Policy Research Working Paper 6043

# **Abstract**

The objective of this paper is to provide a review of the theoretical and, in particular, empirical literature on performance-related pay in the public sector spanning the fields of public administration, psychology, economics, education, and health with the aim of distilling useful lessons for policy-makers in developing countries. This study to our knowledge is the first that aims to disaggregate the available evidence by: (i) the quality of the empirical study; (ii) the different public sector contexts, in particular the different types of public sector jobs; and (iii) geographical context (developing country or OECD settings). The paper’s main findings, based on a comprehensive review of 110 studies of public sector and relevant private sector jobs are as follows. First, we find that overall a majority (65 of 110) of studies find a positive effect of performance-related pay, with higher quality empirical studies (68 of the 110) generally more positive in their findings (46 of the 68). These show that explicit performance standards linked to some form of bonus pay can improve, at times dramatically, desired service outcomes. Second, however, these more rigorous studies are overwhelmingly for jobs where the outputs or outcomes are more readily observable, such as teaching, health care, and revenue collection (66 of the 68). There is insufficient evidence, positive or negative, of the effect of performance-related pay in organizational contexts that that are similar to that of the core civil service, characterized by task complexity and the difficulty of measuring outcomes, to reach a generalized conclusion concerning such reforms. Third, while some of these studies have shown that performance-related pay can work even in the most dysfunctional bureaucracies in developing countries, there are too few cases to draw firm conclusions. Fourth, several observational studies identify problems with unintended consequences and gaming of the incentive scheme, although it is unclear whether the gaming results in an overall decline in productivity compared to the counterfactual. Finally, few studies follow up performance-related pay effects over a long period of time, leaving the possibility that the positive findings may be due to Hawthorne Effects, and that gaming behavior may increase over time as employees become more familiar with the scheme and learn to manipulate it.

This paper is a product of the Poverty Reduction & Economic Management Sector Department, East Asia an Pacific Region; and the Public Sector Governance and Poverty Reduction and Economic Management Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at zhasnain@worldbank.org and nmanning@worldbank.org _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team