Cadsby et al., 2007; Gerhart and Rynes, 2003; Jensen and Murphy, 1990; Lazear 2000) while a growing public administration literature has focused on the problems of PFP (Perry et al., 2009; Tiefer, 2008; Underhill and Oman, 2007; Weibel et al., 2010).

Studying the failure of government reimbursement practices that are adopted from the private sector dominated by the profit motive and individual achievement underscores the need for management theories tailored to the public sector context. While an extensive literature lays out the differences in the public and private sectors (Allison, 1979; Boozeman, 1987; Boyne, 2002), a key difference should be noted regarding the possibility of motivational difference of employees in the public sector.

One type of motivation more prevalent in public sector than the private sector is the concept of PSM. For more than two decades, a large body of research on PSM has been conducted by public administration scholars (Wright and Grant, 2010). Rainey and Steinbauer (1999) define PSM as a ‘general, altruistic motivation to serve the interests of a community of people, a state, a nation or humankind’. Such a description led to the argument that although PSM is more common in public organizations, it could be found in other types of organizations (e.g. business, non-profit organizations) (Boozeman, 1987; Perry, et al., 2010; Rainey and Steinbauer, 1999; Wise, 2000). In short, seen through the lens of PSM theory, implementing PFP in public organizations may not be as effective as in business organizations because of the conflicting relationship between PSM and extrinsic (self-interest based) motives.

Fundamentally, PFP represents a performance appraisal system based on the belief that public servants are motivated by extrinsic rewards. Then, for the policy

776 Public Management Review

entrepreneurs (e.g. elected officials, public servants, academics) in Kingdon’s model (2002), who link problems, solutions and policy arenas, what might be the implications of the motivational differences of public employees? We suggest a possible solution, as an alternative model to PFP, to develop a performance appraisal system that incorporates both extrinsic motivation and PSM as an incremental step to improve reward systems in public organizations. According to Perry et al. (2010), some studies have found that public employees place a lower importance on extrinsic rewards than do private sector employees (Crewson, 1997) and that the relationship between PSM and employee preferences for financial rewards is negative (Bright, 2005, 2009; Karl and Sutton, 1998). One study (i.e. Alonso and Lewis, 2001, p. 363) of federal employees, however, found that there was ‘no evidence that the link between material rewards and performance mattered any less to those (employees) with high PSM’.

Accordingly, based on mixed findings about the relationship between PSM and extrinsic rewards, rather than argue for the replacement of PFP with another system, we propose that trying to modify the current system would be more practical and less risky.

A recent work on PSM by Kim et al. (2012) argues that PSM is composed of four types of motives: (1) instrumental, (2) value-based, (3) affective and (4) altruistic or pro-social motives. We propose that one option for redesigning a performance appraisal system would be to link different types of motives with different reward options, such as through offering high performers opportunities to choose their desired public-serving task within their job description, encouraging participation in organizational policy making in which they are interested, and developing mechanisms that let the employees choose their preferred public (community or citizen) to serve. Although developing the proposed reward system is beyond the purpose of this study, future research on public organization employee reward systems may consider expanding on this type of mixed reward system.

In conclusion, this study illustrates three key points. First, the belief that private sector management practices always work is a myth; it can be false. And yet private sector reforms have an allure of success that is seductive. Second, whenever the public sector tries to adopt business practices, although the rational view is that there should be an assessment of how well the practice worked in the business sector, this case demonstrates that such an evaluation is not always undertaken and is not always appropriate to the values and circumstances of the public sector. Indeed other policy studies also find that solutions that are ideas in good currency or symbolic responses to widely perceived problems are common in government (Brown and Jacobs, 2008; Murray, 1964). Finally, failures as well as successes may be diffused when adopting policies from one sector to another if the policies address deep-ingrained problems that have been difficult to solve. In the case of PFP policies, government managers wanted to motivate and reward high performing employees and demonstrate that they are running government ‘like a business’ to secure political support and provide a rationale for policy change. In the political world where rational solutions are prized but garbage

Park & Berry: Successful diffusion of a failed policy 777

can decision making arenas are common, PFP became a management fad that offered a popular solution to an ongoing problem of employee rewards that diffused from the private to the public sector in spite of evidence that it was not highly successful in the private sector.

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