results in an overall decline in productivity compared to the counterfactual. Finally, few studies follow up PRP effects over a long period of time, leaving the possibility that the positive findings may be due to Hawthorne Effects<sup>4</sup> , and that gaming behavior may increase over time as employees become more familiar with the PRP scheme and learn to manipulate it.

This literature review focuses almost entirely on the individual incentive effects of PRP as this is what the bulk of the literature has emphasized. It should be noted that there are, at least in the policy literature, potential agency-level and public sector wide effects of PRP that have to date been underexplored in the academic literature. PRP can provide a mechanism for conveying to staff the increasing expectations of agency performance, in effect changing the agency-level culture of performance (―this is how hard we work around here‖) through the multitude of individual performance appraisal discussions (Marsden 2004). PRP can also have wider public sector impacts on the fiscal sustainability of the wage bill, public sector pay competitiveness, and social objectives, such as gender equity. PRP may contribute to cost containment by limiting pay increases to less costly performance bonuses (Marsden and French 1998). Some studies have also suggested that PRP may have a gender dimension as men are more likely to see the arrangement as fair and reasonable. Finally, PRP in the OECD countries been introduced in the context of other changes in pay policy, in particular moves towards differentiated pay arrangements whereby pay for similar jobs varies across government agencies and occupational groups, and the delegation of pay setting authority from central human resource ministries to line ministries and agencies (see Box 1). What remains unexplored are the potential linkages between these reforms and whether or not PRP caused or was the effect of these other changes in pay policy.

# **Box 1: The elements of pay flexibility**

OECD countries have move towards flexible pay arrangements in the public sector which is in essence some combination of three key features, or design elements:

- **Performance-related pay:** Enabling pay to differ for civil servants doing the same job by linking a portion of the civil servants‘ pay to individual or group effort or performance with performance targets set either at the individual level and/or the group level.

- **Differentiation:** Pay differences within and across government ministries, departments, and agencies for civil servants doing the same job - based on the need to attract and retain qualified staff for those jobs, or to persuade staff to accept new working arrangements. The need for special incentives for attraction or retention can be based on labor market conditions and/or cost of living in the localities where agencies operate or as a function of the specific skills that the agency competes for in the labor market, based for example on job evaluations and labor market surveys.  Differentiation can affect: (i) all staff paid by the entity, with the result that there are agency-specific pay scales; or (ii) particular occupational groups or cadres **;** (iii) specific individuals, with scarce but vital skills; or (iv) specific locations entailing particular hardship.

- **Delegation:** Transferring authority over pay setting and human resource management from a central civil service agency to ministries, agencies, or departments. The transfer may entail transferring from the central to the entity level (or a mixture): pay negotiations (if any); setting the overall wage bill; and design of pay scales.

While the three dimensions of pay individualization, differentiation and delegation describe analytically distinct elements of pay flexibility, reform examples in the real world often combine all elements. There are three reasons why components of pay flexibility tend to go together: a shared set of assumptions that underpin them; a complementarity in the objectives that they are aiming for; and sequencing. First, many of these reforms took place in the context of New Public Management that emphasized giving managers the authority to manage in exchange for tighter accountability standards. This move reflected wider changes in the economy where there has been a significant move away from industry and sector-wide negotiating arrangements with significant government involvement towards more local and agency-specific arrangements.

> 4 Hawthorne Effect is the phenomenon whereby a subject modifies his or her behavior simply in response to the fact that they know they are being studied, and not because of the particular treatment of interest.

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