Earlier this month, Cabinet Office minister Pat McFadden announced radical plans to reform the UK’s Civil Service. The overall strategy (such as it appears) is to work toward a central Civil Service that “would and can become smaller”. Performance-related pay is a key component of these reforms, meaning senior civil servants who fail to meet expectations could be “incentivised” to leave their jobs.

Whilst few details are available, such tactics hail a shift in performance management in the public sector. Alongside performance-related pay, senior civil servants will also face new measures such as development plans, and perhaps even dismissal, in a bid to combat poor results, says McFadden.

The private sector has long extolled the virtues of performance-related compensation: is this move by Labour, then, a canny way to strengthen the nation’s public services? Or is McFadden swaggering on a bandwagon alongside Elon Musk, mindlessly waving a chainsaw at supposed public-sector bureaucracy?

Systems designed to compensate people for performance may helpfully yield data that encourages new growth.

What are the benefits of performance-related pay?

Performance-related pay aims to align motivation, effort and outcomes with agreed organisational ambitions. This appears a sensible way to maximise the value of investment in people, and to ensure that work done is relevant and of good quality.

To link pay to performance likewise feels fair on a human level. After all, should organisations not compensate employees for the value they create? A common complaint we hear about managers is how they fail to distinguish between low and high performers, either on the salary slip or through opportunities given.

Systems designed to compensate people for performance may helpfully yield data that encourages new growth. Incentives can nudge individuals to do more for their colleagues, customers and other stakeholders – all with the expectation of a fair return.

At the heart of the variable pay strategy is a message that is typically welcomed by strong performers: ‘We value you for the difference you make, and not simply for parking yourself at a desk for 35 hours.’

Surely, only those who perform at low or average levels, those who expect to be paid merely for turning up, will reject compensation linked to performance?

One may argue that both private and public sectors owe a duty of care to the employees who achieve the best outcomes.

Performance measurement systems are notoriously easy to ‘game’.

What are the challenges of performance-related pay?

As with most things relating to humans and their organisation, the question is a complex one. Various factors mean that performance-related rewards are hard to get right.

Performance is collaborative

Organisations are, by design, collections of individuals who strive toward shared aims. Rarely can one person secure an outcome without the aid of colleagues, be they in the same or distant teams. For example, product sales are enabled by people in technology, compliance and HR.

Performance is thus a collective effort: Anglo norms of individual compensation are hard to apply meaningfully across a value chain of rising complexity. This is perhaps why a trend is emerging toward team-based performance measurement, although this takes us back to where we started, where rewards for a given individual may lack merit.

Outcomes versus value

Collaborative processes render individual performance hard to define or measure. The same is true for contributions themselves. I may struggle to close deals – my main objective – and yet add immeasurably to the team’s capacity by offering support to colleagues or championing culture and values.

Performance is typically evaluated on concrete outcomes. Yet much of the value we create is along the way, through building relationships or by enabling practices that serve longer-term ambitions – even when such efforts are not written into the job specification. In short, performance, high or low, is hard to define.

Similarly, performance-related pay strategies typically direct attention to extrinsic rewards, whereas many employees cherish the intrinsic rewards they drive from doing a good job. Here, simplistic management thinking can lead to strategies that miss the point.

Outcomes versus bad luck

No matter how well we perform, we may not achieve our desired outcomes. Collaboration means that…

• Colleagues may let us down.
• Global markets may shift.
• Customers may resign.
• Budgets may be slashed.
• Systems may yield incorrect data (consider the Post Office scandal).

Our limited control of the complex systems in which we work makes it hard for managers or HR teams to define, see or assess the value of an individual contribution.

Whilst perfromance-related pay may seem fair on paper, in practice it may leave people feeling aggrieved – or secretly happy that they are paid more than they deserve.

Gaming the system

Performance measurement systems are notoriously easy to ‘game’, with people bending their effort out of shape to meet the key performance indicators (KPIs) against which they are assessed.  A few also cheat: ‘I shall rate you as Excellent on the annual 360 appraisal if you do the same for me.’

Such gaming makes a mockery of the variable pay system; it also takes individuals and teams away from what matters most to colleagues and customers. Imagine, for example, a world where civil servants are paid on how many calls they answer, rather than on how many citizens’ problems they solve.

Variable pay is better wielded not as a stick but as a carrot.

Problems of bureaucracy

The intractability of KPIs brings us to the wider concern of bureaucracy, the very scourge that McFadden and Musk say they want to rout (or hack with a chainsaw). Performance management systems are typically (as I set out in How relationships beat systems), exercises in bureaucratic goal-setting, evaluation and control.

Variable pay risks are yet another complication. When organisations try to measure what cannot be measured and employees strive to hit simplistic targets, this detracts from vital relationship-building and the creative solving of shared problems.

Finally, and consistent with bureaucratic culture, the Labour narrative on radical plans appears to emphasise penalties for shortfalls, rather than incentives for better performance. This demotivating mantra will rattle and alienate a Civil Service already worried about savings targets, a further bureaucratic tool.

Making sense of performance-related pay

What can we learn from the Cabinet Office’s latest plans? If organisations are to avoid a culture of fear and anxiety, and indeed uphold rather than harm performance, variable pay is better wielded not as a stick but as a carrot.

Any system must be designed with the complexity of modern work in mind. We must recognise that people and relationships matter and humbly accept that performance cannot be readily defined, seen or measured. Acknowledging that numbers are a seductive fantasy about the real world, also goes a long way.

After all, any bureaucratic attempt to curb bureaucracy will only aggravate the very ills the effort is designed to cure.