Preparing for performance

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Relating managers' pay to results is one tool to improve services and efficiency.

If the recent furore over senior Whitehall civil servants' £128m bonuses is anything to go by, headline writers will be gleeful at the prospect of managers in charge of fortnightly bin collections and speeding tickets (to name two Daily Mail hobbyhorses) taking home bumper performance-related bonuses.

Performance-related pay (PRP) as a concept has been around since the 1990s, largely at senior management levels, both within Whitehall and, increasingly, within local government. But in a post-comprehensive spending review environment, where value for money and efficiency savings are very much the mantra, extending PRP to lower managerial levels is rapidly moving up the agenda.

Essex CC is currently embarking on a radical extension of its PRP scheme (LGC, 5 June). The council introduced a scheme for its 250 senior managers in 2006-07. Now, it is in the ground-breaking process of extending it to 1,500 middle managers by March 2010.

"It very possibly might go down another layer. But that would, of course, have to go through a consultation exercise and we would need to make sure we were aligning pay and performance throughout the organisation," says Keir Lynch, director of human resources and customer excellence, who only joined the council eight weeks ago from the Bank of Ireland.

In the past, pay at Essex was banded but there was no link to individual performance. There was an element of incremental payments but no variable pay formula, Mr Lynch points out.

"How it works now is that you will agree with your manager a set of objectives or performance standards. There are two dimensions to this: what we want people to do but also how they do it," he explains.

"Then there are regular discussions about your progress and regular feedback during the performance cycle, with people being rated on five levels of performance, ranging from 'under-achieving' through to 'exceptional'," he adds.

Managers adjust the base salary accordingly on the basis of an individual's performance. "They have the freedom to really reward exceptional performance. There is not a fixed grid of 1%-2% or whatever. So what we doing is stretching the range in terms of paying people a higher base salary," says Mr Lynch.

On top of this, managers have the discretion to award one-off bonuses or, say, split a three-year project into three one-year milestones and reward performance on that basis.

Overcoming suspicion

But, amid suggestions by unions that some 15% of staff affected could face having their pay frozen, Mr Lynch concedes one of the big challenges has been overcoming the natural fear and suspicion that surrounds PRP schemes. In May Unison, for example urged managers affected by the scheme not to opt out of the annual collective pay award negotiated by the union.

"It is about being honest and having lots of open communication. There have been lots of briefings and workshops and communication. We've also allowed managers to be involved in setting the scheme up," says Mr Lynch.

"We've made it clear that, if you are going to have a distribution, then you are going to have winners and losers. It is our responsibility as a council to provide the support mechanisms needed by working with people and dealing with their performance."

While it is feasible that consistently poor performers would have to go, Mr Lynch stresses that this "will be the last resort". However, having your base salary frozen should be a clear signal that things are not as they should be, he adds.

While it is early days, when it comes to tangible results, what is already clear is that there is much more talk about and focus on performance, says Mr Lynch.

"It is now much more the language of the organisation. We are also recruiting more high performers into the organisation. And we have had cases of people who would have perhaps left in the past that we have been able to keep," he points out.

Yet, if local government is going to make PRP into a workable reality, senior managers will first need to get their house in order when it comes to managing and appraising performance, according to recently published research by consultancy Deloitte.

Its Bold Moves survey of senior figures in 10 central and regional government organisations, found that nearly half felt that financial incentives, especially at more junior levels, were often weak and did not encourage greater motivation.

In addition, many felt such carrots to be counterproductive because they caused antagonism.

Three-quarters felt that junior and middle-ranking managers were sometimes poorly equipped to hold effective performance conversations with their teams, with weak or 'soft' appraisals, even for those known to be poor performers, often undermining the whole structure.

"There is a skill set required by senior managers in the organisation to be able effectively to appraise performance, give feedback and deal with poor performance," points out Mark Lawrie, partner, local and regional government, at Deloitte.

"Ranking, for example, who is in the top or bottom quartile is a skill set that has not been developed a great deal in the past. So if an organisation just launches straight in it could produce some damaging schemes," he adds.

Of course, the elephant in the corner with any PRP scheme is the issue of weeding out poor performers.

"If it is followed through to its logical extent, then you will see workforces being reduced in numbers. But that should not in itself be the intention of the scheme. It is important that a PRP scheme is not introduced as a way to reduce headcount but is something designed to improve capability and performance," explains Mr Lawrie.

The risk is that what ends up happening is a tokenistic scheme where, say, a manager is still taking home 95% of their pay however they perform, adds Chris Stirling, director of Deloitte's human capital business.

"In this scenario, the overheads of putting in place PRP will in all likelihood exceed the incentivisation effect. If you employ, say, 200,000 people but only two or three are managed out because of poor performance then you either have an organisation full of superstars or you are not managing that poor performance effectively," he says.

Other challenges include developing a scheme that is meaningful and subtle enough to be able to reward managers working on four, five or even six-year projects, as is often the case in local government.

Whatever the challenges, and particularly given local government's ageing demographic, the retention and attraction of talent, as much as targets, is likely to be a key catalyst in encouraging more local authorities to go down this route, predicts Deloitte's Mr Lawrie. Either way, what is clear is that, like it or not, PRP is not going away any time soon.

"Over the next five years, I think performance improvement is going to have to start being addressed," he says. "It is about keeping talent within the organisation, developing it and getting more from it.

"I think there is going to be a steady move in this direction. A lot of people are going to be watching what happens at Essex." 

Pros and cons of prp

Buckinghamshire CC is one authority that will be keeping a close eye on Essex CC, as it is also considering going down the PRP route.

Like many councils, while it has strong performance-management systems in place they have, as yet, no link to pay, explains Gillian Hibberd, the council's corporate director (people and policy).

"We have 15,000 employees, so if it is something we do it cannot be done lightly. I think it would probably take at least two years to introduce it and there would of course need to be a lot of work on designing it, consulting on it and piloting it," she says.

Nevertheless it is something the council is looking at seriously.

"We are commissioning work to look at how we might develop stronger links between organisational direction and the pay framework," she points out, although stressing it is early days yet.

Ms Hibberd recognises that telling colleagues, of whatever level, that their performance needs to improve and, if not, their pay will be affected, is one of the hardest conversations a manager can have. So, if you go down the PRP route, you need to have done all the advance work properly.

"We need to be supporting managers to make those decisions, offering more training and more support," she argues.