Performance - Standards - Rewards

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PROBLEMS WITH THE IMPLEMENTATION OF PERFORMANCE
MEASUREMENT SYSTEMS IN THE PUBLIC SECTOR WHERE
PERFORMANCE IS LINKED TO PAY: A LITERATURE REVIEW DRAWN
FROM THE UK
MIRAL METAWIE
PhD student in Industrial Relations
KBS Annex
University of Kent at Canterbury
Tel: 01227 82-3375
E-mail: mm248@kent.ac.uk
DR. MARK GILMAN
Senior Lecturer in Industrial Relations/HRM
KBS
University of Kent at Canterbury
CT2 7PE
Tel: 01227 823797
Fax: 01227 761187
E-mail: m.w.gilman@kent.ac.uk
3rd
Conference on Performance Measurements and Management Control (Nice
September 22-23, 2005)

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Abstract
According to Robert Kaplan and David Norton, (1992; 1996; 2001; 2004), 'the final
linkage from high-level strategy to day-to-day actions occurs when companies link
individuals' reward programs to the Balanced Scorecard'. The objectives of this linkage are,
first, to focus employees' attention on strategic priorities, and second, to provide extrinsic
motivation by rewarding employees when they and the organisation reach their targets.
Performance related pay (PRP) which has been widely introduced especially in the public
sector holds out the promise of providing such a link. Yet, in practice performance
measurement in the public sector has been a problematic area with PRP. This paper will
attempt to address the problems of applying performance measurement systems (PMS) in
linkage to pay systems in the public sector through reviewing the literature of the UK.
An extensive portion of the literature on PMS has been concerned with the economic
benefits of the application of such systems as strategic control systems to increase
productivity through monitoring employees’ activities and influencing their behaviours
(Kaplan and Norton, 1996b; Neely, 1995). This however, brings attention to two issues that
raise doubts in the lucidity of this literature and the validity of using, mainly, economic
theories to assess the benefits of PMS. The first is that though one can note that the most
important element influencing organisational performance is the human factor, economists
and scholars have mostly referred to the success of performance measurement (PM) and
incentive systems in terms of productivity, which though incorporating both financial and
non-financial measures still ignores employee relations and organisational behaviour
theories. In fact if we look at the assessment of PRP systems in several industries within the
public sector (e.g. Civil Service, Local Government, and Nationalized Industries) we come to
the conclusion that whilst it may be successful in generating increased productivity;, its
impact on employees’ behaviours, such as motivation, has been proved negative in most
research. The second is that while there is a logical link between PRP and PMS, in practice
such links seem less coherent than suggested in the literature (e.g. Kaplan and Norton,
1992; 1996b). Yet there is a lack of research on what might be the cause of such
incoherence, even worse, there is a lack of research on the strength of such link. In other
words, overlooking the link between rewards and PMS, leads to neglecting the problems
inherent in measuring the performance of the public sector and the difficulties in finding
unproblematic performance measures.
By looking into different fields namely industrial-psychology, sociology and
economics this paper will identify problems of performance measurement when performance
is linked to pay (PRP). For the purpose of this paper, a literature review of the UK public
sector is conducted in order to highlight gaps in the research area of PRP and PM.

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INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION
There has been a substantial body of literature on performance measurement in both
the public and the private sector. Though there have been some differences of interest in
researching both sectors – in the fact that while more clear examples of application and
success have been reviewed in the private sector very few are found in the public sector
where it has been reported more problematic – most papers assessing the work on
performance measurement and performance measurement models have been mainly
presented in the management accounting literature. Historically, PMS have, therefore, been
restricted to the traditional financial accounting measures such as Return on Investment,
Earning per Share, and Economic Value Added [Kaplan and Norton, 1992; Morisawa, 2002;
Neely, 1995; Ballantine and Brignall, 1996], and to the use of frameworks and theories
primarily drawn from the discipline of economics (Otley, 1999).
This approach, viewed as successful in the past; has proved more deficient in today’s
rapidly changing environment driven by political, economic, technological, and social forces.
Politically the increasing importance of corporate governance has held organisations
accountable for not only its economic performance but also its social performance which
affects the wider external environment. In other words, there has been a shift from adopting
a shareholders approach where performance measurements are concerned with the
profitability of the business to a stakeholders approach. Due to the growth of the importance
of the human resources of organisations, there has also been an increased emphasis on the
behavioural aspects of management accounting though still through an economic approach
often related to the agency theory (Otley, 1999) – i.e. assessments of the impact of
accounting systems on employees’ behaviours such as increased effort, distortion of results,
and productivity rather than the softer aspects such as motivation, commitment, and job
satisfaction. Similarly, economically, there has been a growth in the importance of the
human factor as a calculative receptor, and hence in the need to affect its daily activity
through a management control system. Consequently, since the early 1990s more balanced
approaches incorporating multi-dimensional performance measures were developed. These
include the balanced scorecard developed by Kaplan and Norton (1990-1992), the
performance pyramid (the SMART system) developed by Cross and Lynch (1992), the
results/determinants matrix (Fitzgerald et al., 1991), and the Performance Prism (Neely et
al., 2000-2001).
Before a brief review of these approaches is presented it is important to turn attention
to defining performance measurement. In order to identify the problems of PMS, the
following section includes a review of the definition of performance measurement, the
rationale behind its implementation and a brief review of the advanced approaches
mentioned above. The focus is on the balanced scorecard which has received more
attention in the literature, is the most frequently used across sectors, and has also been
used for reward reasons.
PERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMENT: DEFINITIONENT: DEFINITIONENT: DEFINITIONENT: DEFINITION
Though the term performance measurement has been used since the late 1970s,
there has not been a universal definition for the term. The Government Accountability Office
(GAO), 1980, defined performance measurement as “an assessment of an organisation’s
performance, including the measures of:
• Productivity, which quantifies the outputs and inputs of an organisation and
expresses the two as a ratio. Generally, the ratio is expressed as output to input.
• Effectiveness, which determines the relationship of an organisation’s outputs to
what an organisation is intended to accomplish.

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• Quality, which examines an output or the process by which an output is
produced. Quality is indicated by attributes such as accuracy (or error rate),
thoroughness, and complexity.
• Timeliness, which evaluates the time involved producing an appropriate output.
(Citizen-Driven Government Performance, 2004)
The most commonly used definition of performance measurement is that of Neely,
(1998): “the process of quantifying the efficiency and effectiveness of past actions through
acquisition, collation, sorting, analysis, interpretation and dissemination of appropriate data”
(as cited in Moullin, 2003, p.3). Though this definition has not stated what the nature of the
data collected should be (i.e. financial vs. non-financial) it seems to be concerned with the
process itself of measuring performance in the management accounting field rather than its
purpose, and restricted to quantitative measures rather than qualitative ones. Hence,
Moullin, (2002), defines performance measurement in terms of its purpose emphasizing the
assessment of how well organisations are managed and the value they deliver for
stakeholders.
Based on the above and using a contingency approach, particularly as in the public
sector uncertainty lies in the problems of linking the means (inputs) to the ends (outputs)
(Johnsen, 2000), it will be highlighted that performance measurement is a contextually
defined phenomenon in that similar measures may have varying importance and meaning in
different organisations (Euske et al., 1993). Hence, scholars tend to focus on issues
associated with the design of PMS (e.g. Neely et al., 1995), the values and characteristics of
performance measurement (e.g. Newcomer, 1997), the identification of the measures the
system should include in different industries (e.g. Haktanir and Harris, 2005, in the hotel
industry; Goddard et al., 1999; Ballantine et al., 1998, in the public health services) and the
development of new performance measurement frameworks.
It has been widely argued that organizations using balanced PMS report better
performance than those that do not (Lingle and Schiemann, 1996). PMS have undergone
considerable changes in the last twenty years with a number of different models developing
to help organisations define an appropriate set of balanced – financial and non-financial –
performance measures. Yet the most popular model is that of Kaplan and Norton, (1990-
1992), the balanced scorecard. The following section, hence, provides a brief review of the
most commonly used balanced frameworks as well as the latest developments, highlighting
both their strengths and weaknesses, which, in turn, will help identify problems of using
these models in determining pay.
PERFORMANCPERFORMANCPERFORMANCPERFORMANCE MEASUREMENT MODELSE MEASUREMENT MODELSE MEASUREMENT MODELSE MEASUREMENT MODELS
Performance measurement has received considerable criticisms in the 1980s and
early 1990s for being restricted to financial measures and robust accounting methods in
evaluating the performance of organisations or more specifically their profitability. Mostly, it
is argued, that these measures ignore the softer less measurable performance indicators as
well as the relationship between different business units and their variable objectives (Euske
et al., 1993; Ghalayini et al., 1997; Jagdev et al., 1997; Kaplan and Norton, 1992; Nanni et
al., 1992; Neely, 1995). Many researchers have also referred to the number of problems that
arise from relying on such systems such as short-termism (Crawford and Cox, 1990;
Ghalayini et al., 1997; Hill, 1995; Kaplan and Cooper, 1998; Neely, 1995). In response to
these criticisms and dissatisfactions with the traditional system new performance
measurement frameworks have developed, out of which, the most well-known and
commonly used is the balanced scorecard.

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Balanced scorecard
The balanced scorecard was developed by Norton and Kaplan, (1990-1992), to
include both financial measures that report the results of actions already taken and
operational measures on customer satisfaction, internal processes, and the improvement
activities – operational measures that are drivers for the future financial performance (Kaplan
and Norton, 1992, p.71). More specifically, the balanced scorecard is based on the
combination of four key perspectives in performance measurement: financial perspective,
customer perspective, internal business processes, and learning and growth. Evidently,
unlike the traditional systems the balanced scorecard puts strategy, vision and
communication in the centre rather than control.
Figure 1. balanced scorecard four key measures
(Source: Paul Arveson, 1998 accessed, 24/06/05)
Evidence on the success of the balanced scorecard has been reported across many
industries and within the public sector in the US (Hepworth, 1998). Though, attention was
drawn to the complexity of the system and the need for commitment towards accepting it for
the success of its application, and many pitfalls and problems were identified in practice
(Kaplan and Norton, 1996b), no failures of the concept were identified (Hepworth, 1998).
According to Ghalayini et al., (1997, p.209), the main weakness of the balanced scorecard is
that it is primarily designed to provide senior managers with an overall view of performance;
thus, is not intended for, nor applicable, at the factory operations levels. Moreover, as a
multi-stakeholders approach, the balanced scorecard has been criticized for not considering
the interests of all stakeholders, such as suppliers, competitors, regulators, and community
(Neely et al., 1995; Ghalayini and Noble, 1996; Atkinson et al., 1997). Brignal and Modell,
(2000), further argue that the balanced scorecard literature has neglected the relative
bargaining power of different stakeholders in determining whose interests will predominate in
an organisation and the consequent effects on what aspects of performance are measured,
reported and acted upon.

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The Performance Pyramid (SMART)
Cross and Lynch, (1992), have recognized the hierarchical levels that exist within an
organisation and thus provided a link between the performance measures at each of those
different levels so that each function and department strives towards the same objectives
which they placed on the summit of the “pyramid”. This model shows recognition for the
importance of the human resources in achieving the company’s vision by placing four key
operational measures (quality, delivery, cycle, and waste) at department and workcentres on
a daily basis at the bottom of the pyramid. The middle level indicators which bridge the gap
between the top level indicators and the day-to-day operational indicators include customer
satisfaction, productivity, and flexibility. Although this model considers layers between the
business units and individual business activities, and hence integrates corporate objectives
with operational performance indicators it also combines financial, non financial as well as
operational and strategic indicators. It does not, however, provide any mechanisms to
identify key performance indicators, nor does it explicitly integrate the concept of continuous
improvement (Ghalayini et al., 1997). It should be also noted that the system has not been
empirically tested.
The Performance Prism
The performance prism is considered the latest development in performance
measurement. As the result of noting that none of the existing frameworks broadly focused
on stakeholders, Neely et al., (2001), recognize the importance of taking a holistic approach
to stakeholder management in today’s culture of involvement. Its advantages are that it
explicitly addresses all stakeholders – not only investors but also customers, employees,
suppliers, regulators and communities (Powell, 2004). According to the performance prism
vision one of the fallacies of performance measurement is that measures should be derived
from strategy. Yet to derive measures from strategy is to fundamentally misunderstand the
purpose of measurement and the role of strategy. Hence performance prism starts its
process by thinking about the stakeholders and what they want. In fact out of the five facets
of the performance prism the first is stakeholders’ satisfaction. The other four include
strategies, processes, capabilities, and stakeholders’ contribution. By calling it prism, Neely
et al., recognize the complexities surrounding performance and its measurement. Though
this model has only been developed recently, it has been tested in few cases (e.g. DHL,
London Youth, and the House of Fraser), where feedback has been overwhelmingly positive
(Neely et al., 2001). However, given that the attention is placed on the process of finding the
right strategies that performance measurement should be based on, performance prism
tends to neglect issues such as how the performance measures are going to be realized,
hence, little concentration is given to the process of designing the system (Tangen, 2004).
At this stage it should be noted that although there are numerous balanced
performance measurement frameworks, few researches have looked into their effectiveness
and the economic benefits they yield (Neely et al., 2002) – with most research focusing on
the balanced scorecard in particular as it remains the most popular measurement framework
– and even less have explored the problems associated with their application.
This paper highlights the problems that still exist, although rather neglected, in the
application of current PMS in the public sector when performance is linked to pay. By using a
variety of theoretical approaches, not just thos of economics and accounting, it will also
identify new problems that were ignored in narrow evaluations of the systems. Given the
purpose of this paper, the following section considers the nature of the public sector, the
history of performance measurement, and the development of its application in relation to
rewards across the sector.

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PERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMPERFORMANCE MEASUREMENT INENT INENT INENT IN THE PUBLIC SECTORTHE PUBLIC SECTORTHE PUBLIC SECTORTHE PUBLIC SECTOR
Like the private sector, public sector organisations around the world face pressure to
improve service quality, lower their costs, become more accountable, customer focused and
responsive to stakeholders’ needs. While PMS have long been advocated as successful in
the private sector, it was once, considered impossible to measure performance in the public
sector. The first attempts at the evaluation and review were associated with the failed
attempts at large scale strategic planning in the 1970s and it was not until the appearance of
organisational and managerial reforms introduced by the conservative governments in the
1980s and 1990s that public sector performance measurement became firmly established
(Boland and Fowler, 2000, p.417). It should be noted at this stage that the justification of this
paper for drawing evidence from the UK in particular is based on the fact that New Public
Management prescriptions have been applied in that country more consistently than in many
other countries over a quarter of a century (Cutler and Waine, 2005).
Over time there has been change in the form of PMS in the public sector in the UK
with most systems moving towards a balanced scorecard approach. In a review of the use of
performance systems across the UK public sector, Goddard and Mannion, (2000), conclude
that there have been clear shifts from collecting data on a narrow range of dimensions of
performance to a broader range of performance indicators based on the assessment of the
activities of the organisation. Additionally, shifts are also clear in the use of performance
information; instead of being used for internal purposes they are now used for external
control and accountability. There have also been shifts away from informal performance
assessments to formal peer reviews, as well as linking PMS to financial rewards (Propper
and Wilson, 2003).
Examples of PMS in the public sector exist in schools where there are two main
systems for measuring schools performance: OFSTED (Office for Standards in Education)
established in 1992, which involves an in-depth evaluation of the school’s processes and
outcomes, and PI (Performance Indicators) which involves the collection and publication of
summary performance indicators including truancy rates and GCSE pass rates.
Furthermore, in the NHS, the government has adopted a balanced scorecard approach in
their measurement system “Performance Assessment Framework” (PAF). As noted in a
recent consultation document:
“The Performance Assessment Framework … is based on the balanced
scorecard approach. The use of the balanced scorecard allows different
organisations to get more rounded view of performance by identifying different
key elements of performance and understanding how changes in them may have
implications for others.”
(Department of Health, 2001, p.2 as cited in, Chang et al., 2002, p.350)
Similarly, the government modernization agenda has been witnessed in the Civil
Service Reform. In 2002, Sir Andrew Turnbull, (head of the home civil service) has stated his
personal vision for the UK Civil Service in 2005 is:
“ Be respected as much for its capability to deliver as for its policy skills;
Think creatively and operate strategically; Be an organisation that young and
successful people want to join and work with; and Create value for the public
and have values of:
• integrity and trust
• impartiality and readiness to serve all citizens and governments

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• recruitment and advancement on merit
• a make-up that reflects our society ”
It was also stated that emphasis is placed on the civil servants’ own personal
performance targets and how these relate to both their departments’ and government’s
policy objectives and outcomes (Stephenson, 2003).
Overall, it can be stated that, performance measurement is a central aspect of the
public sector reform.
It is essential to point out at this stage that performance measurement in the public
sector has had several labels differing between disciplines and perspectives; for example “in
public administration both review, evaluation, cost benefit, and policy analysis are employed
as characterizations (Simon, 1947; 1997; Wildavsky, 1966, 1969, 1978); in contingency
theory (Thompson, 1967) labels as search, surveillance and monitoring were used, and in
the resource dependence perspective (Pfeffer and Salancik, 1978) performance
measurement was termed as benchmarking, environmental scanning, and monitoring”
(Johnsen, 2000, p.7).
While the term performance measurement has been restricted, in some papers, to
the old financial-based measurement systems in the public sector most PMS are now based
on a balanced scorecard approach (with only few differences) but under different labels (i.e.
Performance Assessment Framework, (PAF), in the NHS, and the Office for Standards in
Education, (OFSTED)). Therefore in this paper the terms will be utilized interchangeably.
Although, as stated earlier, there is a gap in the literature about a clear and coherent
link between performance measurement and rewards, there seems to be some parallelism
between the development of PMS in the public sector and their performance indicators and
the development of PRP schemes. For example, in schools, PRP is based on pupils’
progress being the key performance indicator. Similarly, in 2002, the government has begun
piloting “value added” school performance data to supplement the raw data that were
previously based on schools’ scores. Equally, in the NHS, traditionally some basic
information about the performance of hospitals in England and Wales were made available
for internal use by hospital managers; however, it was argued that this information was of
little use because there was no link of the performance to financial rewards. Evidence of the
government’s support for a salient role for PRP in public sector performance can be found in
the 1999 White Paper Modernizing Government where it was stated that:
“the links between pay and objectives are not always clear. We must use
our pay systems – and performance pay in particular – in creative ways to
provide effective incentives to sustained high-quality performance…” (Cabinet
Office, 1999, p.21, as cited in, Cutler and Waine, 2005, p.78).
Arguments in favour of the use of scorecard rewards include focusing employees’
attention on strategic priorities, providing extrinsic motivation by rewarding employees when
they and their organisations reach their targets, minimizing gaming and sub-optimization
(which will be covered later) through the inclusion of multi-dimensional performance
measures.
Before trying to lay down some of the problems that exist from linking performance
measurement to pay it would be helpful to explore the nature of the public sector, which
might underpin some of those problems.
THE NATURETHE NATURETHE NATURETHE NATURE OF THE PUBLIC SECTOOF THE PUBLIC SECTOOF THE PUBLIC SECTOOF THE PUBLIC SECTORRRR

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Many scholars have referred to profit maximization as the main difference between
the private and the public sector (e.g. Boland and Fowler, 2000), and hence the lack of a
bottom line against which performance can be measured in the public sector. On the other
hand, some argue, that since there still exists an equivalent financial measure to profitability
in the public sector which is “value for money”, then, there is no considerable difference
between both sectors (Jackson, 1990). In this respect, it can be argued that difficulties with
PMS in the public sector do not lie in the lack of bottom line performance measure but in the
complexities surrounding its measurements. Notably, however, given a profitability measure
and the objective of making a profit, the various levels of a private firm can in principle relate
their activities to the contribution they make to the firm’s profitability (Jackson, 1986). The
lack of clear objectives for the public sector organisations, on the other hand, makes it
problematic to set intermediate objectives for all levels of employees within the public sector.
It should be noted at this stage that a key potential role of performance indicators in
performance measurement in the public sector is clarification of objectives, which becomes
even more important with the presence of PRP and performance management systems such
as OFSTED in schools (Mayston, 2000).
According to Dixit, (2002), the one distinguishing feature of the public sector is the
presence of multiple principles which influences the optimal performance measurement and
incentive structure. Moreover, as a service provider, the public sector will be faced with the
difficulties of quantifying their main performance measures such as customer satisfaction,
and quality of service (Jackson, 1990); which also mainly rely on human resources who
being calculative receptors have discretion over their effort and hence need consistent
monitoring and directing towards the organisation’s goals (Neely et al., 1995). As mentioned
earlier, reinforcing the daily performance indicators of general employees is done through
linking performance measures to rewards. In fact one of the characteristics of performance
measurements consistently mentioned is that PM should be derived from the organisations’
business strategies and hence can be used as a strategic control system to influence
employees’ behaviours (Robert and Kaplan, 1992; Neely et al., 1995). This is particularly
relevant to the public sector where the overall performance is dependent on the human
factor. In fact, according to Lynch and Cross’s (1992) performance pyramid, the translation
of measures goes from bottom up, where the bottom represents the departments and work
centres which are daily monitored against four performance measures. Though Norton and
Kaplan’s (1992) balanced scorecard ignores the hierarchical relation between factors leading
to the end goal, when defining the measure of internal business perspective, they state that
managers should focus on the internal operation from which customer satisfaction is derived.
Based on the above, it can be concluded that, first, performance measurement is not
an end in itself and unless it can direct efforts towards organisational goals and influence
future performance it would only represent a tool for measuring past activities. Second, it is
by linking performance measurement to rewards that organizations can improve future
performance. In fact, a recent survey of scorecard implementation in the US found that 70
per cent of the respondents already use the balanced scorecard for compensation purposes
and 17 per cent actively considering its use for this purpose (Perrin, 1996, as cited in Ittner
et al., 1997, p.5). Furthermore, several authors have highlighted the importance of linking
business PMS to rewards (Kaplan and Norton, 1992; 1996; 2001; Eccles, 1991; Neely et al,
1995; Moon and Fitzgerald, 1996; Otley, 1999). However, most of the research in this area
has been merely descriptive. For instance, while proponents of the balanced scorecard
concept contend that this approach provides a powerful means for translating a firm’s vision
and strategy into a tool that effectively communicates strategic intent and motivates
performance against established goals, (Kaplan and Norton, 1996), the balanced scorecard
literature provides little discussion of the scorecard’s role in compensation decisions, despite
the fact that the majority of adopters use it for this purpose (Perrin, 1996, as cited in Ittner et
al., 1997, p.2). Evidently, this has brought only the potential benefits of the system to the
forefront making companies over-enthusiastic about its application. Nevertheless, there are
many problems associated with performance measurement when it comes to measuring
individual’s performance in the public sector and even worse when linking it to pay. These

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problems can be classified under two main categories, one related to an economic approach
and the other to a psychological one. The rest of this paper will, hence, be organized in two
sections, the first will review the economic literature and theoretical underpinning for
performance measurement and PRP identifying problems emanating from the use of the
economic approach; and the second will look into the psychological literature and its
relevance for identifying problems with performance measurement and pay systems and will
point at the fact that using the economic literature has rather simplified those problems.
PROBLEMS WITH PMPROBLEMS WITH PMPROBLEMS WITH PMPROBLEMS WITH PMSSSS ANDANDANDAND PRPPRPPRPPRP IN THE PUBLIC SECTOIN THE PUBLIC SECTOIN THE PUBLIC SECTOIN THE PUBLIC SECTORRRR
ECONOMICECONOMICECONOMICECONOMIC APPROACHAPPROACHAPPROACHAPPROACH
Principal-agent model
The moral hazard model of incentive design is the main tool economists have used to
understand the construction of PMS and the provision of incentives (Courty and Marschke,
2003). According to economists, in many service professions such as in the public service’s
individuals (agents) have discretion over their effort, hence, being self-interested, will tend to
provide the minimum possible effort that may go unnoticed. Kreps, (1997), states that in the
standard model of Agency Theory, without extrinsic incentives, effort is necessarily at the
lowest possible level. Shareholders (principals) will, therefore, act to protect their interest
through incentive compensation – described by Jensen and Meckling, (1976), as “Agency
costs” – that steers the action of the agent towards the principal’s objectives. Given the
nature of the public sector (often serving several principals: tax payers, service users,
politicians, and professional organisations with conflicting goals), however, makes it
problematic to identify the right performance indicators, which if not clearly defined and
communicated, can result for dysfunctional and unintended behaviours.
Dysfunctional behaviour
In designing a PRP system principals should put higher incentives towards the tasks
that can be accurately measured so there would be less manipulation on effort and results,
however, this might cause agents to neglect the other less measurable tasks and spend
more effort on the high powered rewards. With multi-tasking in the public sector linking
performance measurement with pay to monitor and influence behaviour captures the notion
that the investment allocation that maximizes performance outcomes does not necessarily
correspond to the allocation that maximizes value-added (Courty and Marschke, 2003).
When individuals respond to performance indicators in a way that maximizes their
benefits this is known as the gaming response; and may include neglecting unrewarded
tasks, and manipulating and distorting results. Examples of gaming exist across the whole of
the public sector.
In the education sector, where performance measures were based on tests scores
changing students’ grades and “teaching the test” in order to boost the results-based
rewards in schools occurred. Additionally, there was a focus on pupil attainment neglecting
some of the activities that lead to productivity but are not rewarded such as teaching
citizenship, conflict resolution, and interpersonal skills whose development is an important
aim in primary schools (Courty and Marschke, 2003).
The recognition of most of the problems mentioned earlier concerning public sector
multi-tasking, multi-principals, and the lack of objectives, was one of the drivers for the
development of a new system entailing additional performance measures including
academic and non-academic indicators. Under the new scheme, first applied in July 2000,
teachers’ performance indicators are assessed against five main criteria:

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•Pupil progress.
•Wider professional effectiveness (two dimensions).
•Teaching and assessment (three dimensions).
•Knowledge and understanding.
•Professional characteristics.
Source: (DfES, 2001a)
Clearly by placing pupils’ progress on top of the criteria there is a shift to value-added
based rewards. Little research was conducted to evaluate the impact of the new school PRP
system on teachers’ effort, based on the economic approach, and concluded that an
increase effort and test score gains were evident (e.g. Burgess and Croxson, 2001; Burgess
et al., 2001; Atkinson et al., 2004). However, by only focusing on one criterion (i.e. pupils’
progress) there is a lack of data on whether the improved results represented extra effort on
performance as a whole or only on this criterion and, hence, is merely a diverted effort from
other professional activities rather than improved performance. Consequently, in consistently
following the agency theory approach, it can still be argued that since agents tend to
produce the least effort or the necessary amount that leads to the benefits, then, under the
new system problems of sub-optimization, distortion, and gaming still arise. However, this is
only a suggestion based on a theoretical ground. Hence, more research is needed to
evaluate the progress in other criteria such as professional effectiveness, professional
characteristics and knowledge and understanding.
In respect to the gains in the test scores and improved pupil performance another
problem arise which is the sub-optimization of the educational outcomes compared to the
wider social goals and misalignment of performance measurement objectives with the
objectives of reward. Sub-optimization occurs when there is a lack of congruence between
PRP measures and the global objectives of the organisation. Mayston, (2000), argues that
one of the measures valued by society is student satisfaction. The current priority given to
pupil’s progress and maximizing the reported examination results may lead students to
experience additional stress and pressures from further increasing their examination results
which will consequently reduce their satisfaction and sense of fulfillment from the
educational process itself. Even worse the drop in students’ satisfaction, in turn, may impair
their examination performance (Mayston, 2000).
Moreover, given that, PRP operating in schools is an individual-based scheme,
where teachers are assessed individually against the performance measures and are given
an incremental progression up through a scale of nine increments which once reached
become permanent in their salaries two hypothesis can be derived. The first is that, since
PMS in this case are school-based as opposed to teachers’ individual assessment, there is a
misalignment of the objectives of PRP and PMS. The second is based on the fact that since
reward increments go into teachers’ permanent salary meaning that even if performance
drops the salary will remain the same, then, performance measurement in linkage to pay
would only be a tool for monitoring past performance and controlling the wage bill rather than
improving future performance.
Evidence on unintended responses and dysfunctional behaviours is also apparent in
the health sector. Goddard et al., (2000), found evidence of gaming concerning efficiency,
where respondents were reluctant to produce improvement in costs for fear that the following
year’s efficiency targets would be set at a higher level. He also noted that “financial regime in
which Trusts operate encouraged Trusts to fail to meet their financial target as these were
often “bailed out” by the region” (p.105).
Clearly the performance assessment framework being based on a balanced
scorecard approach includes wider performance measures based on financial, clinical and
patient-care indicators for hospitals (Popper and Wilson, 2003). Yet, the lack of measures

12. - 12 -
relating to clinical outcomes was evident in Goddard’s et al., (2000) study on Performance
Assessment Framework, which they called tunnel vision. In the same study, two other
problems were reported. It can be assumed that the first one which is misrepresentation
corresponds to distortion of data in the educational sector. Distortion and misrepresentation
of data can exist in the appraisal process itself where agents (teachers or clinical staff) can
only focus on the positive sides of their achievement (Forrester, 1998) since many of the
data used to measure performance are under the direct control of those staff (Goddard et al.,
2000). Similar to the reasons of gaming in the health sector, misrepresentation of data can
sometimes be negative, extending waiting times because again there is tendency to provide
additional funds to Trusts who fail to meet their objectives (Goddard et al., 2000). In this
respect, selecting performance measures that optimally trade off the desire of controllability
with the need of goal alignment are argued to be crucial for the success of PRP [Baker,
2002].
Subjectivity and perception of fairness
To avoid the problems associated with basing pay on more or less objective
measures such as misallocation of effort by the agent, gaming, misrepresentation and
distortion, and short-termism principals have to weaken the power of incentives on the more
accurately measured tasks (Burgess and Ratto, 2003). This, however, gives rise to issues
surrounding the difficulties of determining the relative weights to place on various measures
when determining rewards. Evidently the flexibility in weighting quantitative performance
measures against qualitative indicators will result in the introduction of subjectivity into the
reward process. Consequently, problems such as inequity, unfairness, and mistrust will
arise.
The issues of equity and fairness have been addressed by different theories,
reciprocity theory, equity theory, and relative deprivation theory.
According to equity theory (Adam, 1963; Adams, 1965) people compare the ratios of
their own perceived work outcomes to their own perceived work inputs to the corresponding
ratios of a comparison with others (as cited in Greenberg, 1990, p.400). If employees’
investments are not proportionate with the rewards given, inequity arises and employees will
attempt to restore the balance, which in turn, results in a range of undesired outcomes. In
fact, recent research supporting the predictions of equity theory shows that neglecting
internal comparisons of fairness may have a deleterious impact on the health of the
psychological contract since inequity is associated with job satisfaction (Perry, 1993; Ago et
al., 1993; Witt and Nye, 1992; Berg, 1991; Summers & Hendrix, 1991; Moorman, 1991;
Covin et al., 1993, as cited in Balkin et al., 1998), absenteeism and turnover (Geurts,
Schaufeli, & De Jonge, 1998; Iverson &Roy, 1994; Van Yperen, Hagedoorn, & Geurts, 1996
as cited in Taris et al., 2002; Covin et al. 1993; Weiner, 1980, as cited in Balkin et al., 1998),
and lack of organisational commitment (Schaufeli, Van Dierendonck, & Van Gorp, 1996 as
cited in Taris et al., 2002). Though it is difficult to argue with the basic principle: “that it is
equitable to reward employees according to their contribution” (Thompson and Milestone,
2001, p.35), there is a large behavioural literature arguing that treating employees differently
from each other is detrimental to employee morale (Baker et al., 1988). In their evaluation of
PRP in the NHS, Richardson and Dowling, (1997, p. 354), further argued that the inclusion
of qualitative data in performance measurement produced frequent scepticism, both on the
possibility of measuring the job performance of NHS managers at all properly, and on the
likelihood of subjective judgments .
While it was stated in that study that only a minority, 24 per cent felt that their
appraisal interviews were not conducted appropriately, 26 per cent did not understand how
their performance was measured, 30 per cent felt that their performance was not measured
fairly, 67 per cent thought that there was a significant degree of subjective judgment in the
making of PRP awards. Stronger evidence of unfairness is also apparent in the research
conducted in BT (British Telecom) where only 6.5% of the respondents said PRP at BT had
brought an improvement in managerial performance, while as many as 63% believed it had

13. - 13 -
been applied unfairly in practice causing de-moralization (Kimble, 2005). In the Inland
Revenue, it was added that de-motivation also arose from perceiving the whole concept as
unfair. In order to maintain trust and effective working relationship with their peer group
managers tend to distribute the pot of PRP fairly between the team rather than reward high
performers. This, nevertheless, raised doubts in operating PRP fairly in a cash limited
environment like the public sector. In respect to subjective performance measurement
Lawler, (1971), concludes that “pay plans based on subjective criteria have little chance of
success” because employees don’t trust superiors to accurately evaluate their performance.
He, further, argues that, “the more subjective the measure, the higher the degree of trust
needed, because without high trust there is little chance that the subordinate will believe that
his pay is really fairly based on performance.” (p.171, as cited in Baker et al., 1988).
It should be noted that the notion of fairness not only exists in the appraisal process
but also in the process of negotiating the contract. It is the reciprocity theory that postulates
that agents prefer a condition of fairness in their exchange relationship with the principal. In
this respect, the perception of fairness of a contract is an important element of the
psychological contract, which helps predict the kind of reward employees are expecting in
exchange for their level of effort invested in the company (Hiltrop, 1996). However, once
more, standard agency models tend to rather simplify this type of interaction between the
agent and the principal (Herpen, et al., 2003).
Based on the above it can be hypothesized that by ignoring the psychological
interaction in the process of performance measurement economists tend to ignore issues
such as social comparison, equity, and trust.
Though equity has been treated within the economic literature, little attention has
been placed on equity as one of the variable leading to motivation, thus more attention
needs to be paid to the psychological consequences of systems such as performance
measurement on behaviours.
PSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROAPSYCHOLOGICAL APPROACHCHCHCH
Although agency theory has been used by most economists as a theoretical
underpinning for PMS and incentives, economic literature has largely neglected the various
psychological effects of monetary rewards on behaviour and thus on effort (Frey, 1997).
Similarly, evidence of increased effort and productivity in the public sector is apparent in
many of the studies based on an economic approach (e.g. Burgess and Croxson, 2001;
Burgess et al., 2001; Atkinson et al., 2004) as well as a psychological approach (Richardson
and Dowling, 1997; Marsden and French, 1994; Heery, 1996; Marsden and French, 1998);
hence PRP systems were sustained. Yet, impact of these systems on employees’ behaviour
such as motivation has been negative (Thompson, 1992; Marsden and French, 1998;
Marsden and French, 1994; Richardson and Dowling, 1997; and Marsden, French and
Kubo, 2001).
Despite the fact that agency theory contributes to understanding the behaviour of
agents and provides a rich fund of practical implications for the design of incentive contracts
(Pfuff and Kunz, 2002), evidently, economists have taken a clinical approach to human
motivation, meaning that the behaviour of agents is assumed to be rational (Herpen et al.,
2003). Employee resistance towards pay for performance systems in the public sector may
therefore be little understood by economists, given the perceived potential benefits of tying
pay to performance. Industrial organisational psychology, organisational behaviour, and
sociology, on the other hand, have paid greater attention to the complexities of the concept
of motivation, looking at both, intrinsic and extrinsic motivation, thus, providing alternative
explanations for why monetary rewards may be counter-productive.
The following section will draw attention to the importance of the psychological, social
psychological, sociological, and organisational behaviour theories and their relevance to

14. - 14 -
performance measurement and rewards with the aim of highlighting their contribution to
performance measurement and reward studies.
Problems with motivation
Though economic arguments for the introduction of PRP, based on agency theory,
are often flawed, motivation is always referred to as the main reason for the increased level
of efforts. Consequently, the rationale and objectives of PRP have been mostly reported as
to better motivate staff by basing salary on performance rather than seniority. Hence, most
empirical researches have tested the impact of PRP on employees’ motivation in the public
sector through the lenses of two main theories; expectancy and goal-setting theory.
According to the expectancy theory motivation is affected by three factors. The
first is expectancy which concerns the individual’s perception that effort is positively
correlated with performance. The second factor is instrumentality, which concerns an
individual’s expectation that this reward is closely tied to his performance; and the third is
called valence and is a measure of the degree to which an individual values a particular
reward. Although expectancy theory has been criticized for being based exclusively on
extrinsic rewards, ignoring the role played by other intrinsic incentives in motivating
individuals, it should be noted that the theory indicates that money can act as a motivator
only if it is perceived as a means of achieving goals in the presence of a clear link between
effort and reward. Thus, the emphasis is on the intrinsic motivation of the perceived
relationship effort and good outcome for effort incentives (Sloof and Praag, 2005).
It is argued that the second and third factors of the model can be translated into the
agency model, where instrumentality is given by the incentive intensity in the agency model,
while valence refers to the arguments that appear in the agent’s utility factor – i.e. wage and
effort (Sloof and Praag, 2005, p.8). The only factor that differentiates the two theories is
expectancy which might explain the agent’s reaction to the pay-performance sensitivity when
they select their level of effort. Though it was found that levels of efforts are invariant to
expectancy (Sloof and Praag, 2005), and thus productivity increased regardless of that
factor, motivation was reported as negative (Thompson, 1992; Marsden and French, 1998;
Marsden and French, 1994; Richardson and Dowling, 1997; and Marsden, French and
Kubo, 2000).
From the above it is evident that imperfect performance measurement remains one
of the central reasons for employees’ disenchantments with PRP in the public sector. In fact,
Marsden, (2004), maintains that the quality of appraisal which plays a central part in both
expectancy and agency theory is the key independent variable for the perceived incentive
and divisiveness of PRP.
Murnane and Cohen, (1986), claim that PRP works best where there are clearly
measurable outcomes, which, does not apply to the case of the service sectors [Chamberlin,
et al., 2002, p34]. In the public sector jobs, where measurable outcomes are unclear, where
PRP has been introduced, no evidence was reported of improved motivation. Marsden,
(2004), provides summary evidence on employees’ responses to PRP in six areas of he
public sector: Inland Revenue, (1991 and 1996), the Employment Service, two National
Health Service Trusts Hospitals, and head teachers in primary and secondary schools in
table 1.

15. - 15 -
(Marsden, 2004, p.357)
In studying the effect of PRP on employees’ behaviours in four different local
authorities in the local government, Heery, (1996), concludes that:
“… PRP schemes of the kind operated in local government tend to have
a rather limited impact on workers’ behaviour. The process of work in the four
authorities, it seems, runs along its established course and PRP has been
insufficient to jolt it down a radically new path… PRP in this respect appears to
be something of a damp squib” (p. 219).
Similarly, in their study conducted in the Inland Revenue, Marsden and Richardson,
(1994), concluded that:
‘The positive motivational effects of Performance Pay . . . were at most
very modest . . . Even worse, there is clear evidence of some de-motivation’ (p.
253).

16. - 16 -
Moreover, in the follow-up study conducted by Marsden and French in the Inland
Revenue in 1996, a significant rise in the reported adverse behavioural effect with the
system was evident, indicating that familiarity with the system do not generate more
approval (Richardson, 1999). Similarly, in the Employment Services, Marsden and French,
(1998), found that most staff did not believe it had raised their own motivation, and hence,
concluded that the net effect of performance pay on motivation has been negative. Echoing
the above results are teachers’ responses to the effect of PRP in two schools, where
motivation has been reported negative (Marsden and French, 1998).
Contrary to the above, however, is the study of the NHS, where there were
significantly higher percentages of reported motivation; though not higher than 30 per cent,
this number is still significant given that the rest of the respondents did not report de-
motivation but rather no effects (Richardson and Dowling, 1997). It should be noted that,
appraisal systems, in this case, operated in light of the goal-setting theory, which might set
the explanation why the scheme appears to be more motivating to managers.
Goal-setting theory places less emphasis on rewards and stresses the motivating
power of defining appropriate work goals and engaging employee commitment to them
(Marsden, 2004, p.354). A number of studies have attempted to examine the relationship
between goal-setting and performance. It was found that the majority of evidence suggests
strong support for the theory. In fact, it is where managers were not sure of their objectives,
doubts into the credibility of the system evolved. Marsden, et al., (2001), found that when
employees thought PRP had led managers to set targets more clearly (because they have to
appraise them afterwards), and if they thought their last appraisal fair, then they were more
likely to experience positive incentive effects (p. 11). Additionally, evidence on the fact that
PRP helps setting goals more clearly was apparent in the Inland Revenue and the NHS
where the clarification of objectives, that the scheme had introduced, was seen as more
effective motivator than money and was seen as one of the main pillars of the success of the
scheme (Marsden and French, 1998).
Inevitably, however, some contrary findings are especially evident when identifying
performance dimensions by using a goal-setting theory is followed by another set of issues
concerning how these dimensions and goals can be measured [Mullins, 1999]. In the Inland
Revenue, there was no evidence that clearer goals helped motivation towards better
performance particularly that the majority of individuals felt that they were already working at
their maximum level of effort. Similarly, in 1996, research conducted in a multi-divisional
company in Ireland argued that, despite the fact that 87 per cent of managers considered
that their set objectives were 'clear and specific', 78 per cent still ranked 'measurement of
performance' as one of the top three disadvantages with the system, indicating that clear
and specific objectives do not necessarily result in an adequate measure of performance
(Kelly and Monks, 1996). Additional difficulties with the measurement of performance were
also evident in the comments which reflected the problems involved in defining and
measuring goals, especially for managerial positions: 'True goals are hard to clarify and
harder still to judge' (manager, 1996, as cited in Kelly and Monks, 1996).
Once more, the role of clear measures and fair performance measurement system is
apparent in need for a successful reward system as a motivator. Moreover, extrinsic rewards
were not perceived as the prime motivator given the nature of the public sector (i.e. serving
the community). In fact, it was claimed that PRP contradicts the personal standards or the
ethos of the NHS, as one manager stated (Dowling and Richardson, 1997):
Pay in the NHS is definitely NOT a motivator. Most of my colleagues
work far in excess of their contracted hours for little or no financial rewards.

17. - 17 -
…Having worked as a professional paramedic for 18 years before going
into general management I have never been motivated I believe by financial
reward and this continues to be the case in general management. My motivation
is to get the job done to the best of my ability. (p. 356)
From the above statement there is clear evidence that managers are more
intrinsically motivated by the desire to produce public value from which the community will
benefit.
Moreover, it is argued that setting financial rewards based on performance may
actually be counter-productive in that it may send the signal that the relationship between the
workers and the organisation is a pure market relationship (Burgess and Ratto, 2003, p.10).
Yet economists have tended to exclusively use the agency theory to analyse the linkage
between and working of performance measurement and reward system, neglecting the
importance of providing a balance between intrinsic and extrinsic motivation, and it was not
until recently that attempts have been made to insert psychological approaches in economic
theory (Frey, 1997; Frey and Jegen, 2001; Osterloh and Frey, 2000).
The basic idea that extrinsic rewards may have a deleterious effect on intrinsic
motivation stems from the psychological theory called cognitive evaluation theory (Deci,
1975) which argues that individuals strive to fulfil two basic needs: self-determination and
competence. Subsequently, Deci, (1975), argues that providing financial rewards, places
emphasis on the extrinsic motivation driving the focus away from the intrinsic one. Moreover,
he differentiates between two aspects of every reward, a controlling and an informational
one. If rewards place emphasis on the control factor, feelings of self-determination and
competence decrease in light of restricting the individual’s action and hence, diminish
intrinsic motivation; contrastingly, emphasizing the informational aspect can increase the
intrinsic motivation since it provides individuals with information about their level of
competence and self-determination (Kunz and Pfaff, 2002). Recently, the concept of intrinsic
motivation has enjoyed increasing popularity in the economic field. The integration of
psychological theories in the economic theory, consequently, resulted in the development of
the motivation crowding theory (Frey, 1997), which is closely related to the cognitive
evaluation theory. The crowding theory by suggesting that monetary incentives will crowd
out intrinsic motivation opposes the economic view held by the agency theory that levels of
effort will be affected by the level of incentives. Although, Frey, (1997), states that the
motivation crowding theory explores the psychological effects of monetary rewards and effort
in order to treat the weakness of economic theories which only considered the absolute
monetary incentives and strategic benefit, more empirical research need to be done in that
area in order to examine the effectiveness of performance measurement and reward
systems and their impact on employees’ behaviours particularly on the long-term.
It is worth mentioning at this point that from an agency theory perspective, it might be
argued that the negative motivational impact and the divisiveness of PRP reported in the
public sector could simply be the result of employees’ resentment to the system since
according to the agency theory such systems oblige employees to produce more effort. By
arguing that there is only a minority of employees in the public sector who would “shirk”
because of high levels of organisational commitment among public servants Marsden,
(2002), implies questioning one of the factors presented in the agency theory and its
relevance to the public sector: providing minimum level of efforts. However, with recent
studies referring to new employment relation and the changing state of the psychological
contract in the public sector (Anderson and Schalk, 1998; Millward and Hopkins, 1998;
Rousseau, 2000; Hecker et al., 2002; Rousseau, 2004) one should reconsider measuring
the state of commitment among public servants. In fact, Le Grand, (1997), argues that the

18. - 18 -
nature of public services is changing from one where employees were seen as serving the
community to one where all parties are self-interested. On the other hand, this change in the
nature of the psychological contract can be argued to be the result of more flexible
measurement and pay systems, as it is noticed that this change only came about at the
same time that rewards were transformed from being based on seniority to one where
employment contracts lack security given a reward based on performance.
CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION
Performance measurement systems, which assess an organisation’s performance
against its performance indicators, have been widely applied in the public sector after the
modernisation agenda characterised under the heading “Public Sector Management”.
Although performance assessment is not a new phenomenon to the public sector,
performance measurement has undergone considerable changes over the past decade with
an increasing emphasis on the use of a combination of financial and non-financial
performance measures following the extensive criticism traditional systems have received for
being short-term and lacking a link to business strategy. One of the central aspects of this
change and a central defining feature of the New Public Management is linking the
measurement of the public services’ performance to financial rewards. In fact, several
scholars have highlighted the importance of linking performance measurement systems and
particularly the balanced scorecard to rewards. Hence, the past decade has witnessed a
growing body of literature on performance measurement and performance related pay in the
public sector.
Benefits of linking performance measurement to rewards include providing a powerful
means of linking and communicating the organisation’s strategy to all levels employees, and
motivating employees by clarifying goals and targets (e.g. Kaplan and Norton,1992; 1996;
2001; Eccles, 1991; Neely et al, 1995; Moon and Fitzgerald, 1996; Otley, 1999). However,
by reviewing the literature of performance measurement and performance related pay, this
paper suggests that there still remains a gap in the literature concerning three main issues.
First, the literature on the balanced scorecard provides little discussion of the scorecard’s
role in determining rewards. Thus, companies are left with deciding on the choice of multiple
measures and their weights with little information on how to create a balance in the
compensation scheme. Second, there is a lack of evidence on the strength of the linkage of
performance measurement and reward systems in practice. Evidently, by reviewing the
literature of both performance measurement systems and performance related pay systems
in the public sector, this paper hypothesises that there is a misalignment of objectives
between both systems. For example, in the education sector performance measurement
systems (OFSTED) produce school-based reports while rewards are based on individual
performances, which is claimed to discourage teamwork. However, few empirical researches
have evaluated this linkage. Yet, their findings are not consistent. For instance, while Kaplan
and Robert, (2004; 2001), show positive effects of using performance measurement in
determining rewards, Ittner et al., (1997; 2003), and Goddard et al., (2002), show that linking
performance measurement to rewards may result in dysfunctional behaviours, including
gaming, tunnel vision, misrepresentation, neglecting tasks, and short-termism. Moreover, the
level of subjectivity found in the process of measuring performance has proved to have a
negative impact on employees’ behaviour and cause demoralisation when it comes to linking
pay to performance (Marsden and French, 1998; Dowling and Richardson, 1997; Marsden
and Richardson, 1994; Heery, 1996). The third gap arising here is that, though few
researchers attempt to insert psychological approaches in economic theory most research in
this area has been presented in the economic field and has rather simplified its interrelation
with other fields such as sociology, industrial relations, and organisational psychology, which
in fact draw more attention to the importance of the human resources and hence to the
psychological aspects and consequences of performance related pay on employees’
behaviours. Subsequently, again this seems to weaken the linkage between performance
measurement and performance related pay systems.

19. - 19 -
A central element to reviewing performance measurement systems is the nature of
the public sector. Many scholars have recognised the differences between the nature of the
public sector and the private one, referring to the presence of multiple tasks and multiple
principles as well as the lack of profit maximisation as the main differences and hence the
main complexities surrounding the application of performance measurement and
performance related pay systems in the public sector. However, there has been a disregard
or rather a simplification of the psychological aspects inherent in the public sector namely
public service ethos. Traditionally under the notion of public sector ethos employees
benefited from an open-ended employment contract, which, in turn, created a psychological
contract that is relational in nature where employees were motivated and committed to
providing maximum effort and best quality services to the community in exchange for long-
term job security. With the New Public Management Reform increasingly importing practices
from the private sector in order to improve quality and performance, it is suggested that the
public sector economy is becoming more market-driven which is suggested may be
endangering the public sector ethos (Morgan and Allington, 2003) and changing the nature
of the psychological contract (Hiltrop, 1996). It is argued that changing rewards from
seniority based to more flexible rewards based on performance, have affected employees’
feelings of job security, and hence, tend to reduce the peculiar commitment and motivation
previously found among public sector workers.
Although, as stated earlier, advocates of the agency theory might argue that the
resentment of employees against systems such as performance measurement and
performance related pay is due to the fact that agents are expected to ‘shirk’ and with the
studies suggesting a change in the psychological contract, one would believe such
argument, Marsden et al., (2001), concluded that employee commitment was the main factor
sustaining performance related pay systems in the public sector albeit combined with a
negative impact on behaviour. It is, hence, important to draw more attention to the level of
commitment in the public sector, the nature of the psychological contract, and the impact of
such systems on not only behaviours (i.e. motivation) but also attitude (i.e. commitment).
Finally this means that more attention and investigation is required into the nature of the
effort bargain from multiple perspectives: economic, sociological and psychological, to name
but a few.

20. - 20 -
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