SIGMA Support for Improvement in Governance and Management

A joint initiative of the OECD and the European Union, principally financed by the EU

This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union, and do not necessarily reflect the views of the OECD and its Member

countries or of the beneficiary countries participating in the SIGMA Programme.

Salary Systems and Performance Related Pay

Paper by

Peter Reinberg Head of Personnel Department

Regional Government of Upper Austria

Workshop on Building a Professional Civil Service in Kosovo

Pristina, 26-27 June 2008

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Salary Systems and Performance Related Pay

In the first part of my presentation I will try to give you a glimpse of the salary systems of various European countries and the EU. In the second part, I will reflect on performance related pay and in a third part give some recommendations.

A. Salary systems in Europe 1. Austria Austria with its 8.4 m inhabitants and 84.000 km² is a federal state, consisting of 9 regions ("Länder"). The regions have some legislative competences for their civil service personnel, especially in the field of laws and regulations. This provokes a certain competition between the federation and some regions to modernize their HR system and to undertake salary and pension reforms. The traditional civil service systems in Austria are still career-based, taking into account mainly university or other degrees and age (seniority). They are also a combination of civil servants appointed to life-long service and contractual public employees. In many administrations, it is the latter that already prevails already, covering not only temporary, but lower-grade posts as well. Promotions are typical for the career-based system, but also those on fixed-term contracts can climb the ladder by graduating in higher studies and applying for corresponding posts. Of course, both systems have biennial steps. Fixed salaries are in use only for the highest functions in federal administration and judiciary: director generals and directors, presidents of the high and supreme courts. In its programme for 2007-2010, the federal government has proposed the creation of a uniform public service law, ending the difference between appointed civil servants and contractual public employees. Opinions are divided: the unions prefer a solution in the form of appointment (public law), and the government tends towards a contractual solution with restrictions for the termination of contracts. The Constitution has to be amended if the contractual solution is to be realized. However, the newly uniform public service law will be a third form because it will apply only to those civil servants just entering and to those who will voluntarily change their statute. In recent years, there has been a shift from career-based to position-based salary systems. The federation already took a very formal first step towards this in 1984. Level A was named A1, level B A2 etc. But the salary was split into a basic salary and a function allowance which at least in theory could be revoked in case of loss of the function. In 1999 the next step followed: The former contractual schemes I and II were replaced by the new schemes v (administration) and h (workers) whose salaries were adjusted to those of the corresponding civil servants: v1, v2 etc. Shortly afterwards several regions followed with their own position-based systems:

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Vorarlberg (0.4 m inhabitants) 2001 with a swiss-style system (29 grades), Upper Austria (1.4 m inhabitants) 2001 based on the Hay Group system (25 grades) – Cf. ANNEX I Styria (1.2 m inhabitants) 2003 also based on Hay (24 grades), Lower Austria (1.6 m inhabitants) 2006 also based on Hay (25 grades), Tyrol (0.7 m inhabitants) 2007 with a system similar to Hay (25 grades). What is common to these systems:

- equal pay for civil servants and contractuals, - flattened salary curve from entry into service to retirement (15 equal steps: 5 biennials, 5

triennials, 4 quadriennials): higher initial salary, lower salary towards the end of career - extra costs no more than 2 % per year, savings beginning with the 3rd decade. Reform could reduce the number of steps and create fixed salaries without steps for the highest functions.

2. Belgium Belgium is a federal state divided into: 3 regions: Flanders, Wallonia and Brussels-Capital City, and 3 communities: the flemish / french / german/ speaking communities. Following Philippe Vermeulen's report on the Belgian Civil Service System, 2008, I can summarize: The Royal Decree on General Principles from December 2000 aims at the convergence of civil service regulations at all levels of the state. So, despite all differences in detail the Belgian salary systems are essentially career-based. They also are, as a rule, on a life-long statutory basis. Contractuals are the exception, essentially for temporary needs or short-term positions such as for replacement of absent members of staff. Contractuals in general have no career option. This is a point being discussed at this time. Jobs are classified into 4 levels: A = university degree (master) B = higher education, short studies (bachelor) C = higher secondary school certificate D = no special school certificate Level A is subdivided in classes A1 (lowest) to A5. Promotions are dependent on seniority and vacancy of posts. The system is very complicated. The Belgian salary system has a lot of allowances: for children, bilingualism, projects, leadership etc.

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A peculiarity is the allowance for competence, paid once a year in September after a successful competency assessment (test or certified training). It goes all the way up to 4200 Euro. Below, find key approximate numbers of the tabloid (€ Euro), without allowance, according to Johan Janssens (Vilnius Conference December 2006) and rounded up to 2008 (estimate): D 1500 - 2800 C 1700 - 3200 B 1800 - 4100 (senior ICT expert) A 2600 - 7000 (A4/3) Management and staff functions (fixed salaries per year in the recent system of 6-year-term appointments based on numerous assessments) per 01/11/2006:

Categorie 1 = 72 773.36 € Categorie 2 = 79 958.24 € Categorie 3 = 91 725.42 € Categorie 4 = 102 474.78 € Categorie 5 = 122 356.94 € Categorie 6 = 143 047.82 € Categorie 7 = 164 664.51 €

3. European Union Service in EU institutions is still founded upon life-long appointments as officials according to the Staff Regulations. But an increasing number of "other servants" are engaged under contract, such as: - temporary staff, - auxiliary staff, - contract staff, - local staff, - special advisers. The basic salaries of the officials are determined by grade and step. Remuneration comprises also family allowances and others, notably the expatriation allowance (16 %). Since 2004, there is a new salary tabloid system for EU officials: grade 1 (lowest) to 16, each comprising 5 steps (grade 16 only 3 steps). The former levels A-B-C-D were concentrated only on two groups: AD (Administrator) ranking from AD5 to AD16, AST (Assistant) ranking from AST1 to AST11. If you remember that a Director General in the EU Commission formerly was an A1, you know that nowadays he is an AD16. Cf. ANNEX to the Staff Regulations (Annex II).

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4. Germany Civil servants

The remuneration of civil servants, judges and professional military personnel is governed by the Civil Servants' Remuneration Act. I refer to the paper given by Kai-Andreas Otto from the German Interior Ministry who gave an excellent analysis in the OECD/SIGMA Bucharest Conference on Civil Service Salary Systems in Europe, April 2007. It is still the classical system based on the so-called maintenance principle – providing suitable maintenance (standard of living) corresponding to the office assigned. In theory, salary is therefore not a direct payment for individual work done. In practice, there are various forms of allowances to the basic salary, from family allowances to bonuses or performance allowances or even special allowances corresponding to labour market conditions. There are 4 remuneration schemes:

A, B – civil servants (in the administration) and military personnel, W – professors and lecturers at higher education institutions, R – judges and public prosecutors. Grades A2 (lowest) to A16 have steps in a rhythm of 2, 3 and 4 years. Grades B1 (lowest) to B11 have fixed salaries. Similarly in the R scheme: R1 and R2 with steps, R3 to R10 fixed. Cf. ANNEX III (functions and pay grades).

Public employees

On November 1st 2006 the new collective agreement for the public employees of the "Länder" (regions) entered into force. All public employees were transferred into the new scheme. Those who would have had lower pay got compensatory payments. The tabloid comprises 15 pay groups (E grades), E1 being the lowest. Each grade has 5 or 6 steps. These steps are attained not by function of age but - by function of professional experience, - into steps 4-6 additionally by function of individual performance:

performance above average may shorten the period and vice versa.

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E grade

basic pay development steps

step1 step2 step3 step4 step5 step6

after 1 year

after 3 years

after 6 years

after 10 years

after 15 years

15 3384 3760 3900 4400 4780

14 3060 3400 3600 3900 4360

13 2817 3130 3300 3630 4090

12 2520 2800 3200 3550 4000

11 2430 2700 2900 3200 3635

10 2340 2600 2800 3000 3380

9 2061 2290 2410 2730 2980

8 1926 2140 2240 2330 2430 2493

7 1800 2000 2130 2230 2305 2375

6 1764 1960 2060 2155 2220 2285

5 1688 1875 1970 2065 2135 2185

4 1602 1780 1900 1970 2040 2081

3 1575 1750 1800 1880 1940 1995

2 1449 1610 1660 1710 1820 1935

1 every 4 years 1286 1310 1340 1368 1440

5. Moldavia A World Bank and OECD HR-seminar in Chisinau in March 2008 showed that Moldavia had adopted a seemingly very modern pay scheme in the public sector. The remuneration of civil servants consists of: - basic pay related to grade, - pay supplements and - a performance-related bonus.

Originally basic pay accounted for only a third of total pay, on average. The salary reform act from 2006 in effect raised this quota to half the total pay.

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Even this increased quota does not comply with OECD standards. It is recommended not to exceed a 10-20 % quota of variable performance-related pay, and for lower ranks 10 % is the maximum. On the other hand, the decompression ratio between the lowest and the relatively highest salaries (except top managers) is only 2.5, providing only little incentive for career development and for keeping people in the civil service. I was told that it is almost impossible to recruit technicians or even workers for the Moldavian road construction and maintenance department. Moldavia will have to further develop its salary system including a revised position-based job classification system. 6. Portugal The New System of Remuneration (NSR) has replaced the old rigid system. It is in force for all public administrations at the central, regional and local level. NSR is still a career system, differentiated into various professional groups such as doctors, nurses, specialists, teachers, diplomats, senior officers or manual workers. Each professional group is accorded a certain scale of points between 100 and 900 (general scale). In the scale specific for a certain profession the civil servant gains 3 steps, each after 3 years, as well as possible promotion to a higher post. Managers have a greater score of points. The salaries are calculated by multiplying the points with the annually negotiated index (2008: 333.61 Euro). This basic salary is supplemented by social allowances and working condition supplements (for risk, night work, extra work, etc.) 7. Spain The Spanish civil service at all three levels (national, autonomous, local) is still based on a career system. It is also, as a rule, on a life-long statutory basis. Contractuals are the exception as they have the less important functions. The job positions are structured in 30 levels (grades), but actually the lowest grades 1-9 are no longer used. Civil servants are classified into 5 groups A-E, depending on university/school diplomas. Salary is a mixture of basic remuneration and supplements: a) Basic remuneration

− sueldo (salary), − triennial (seniority), − extra payments June and December;

b) Supplements

− level supplement (grade);

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− specific job supplement: for specific jobs which implicate special technical difficulty, dedication, responsibility, incompatibility, risks or laborious difficulty – evaluated by Hay system criteria;

− performance related pay (in general linear); − gratifications (bonuses) for extraordinary services.

Compression ratios: They range from 2.1.1 for the sueldo to 4.5:1 for the level supplement and 19.7:1 for the specific job supplement. My general impression is that the Spanish salary system is not very transparent. Its position-based elements could be reinforced.

B. Performance Management

You have already heard a lot about performance appraisal systems in various countries. Even in highly developed civil service systems with a long tradition, such as Germany, euphoria has given way to scepticism towards sophisticated systems of performance related pay (PRP). I cite Kai-Andreas Otto, Bucharest 25/04/2007:

"In summer 2005 the federal government adopted a performance related pay reform. The government's proposal for a new remuneration act was to reduce the basic salary at the initial and final steps. After the initial step, basic salary rises in 5, 10 and 20 years to the maximum basic salary. A performance variable of 2 %, 4 %, 6 % or 8 % can be added to the basic salary. A person fulfilling the minimum requirements would not receive any performance variable = 96 % of the old basic salary; a normal achiever with satisfactory performance would receive a performance variable at step 1 (plus 2 % = 98 % of the of basic salary); a high achiever with very satisfactory performance would receive an additional 4 % = 100 % of the old basic salary; for above-average performance an additional 6 % = 102 % of old salary; and for outstanding performance an additional 8 % = 104 % of the old salary. Finally the legislative process was interrupted by the elections in autumn 2005. The new coalition agreement between the two leading political parties did not pick up this proposal. The main reason has been the bureaucracy expected coming on with the new performance related pay system. It also was regarded very difficult to use the new instruments in a responsible and balanced way. The current discussion moves towards improving the 1997 bonus system. The remuneration schemes should not be touched anymore."

Of course there are pros and cons concerning PRP. In my view the cons are predominant. I cite Francisco Cardona, PRP in the public service in OECD and EU Member States, 2006 (based on Sean Fitzpatrick's survey for a meeting of the Directors General of the Public Service of EU Member States in 2002):

• "Performance-related pay systems are costly and time-consuming to implement.

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• In many cases such systems are only applicable at senior levels.

• Discretion of managers is confined to issues such as measurement of performance and distribution of the small pool of money available for performance-related pay.

• Some systems have been introduced as pilot projects with a view to wider application at a later date, but in absence of rigorous analyses of the effects of the pilot projects it is not clear how wider application could be introduced.

• Almost none of the current schemes address the issue of underperformance (no punishment for failure to deliver).

• Measurement of performance, particularly in areas where there are no obvious quantifiable outputs, is a very difficult issue.

• No evidence has been found that performance-related pay schemes have contributed to an improvement in performance, in human resource management or in the quality of the service delivered.

• Additional remuneration was not a significant motivator for the employees concerned.

• The regular, annual or more frequent, formalized discussions between managers and employees on performance, targets and progress achieved have positive effects on motivation (recognition of the contribution of an individual to the organisational performance)."

In my view, performance management has more success and is easier to manage if it has no direct link to pay. It should be part of the general strategic procedure in the administration: - strategic goals are specified to annual goals and the ways to achieve them; - the annual goals distributed to the single administrative entities (directorates etc.) are the

object of "contracts" between government and administration on the one side and inside the administration between managers and collaborators on the other side.

These contracts are not necessarily formalized. The essential character is the dialogue on goals, the degree of their achievement and the reasons for it. This dialogue within the framework of MbOs (management by objectives) can be combined with a performance dialogue every year combined with proposals for personal development, for instance: - individual training needs, as well in technical expertise as in dealing with customers or

colleagues, - horizontal mobility to get broader experience, - career planning especially for high performers. We have been doing this in Austria for several years and have had very good experiences. First of all, motivation of civil servants is raised and the sense of the individual contributing to the objectives of government is improved.

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C. Salary System for Kosovo

It would be too ambitious to recommend to Kosovo a new and elaborated salary system as seen from outside. Furthermore, I am sure that HR-rules for the actual administration already exist and, which of course, are to be taken into account. Let me give only some indications for a possible new or reformed salary system: 1. Salary reform should be part of a broader administration reform.

2. Political leaders must support and promote the reforms.

3. A realistic budget frame to be established in advance and which complies with OECD

standards (maximum 10 % of GDP).

4. Strategic objectives are to be fixed: − civil service personnel of sufficient quantity and quality, − being competitive with the private sector and comparable to similar states, − ensuring civil servants' motivation to dedicate their best possible work to the nation − fairness of the system – equal pay for equal work, − giving security and stability to civil servants, − higher contributions to and responsibilities for the administration's output are paid off in

reasonable and transparent form.

5. A reform team should be established consisting of HR specialists, the administration’s upper management, and also the unions and some external experts.

6. The guidelines of the reform should be discussed and fixed. The following propositions are my strictly personal view and not at all binding:

7. − all-in monthly salary without allowances (except for family, overtime and risk);

− position-based system similar to the system in force in Upper Austria and other Austrian regions;

− 16 grades seem to be sufficient for differentiation;

− as many jobs as possible are to be classified into job families through general regulation of the central HR authority so that only a smaller portion of single or rare jobs has to be evaluated separately;

− evaluate the system every 3 years;

− create a salary tabloid for these 16 grades with seniority steps, which may range from 15 in the lowest grades to 5 in the highest and which are equal inside every grade;

− flatten the life-earning curve by giving the first 5 steps every 2 years, the further 5 every 3 years and the last 4 every 4 years;

− use a reasonable decompression rate of 5 or 6 between the highest and the lowest grade;

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− discuss fixed salaries for the highest managerial (and judge) functions and their appointment revision and renewal every 5 years (except judges who of course are removable only by court decisions);

− in the first years of the administration's consolidation refrain from an elaborated PRP-system;

− instead give bonuses in a limited way, e.g. 1 % of the personnel budget – partially decentralized to the discretion of line managers, partially and centrally for very successful projects;

− give no bonuses to managers with fixed salaries, their reward is re-appointment to further periods after a transparent and objective assessment;

− only 2 performance rates: adequate/not adequate; this corresponds to a realistic image of civil servants who should be given jobs adequate to their competencies;

− avoid the performance rate "excellent", otherwise you'll have at least 90 % excellent collaborators;

− the hopefully few civil servants rated "not adequate" shall get 10 % deduction of their salary, the second time they are dismissed.

Now I invite you to discuss all these topics with me and thank you for your attention.