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# **Introduction**

Substantial uncertainty surrounds the effects of pecuniary incentives on worker motivation to undertake pro-social and mission-oriented tasks, particularly in the public sector. Wide variation in public sector compensation practices reflects this uncertainty. Ability-based pay systems characteristic of “Weberian” public administrations have long been considered the ideal compensation system for the public sector (from the mandarins in East Asia to Bismarck). However, performance-based pay is increasingly common (up to half of civil servant pay in Singapore consists of performance bonuses), and flat pay systems, unrelated to either ability or performance, proliferate around the world, particularly in poor countries. We use evidence from laboratory experiments with Indonesian public sector employees to examine the tradeoffs across these pay schemes with respect to the motivation, ability and effort of individuals who choose to work in the public sector.

A central issue in comparing pay schemes in the mission-oriented sector is how they interact with intrinsic and pecuniary motivations to undertake effort. Flat pay systems may be inexpensive to implement, but drive away the most able and motivated. Pay for ability screens out low ability individuals, may attract motivated individuals, but lacks incentives for workers to exert effort, since pay is independent of performance. Pay for performance attracts higher ability individuals and gives them high-powered incentives to perform; however, it may be more costly to implement and discourage pro-social individuals from exerting effort on the job.

Our experiments shed light on these tradeoffs, using a sample of future public sector workers. First, they show that the tradeoffs are sharper with respect to ability than pro-social motivation. Though the pay systems are quite distinct, there are no significant differences among them with respect to the pro-social motivation of those who choose the mission sector. However, pay for performance and pay for ability systems are superior to flat pay systems, and similar to each other, in attracting high ability and deterring low ability individuals from joining the mission sector.

The second key concern is pay system effects on effort. In particular, do high-powered incentives – pay for performance – inspire greater effort in mission-oriented tasks? This question emerges at two key junctures, from the point of view of those seeking to reform the pay system governing a mission-oriented task. On the one hand, reformers are concerned about the effects of pay reforms on the effort of incumbent workers. On the other hand, pay reform has selection effects, as individuals re-sort themselves across the mission and non-mission sectors in response to the pay reform.

Consistent with the intuition of proponents of high-powered compensation in the public sector, pay for performance has a significant positive effect on incumbent effort relative to both flat pay and pay for ability. Moreover, these effects operate on individuals who are less prosocially motivated. Individuals who exhibit greater pro-social motivation exert similar effort across all pay schemes.

In the “long run”, though, after selection effects have taken hold, effort is indistinguishable across pay for ability and pay for performance systems; both yield higher effort than flat pay systems. That is, after selection effects are taken into account, there is no tradeoff with respect to effort in the choice between pay for performance and pay for ability. However,