Explaining cross-country differences in performance-related pay in the public sector

Abstract

This article aims to explain cross-country variations in a paradigmatic element of the new public management reforms: the shift from low-powered incentives (i.e., flat salaries) to high-powered ones (i.e., performance-related pay [PRP] systems). It presents a theoretical model based on insights developed for understanding the success of performance-related incentives in the private sector. Economic literature has underlined the need for a system of separation of interests within firms to make promises on incentives credible. The interests of those who benefit from the incentives (e.g., owners) must be relatively different from the interests of those who manage the incentive system (e.g., managers). Similarly, this article argues that incentives in the public sector are more likely to be implemented in those administrations in which there is a relative separation between those who benefit from the incentives (e.g., politicians) and those who manage the incentive system (e.g., senior civil servants). Where the interests of both groups overlap (e.g., the careers of senior officials and politicians are intertwined), incentives will be less credible and thus less likely. A quantitative analysis for 25 Organization for Economic Co-operation and Development countries confirms that PRP is significantly more used in contexts with clear separation of interests between politicians and senior civil servants. © The Author 2009.