Civil service reform is inevitably a difficult reform agenda in developing countries,<sup>22</sup> but the Government of Lao PDR (GOL) has demonstrated sustained commitment to initiating the process of modernizing and enhancing the productivity of its civil service. Yet the civil service continues to face several long-time challenges in the areas of compensation, grading, and human resource management (HRM) systems. Foremost among these are: (i) the widespread perception that civil service wages are too low and too compressed to motivate high quality performance; and (ii) concerns that deficiencies in the HRM structure—e.g., the grading regime and establishment control mechanisms—combine with low compensation to thwart the recruitment and motivation of qualified personnel.

In addition, as a consequence of an acute lack of data and limited analysis concerning civil service compensation, the fiscal costs of the civil service are growing and a number of hidden non-wage recurrent costs could prove to be a liability for the government. If wage bill growth continues unchecked, the government will likely be forced to consider painful pay and employment measures to ensure fiscal sustainability. Moreover, there are signs of emerging dysfunctionalities in civil service management, particularly as parallel systems of non-regular compensation proliferate, that skew the incentives of public employees away from a performance orientation. Even if existing compensation and HRM practices are adequate for now—in terms of attracting and motivating civil servants—there are thus growing signs that the system will come under pressure in the near future.

Pay and compensation reform is a central and necessary—albeit insufficient—plank in improving administrative capacity and performance as a step toward tackling longer-term civil service management issues. As the experience of other developing countries has shown, the success of broader administrative reform can hinge on a government’s ability to compensate its civil servants such that they are adequately motivated to perform professionally and effectively.<sup>23</sup> Initial analysis in Lao PDR indicated that civil service pay in Lao PDR is low and compressed;<sup>24</sup> hence it would seem that the civil service would have difficulty recruiting and retaining personnel. Yet anecdotal evidence reported by sector staff and government counterparts indicated that staffing quotas, particularly for teachers and health workers in the provinces, are often over-subscribed, pointing to additional benefits not yet being captured in the data. Low compensation would suggest that civil service jobs are comparatively unappealing to alternatives; but quotas being oversubscribed suggests that these jobs are indeed desirable. Either of these conclusions may be correct for particular grades or cadres of workers within the civil service, but they cannot both be true for the civil service taken as a whole.

The analytical challenge motivating this assessment was to determine whether particular civil service jobs are under- or over-compensated, and to get a sense of the magnitude of these phenomena. Prior to conducting the analysis, the general sense—shared by government and development partners alike—was that the managerial ranks of the civil service were almost certainly under-compensated relative to alternative employment, hampering their motivation. Indeed, anecdotal comparisons of base salary (or even base salary plus monetary allowances) suggested the existence of such a compensation gap. Our 22 The Independent Evaluation Group’s 2008 assessment of the World Bank’s public sector portfolio was particularly critical of the track record in civil service reform, pointing to a serious lack of robust analytical work in the area. See Independent Evaluation Group, _Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support_ (Washington DC: The World Bank, 2008). See, also, Operations Evaluation Department, _Civil Service Reform: A Review of World Bank Assistance_ (Washington DC: The World Bank, 1999).

23 See, for example, Lindauer and Nunberg, eds., _Rehabilitating Government_ ,.

> 24 See _Lao PDR Civil Service Pay and Compensation Review_ ; _Lao PDR Public Expenditure Tracking Survey_ ; _Teaching in Lao PDR_ ; and “Civil Service in Lao PDR—Issues and Challenges: Approach Note.

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