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Last updated: 19 September 2001

Performance management in the APS: A strategic framework

MAC

The Management Advisory Committee (MAC) is a forum of Secretaries and Agency Heads established under the Public Service Act 1999 to advise the Australian Government on matters relating to the management of the Australian Public Service

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Approaches and trends in rewards and recognition

There is general agreement on the need for rewards and recognition to form part of any effective performance management system. There is less agreement - both amongst the people interviewed for this project and the literature surveyed - on the best approaches for this.

Recent years have seen marked changes in APS approaches to rewards and recognition, notably through agency bargaining, increased differentiation in pay and conditions and a much stronger focus on performance-based remuneration. This was a strong theme in the interviews conducted for this report. A growing trend to complement remuneration policies with broader reward and recognition strategies such as point-in-time rewards was also identified, as was a desire to reward teams.

The move to enterprise and individual agreements in the APS has had a significant effect on improving flexibility. Agencies have taken responsibility for their own financial and human resource management. Overall, there is considerable diversity in systems and approaches, and a strong view among CEOs that this was an appropriate reflection of the diversity of businesses and organisational cultures.

4.1 Performance-based remuneration

Agencies are using a range of different approaches to performance-based remuneration. Virtually all agencies link performance to remuneration in one way or another, consistently with the Government's Policy Parameter that performance management should guide salary movement.

4.1.1 Trends

The two most common forms of performance-based remuneration adopted by APS agencies are:

A base salary increase for satisfactory or higher performance, usually in terms of incremental progression through pay points or through a percentage increase; and
A performance bonus, usually a one-off bonus payment in recognition of higher than satisfactory performance.

Agencies are also increasingly including retention bonuses, where the retention of an individual is seen as crucial to short-term organisational performance.

Frequently a combination of approaches is used.

Although some confusion has developed from the interchangeable use of terminology, the term performance pay has increasingly been used for either a performance bonus or for a system of proportional increases in base salary for higher than satisfactory performance. Systems that link the full base salary increase to the attainment of satisfactory performance can be seen as performance-based remuneration but are not generally seen as denoting a performance pay system.

Agencies are mostly using a combination of Certified Agreements (CAs) and Australian Workplace Agreement (AWAs) to underpin their performance-based remuneration approaches. The latter are used particularly for SES and Senior Officers and (quite frequently) reflect different approaches than for other employees covered by the agency's certified agreement.¹

An analysis of the approaches adopted in certified agreements undertaken by the PSMPC provided the following broad findings:

Agreements generally include strong links to organisational goals, APS values and the basis for providing employees with a clear statement of expectations.
Systems have been evolving with many agencies reviewing and revising arrangements in their second and third round agreements.
Nearly all agreements include some form of performance review (mostly with an annual formal assessment).
There has been a noticeable trend away from semi-automatic increments to performance based advancement. However, we would note that a small number of agencies are still using the old efficiency, diligence and attendance for duty criteria and approach. We would expect this to be addressed in subsequent agreements.
Ranges of review and rating procedures are used and, while increasing, the use of multi-source feedback is not generally linked to pay.
There is a considerable diversity of approach with agencies using a mix of remuneration and rewards - wage increases and productivity bonuses, performance linked remuneration, retention bonuses and cash/non-cash rewards.
The most common approach to performance linked remuneration in Certified Agreements is salary advancement through multiple pay points within a classification or broad band of classifications - either by itself or in combination with some other approach, e.g. bonuses.
Use of performance bonuses in Certified Agreements was less common with only 27% of agreements including provision for this form of payment. In addition, bonuses were mainly used in combination with other approaches.

Material provided through interviews and case studies and informed by the SES Remuneration Survey conducted by DEWRSB, indicates that the following observations can be drawn on the importance of performance assessment in AWAs:

Greater use is made of performance bonuses for AWA employees, with over half the agencies interviewed providing for them as part of their remuneration arrangements (this includes a small number of cases where the employees concerned are given the option of choosing a performance based bonus or salary advancement).
A greater proportion of pay is generally based on performance and therefore at risk.
The DEWRSB survey shows that 84% of agencies (covering 90% of APS SES employees) provide pay incentives (98% in the form of cash bonuses and 33% in the form of salary increases). Of those SES employees who were eligible, 80% received an incentive payment in 2000.
18% of SES Band 1 increasing to 35% of SES Band 3 were last year eligible to participate in agency retention pay plans.
Arrangements for executive remuneration generally allow for greater flexibility in the salary range that applies and capacity for differential location of employees in that range, as well as greater flexibility in total remuneration packages. The DEWRSB survey shows a significant widening of SES Band ranges.
There is increasing differentiation emerging across agencies for executive remuneration (including performance based elements).
In some instances access to performance-based remuneration is limited to staff who choose to sign an AWA.

In the private sector a common option for rewarding high performance is through the issuing of shares to staff, which has the effect of linking at least a notional component of income to the performance of the organisation overall. This mechanism is used by at least one private sector employer we interviewed.

In the public sector this sort of mechanism is less available and in the APS not at all. However, several of the APS agencies we interviewed are providing a bonus based on organisational performance paid to all employees or those rated as performing.

4.1.2 Issues

There is universal acceptance of the importance of performance management. However, arguments surround the usefulness of performance bonuses or salary at risk. Proponents argue that it is an effective way of getting people to focus on making the performance management system work and comply with the process, putting ratings and raters under scrutiny. They say it is a powerful tool for sending a message and aligning people with organisational objectives. Interestingly almost all the proponents cited the outcome of getting people to focus whereas the proposition that money is a strong motivator was only cited by a couple. Some proponents see bonuses as an effective method of rewarding superior performance even where they do not see it necessarily as a means of driving performance.'

Performance pay is certainly not a motivator to work harder. Managers who think so, particularly in the public sector, misunderstand what drives their people. Rather, the way I use performance pay is to acknowledge or recognise high performance after the fact. A personal thank you is one thing; a personal thank you and a meaningful cheque means that you are serious. You honour and value the person and their performance'.

Performance pay will keep going because it puts pressure on managers to carry out performance appraisals … On balance it helps to make performance appraisals happen, it makes it more honest'.

Critics argue that there is no conclusive research proving that pay at risk or bonuses are effective at improving organisational performance. Also they can cause friction, a sense of injustice and can undermine team solidarity.'

I am not aware of any place where it works. I would be happy to be shown literature which proves otherwise'.

On the other hand…

The very widespread and increasing use of performance linked remuneration by the private sector at executive levels throughout so much of the developed world points to their confidence in performance pay as a tool for organisational performance improvement'.

Proponents of bonuses or salary at risk argue that the problem with base salary movement linked to performance is that it locks the employer in to a (superannuation linked) pay level even if performance drops subsequently.

Others contest this assumption about employees' motivation pointing out that is implausible that effort rewarded with a pay rise would be followed by a diminution of effort. If performance drops, they say, then that is an issue for the management of poor performance, requiring a whole range of interventions, not just the big stick of pay level, albeit that might be an issue at some point.

In today's more flexible labour market APS employers also want the ability to be able to reward skill gained and applied without the contrivance of created vacancies and promotion processes. AWAs are used to provide APS employers with the means, for example, to retain specialist staff without promoting them into supposedly generalist SES management jobs, to add salary points into the top of a pay range or to pay staff bonuses for staying with an agency for a specified period or project.

The different approaches in different agencies reflect in part the different views of CEOs. It is, however, important that without constraining their operations, CEOs appreciate the other environmental shapers of performance management in their particular agencies, and design their approach in the light of such considerations as:

How best to ensure performance feedback occurs universally and regularly now and into the future;
How best to ensure performance feedback is clear and honest, and consistent;
The appropriate balance between positive feedback and criticism, to best motivate improved individual performance;
The importance of monitoring and rewarding an individual's development over time, as well as monitoring individual's performance relative to others;
How best to manage under-performance to reverse a deterioration and/or to remove an obstacle to the performance of a team;
How best to ensure systematic succession planning and career planning;
The importance amongst staff is for pay to reflect individual performance as well as work value and market consideration.

Even strong supporters of performance bonuses accept that these are but one option.

To quote a supporter of performance bonuses, 'If there was no performance pay, it would not be the end of the world - the public service would not stop and the very best would not leave - but we would not be as effectively managed'.

To summarise in relation to performance related remuneration; all APS agencies use it, which is clearly consistent with good practice. They differ in their construction, with CEOs accepting that diversity is appropriate and that no one system is inherently superior. Not only do the limits to our capacity to measure outcomes with confidence inhibit such judgement but there is also a fundamental consideration about alignment. One of the challenges in performance management is to align the design of any system with the culture (or desired culture) of the particular organisation.

4.2 Recognising and rewarding teams

Proponents of team-based reward and recognition argue that this encourages employees to work collaboratively, to achieve goals and to share resources and information rather than compete for them. They argue that complex organisations require employee collaboration to succeed. Critics argue, however, that concentrating on team performance robs the organisation of the opportunity to focus on individuals and upgrade the quality of its employees. It detracts from the achievement of individuals by not differentiating clearly enough between various levels of contribution, and devalues individual excellence. At a practical level, critics highlight problems in comparing teams, and handling problems of poor performers in good teams and good performers in poor teams.

Nonetheless, there is considerable attractiveness in reward or recognition structures that embrace both individual effort and the contribution of teams.

Team-based reward and recognition should not be inherently in conflict with much of the workplace culture of the APS. However, it is not widely practised except in some agencies, which measure teamwork as part of individual performance. This was singled out in several interviews as a challenge for current performance management systems.

One agency established a team-based reward and recognition system but abolished it when it proved too problematic with staff and lost widespread support.
Interestingly a small APS agency had eschewed individual performance-related remuneration but decided instead to reward staff on the basis of organisational performance. They believed that this had produced a several-fold increase in organisational productivity.

The research for this report observed a number of different approaches to taking account of the impact of the individual on the group in individual appraisals. These were all aimed at ensuring that people did not achieve their individual targets at the expense of the well being and/or performance of other staff, the team or the organisation as a whole.

Many organisations give strong weighting to alignment with corporate values and behaviours that are in accordance with these values. Some went as far as ensuring that financial rewards linked to performance were not available to anyone unless they met a minimum standard on both performance against targets and alignment with the values/behaviours of the organisation.

Another approach to achieving a balance between individual and group performance was found in some public companies where the formula for calculating performance-linked remuneration contained a percentage for individual performance, a percentage for the group performance and a percentage for the overall performance of the company.

4.3 Other Rewards and Recognition

Many organisations recognise the benefits of giving rewards and recognition more immediately than is possible through an annual performance cycle. These include both formal and informal rewards and recognition and range from nominating individuals for Australian honours and awards to the simple, but effective, thank you for a job well done. The range of strategies actually used has increased in the APS in the last few years, as agencies have developed human resource management strategies tailored to their own organisational needs.

Listed below are good examples of the types of rewards and recognition being used:

4.3.1 Formal

Nominating individuals for formal Australian Honours and Awards including the Order of Australia, the Public Service Medal and the Conspicuous Service Decorations. These may also recognise achievements outside of the APS.
Secretary's Awards and Commendations, which can be awarded to both individuals and teams, are usually presented at public award ceremonies.
The Australia Day awards sponsored by the National Australia Day Council, which is awarded to individuals or teams. In one organisation outsourced providers sponsor the award.
Employee of the Year, Monthly Rewards or 'Instant Recognition' Rewards, which can range from the awarding of a certificate to small monetary rewards such as a dinner for two, movie or theatre tickets or gift vouchers. There is now considerable variety: one organisation even provides a prized car parking spot next to the CEO for the month! These types of awards can be either management or employee initiated (awarded by the social club, staff consultative committee or branch/divisional heads).
Access to specific learning and development opportunities such as leadership development programs, specialist knowledge development, overseas conferences or representation.

4.3.2 Informal

Informal rewards and recognition are very effective and often one of the things that employees seek most. These types of rewards and recognition being used include:

Timely praise and thanks to both individuals and teams (private thanks, comments at meeting/morning tea, comments written on work undertaken, e-mail).
Small presentations or gestures of appreciation from managers.
Provision of work/home balance programs which provide employees with the flexibility to manage both work and home commitments. This may include time off in lieu arrangements, job sharing, part time work, family rooms, workbased childcare facilities, home-based work, provision of carer's leave and health programs.
Publicity of achievements such as articles in internal or external newspapers and magazines and public recognition through external awards and recognition.
Provision of additional recreation leave to employees who have been required to work long hours in order to meet performance targets.

4.4 Conclusion

In summary:

All APS agencies apply performance linked remuneration in line with the appropriate legislative and policy frameworks;
Performance management works best where there is a strong link between organisational culture (or culture to be achieved) and the types of rewards and recognition used, alignment between outputs/outcomes and values/behaviours and rewards and recognition, and consistency in application of rewards and recognition;
When these factors are aligned rewards and recognition strategies can be a credible and effective part of a performance management system. Where that is not the case, reward and recognition can undermine the credibility of the whole system;
Best systems make good use of point in time rewards and recognition and there are a lot of good ideas out there to pick from;
Views vary on the effectiveness of performance-related remuneration strategies - but where the method chosen is aligned with the culture of the organisation or the culture you are trying to achieve, and supported by employees, it is a very effective way of reinforcing a performance-based culture; and
While performance linked remuneration is a motivator for many people it is ranked behind other motivators such as the quality of work, the work environment, intellectual stimulation, interaction, achievement, and worthwhile notion of public service.

MAC considers the various approaches to performance management build on and complement these frameworks by linking other systems of recognition and reward ranging from positive feedback through to performance bonus or other performance related rewards. However, it is important to keep performance related remuneration in perspective as only one component of performance management and of broader approaches to reward and recognition, and to acknowledge the diversity of views and approaches on this subject.

1 State of the Service Report 1999-2000, Public Service and Merit Protection Commission, pages 73-74.