Author: Simon Burgess
Teacher performance pay without performance pay schemes
Amid the macroeconomic gloom, the Autumn Statement contained a line about teachers’ pay. The School Teachers’ Review Body recommends “much greater freedom for individual schools to set pay in line with performance”. Consultations and proposals are expected in the near future.
But simply giving schools the freedom to do this may be a rather forlorn hope of anything much happening. It is not clear that there is a substantial demand from schools for performance-related pay (PRP) schemes that has only been thwarted by bureaucratic restrictions. It is hard to see high-powered, tough-minded PRP schemes being introduced by more than a handful of schools, not least because we have not seen large scale deviations from national pay bargaining in academies in England despite their new freedoms to do so.
If that path seems unpromising, there are other ways of facilitating a greater reflection of performance in pay, discussed shortly. But first – is PRP for teachers a good idea in the first place? Does it raise pupil attainment? What are the ‘side effects’?
This is a question that economists have produced a good deal of research on. And to summarise a lot of diverse work briefly, the international evidence is mixed. Those on both sides of the argument can point to high quality studies by leading researchers that find substantial positive effects, or no effects. In both cases, interestingly, there appeared to be little evidence of gaming or other unwanted effects of the incentives.
There is little evidence specifically for England. Our own research found a substantial positive effect of the introduction of a PRP scheme, but given the varied results found elsewhere it would seem unwise to place too much weight on this one study. The underlying performance pay scheme was poorly designed but nevertheless had a positive effect on the progress of pupils taught by eligible teachers relative to ineligible ones.
And design is key. There are many reasons why a simple high-powered incentive pay scheme might be detrimental to pupil progress, which we have discussed here and here. These include the fact that teachers have multiple tasks to do, the problems of measuring the outcomes of some of those tasks, the complex mixture of team and individual contributions, and the potential impacts on implicit motivation. The overall message is that incentives work, but schemes have to be very carefully designed to achieve what the schemes’ proponents truly intend.
There is another way to facilitate a closer link between pay and performance that does not require any school to introduce a performance pay scheme.
Published performance information in a labour market can change the way that the market rewards that performance. The critical features are first that the organisation’s own output depends in an important way on this performance characteristic of an individual; second that the organisation has some discretion in the pay offers it can make to new hires; and thirdly that the performance information is public – is available and verifiable outside the current employer. In this case, the pay structure of the market will reflect the performance rankings: high-performing individuals will be paid more.
In teaching, the first two of these three conditions are met: teacher quality matters hugely for schools, and schools have some discretion over pay. Now, suppose we had a simple, useful and universal measure of each teacher’s performance in raising the attainment of her pupils (obviously we don’t at the moment; I come back to this below), and that this was published nationally, primarily for the attention of Headteachers. The idea is that Headteachers trying to improve the attainment of their pupils would be on the look-out for high performing teachers when they had a vacancy to fill. Armed with this performance information, they might try offering a higher wage (or something else – it doesn’t have to be money) to tempt them to join their own school. Equally, the teacher’s current school may respond by raising the offer there. Over time, this process will tend to raise the relative pay of high-performing teachers relative to low-performing ones, whom no-one is trying to bid for.
This idea should not be a strange one. A number of professions have open measures of performance. Just today it is reported that performance measures for more surgeons will be made public in the summer of 2013; this is already true for heart surgeons.
It is well-known that PRP does two things: it motivates and it attracts. The outcome for pay described here will tend to make teaching more attractive to people who are excellent teachers and less attractive to those who aren’t.
There are a number of problems with this idea, though perhaps less than might appear at first glance. First, it could be argued that a performance measure derived from teaching in one school is not relevant to teaching in another school. Obviously each child and each school is unique, but it seems very unlikely that there is no commonality of context between one school and the next. Observation suggests this: teachers moving from one school to another are not counted as having zero experience, and Headteachers are often appointed from outside a school.
Second, there might be a fear that the teacher labour market would become chaotic, with everyone churning around from school to school in search of a quick gain. We have to recognise that there is substantial turnover of teachers now < http://www.bristol.ac.uk/cmpo/publications/papers/2012/wp294.pdf >. But the main point is that it does not require much actual movement to make the market work. Schools can make counter offers to try to retain their star teachers and the end result is the same – higher salaries for high-performing teachers.
Third, any measure would be noisy, partial and imperfect. Of course, all such measures are. Whether a measure is perfect is not really the question, the question is how noisy and imperfect is it, and whether it contains enough information to be useful. One advantage in this case is that the consumers of these performance indicators are the people best able to judge their usefulness and their shortcomings: Headteachers. If such metrics are not useful, Headteachers will simply ignore them; there would be no compulsion to use them. Even in labour markets with some of the most detailed and finely measured performance indicators (for example, football or baseball) there are many moves between employers that do not work out. It is worth re-emphasising that these performance measures are bound to be imperfect and incomplete, but broad measures of performance may nevertheless be very useful.
There are useful parallels to be drawn from another profession: academics. For academics, the combination of very detailed and public performance information and a context where research performance matters a great deal to universities seems to have had a substantial effect on academics’ pay.
The Research Assessment Exercise (RAE) and more recently the Research Excellence Framework (REF) have made a strong research performance very important to a university’s standing and its income. But the critical factor for academics is that an individual’s research performance is public knowledge, through very detailed recording of the impact of their research papers. Departments and universities aiming to improve their ranking seek out star researchers and attempt to bid them away with higher salaries (plus other things such as research facilities). These offers may well be matched by their current employer, but the end result is that salaries now seem to be much more closely correlated with research productivity than before the RAE/REF (I say “seem” as there does not appear to be any evidence on this, so this is casual empiricism). This is a lot of what drives many young researchers to put in very long work hours: having a paper published in a top scientific journal early in a career has a substantial lifetime payoff even in a world with few or low-powered incentive schemes. If you check out academics’ websites you will invariably see their academic output prominently displayed.
Again, an important feature is that these indices of research output are largely consumed by other academics who are aware of their strengths and weaknesses. So although they are far from perfect, they are used by precisely the people best placed to calibrate their usefulness appropriately.
If we are to go down a path of tying teacher pay more closely to performance, and yet respect the rights of increasingly autonomous schools to determine their own pay systems, then this might be an option to consider. The challenge is to devise a measure that is simple, useful and universal. It would measure the progress made by the pupils that teachers taught, it would have to deal with normal variations in performance by averaging over a number of classes and a few years, and be on a common metric. This is not straightforward, but if it gave rise to a robust broad measure of performance it could form a part of performance pay for teachers, and performance management more broadly. It could also have substantial effects on the pay of high-performing teachers.
In a recent surprise announcement to the House of Commons the Chancellor announced that he wants to scrap national pay deals for public sector workers. Labour unions across the land are hitting back, arguing that this will damage public services. In fact, the evidence we have on the effect of national pay regulation suggests exactly the opposite.
National pay awards tend to overpay public sector workers in low cost areas of the country and underpay those in high cost areas. Recent research shows the size of these differentials. For example, the Institute for Fiscal Studies suggests that women working in the public sector in the West Midlands are paid upto 14 percent more than their private sector counterparts. What has received much less attention is that these pay differentials may have an important impact on the quality of public services provided in different parts of the country.
National pay arrangements effective impose a pay ceiling for workers in high cost areas. Simple economics suggests this should impact on the ability of the public sector to deliver services in these areas. The lower wages offered to public sector workers relative to their private sector counterparts in high cost areas will mean, all other things equal, that the public sector will struggle to recruit and retain the best quality workers. This in turn will mean problems in producing services.
Recent work undertaken at the CMPO and the London School of Economics confirms this intuition in a very stark setting. Analysis of the impact of national pay regulation of the wages of over half a million nurses in the NHS showed that hospitals in high wage areas had higher death rates for patients who were admitted following a heart attack. Furthermore, the output of hospitals in low cost areas such as the North East did not appear to compensate for the lower quality output of their counterparts in the high cost South East. Our research suggested that deregulating pay to reduce the gap between nurses pay and that of their counterparts in the private sector would both save lives and cut costs. So in this case both economic intuition and the Chancellor’s instincts are right: deregulating public sector wages will improve the quality of public services.
Further details of the research can be found at: Propper, C and Van Reenen J (2010). Can Pay Regulation Kill? Panel Data Evidence on the Effects of Labour Markets on Hospital Performance. Journal of Political Economy 118 (2): 222-273.
The Coalition government is concerned about public sector pay and has instigated a review chaired by Will Hutton. Hutton has signalled that he will be looking at it the level of pay, both across sectors and within the public sector. However, one issue on which there have been fewer pronouncements to date is the regional variation in pay within the public sector.
Pay in the public sector for doctors, teachers, nurses, armed forces and other public sector workers is set by the Pay Review Bodies. These bodies review the state of the labour market and recommend a level of pay for to the government and the unions each year. Public sector unions often stress fairness in their wage negotiations: the commonly articulated view is that a teacher in an inner city should in Newcastle does the same job as one in inner London and should therefore be paid the same wage. Perhaps as a result of this argument the review bodies basically set one wage for all the workers they cover, regardless of where they are located in the country. There are extra increments for those located in the South East and London, but these tend to be small. The result is that wages in the public sector tend to be much ‘flatter’ across geographical space than private sector wages. As an example, the difference in the pay of a nurse located in the North East and London is around 15%. However, the difference for a private sector employee with similar skills to a nurse is in the order of 40%.
Such large gaps are likely to cause recruitment and retention problems for public sector employers in the South East as their workers live in a high cost area and as a result will be offered higher wages in the private sector. Shortages of nurses and teachers in the South East have been an ongoing and well documented problem. But is is likely that these recruitment and retention problems also have a knock on effect into the productivity of public sector services in high cost areas. Shortages of workers, high turnover rates and perhaps low levels of morale as a consequence, are likely to cause production problems. CMPO research on nurses’ pay has confirmed this intuition: centralised regulation of nurse pay caused extra deaths per year amongst patients admitted to hospital following a heart attack. They also calculated that wage regulation didn’t even save the government much in direct wage costs as the benefit of lower wages bills in the South East was offset by higher pay in the North of the country so the wage savings were small. The reason for the small wage savings were that the pay review body gets the level of wages ‘right’ on average – what they get wrong is the extent of variation across different parts of the country. These seems very plausible: the review body takes evidence from a wide variety of sources and probably therefore sets the average level correctly, but in responding to union (and perhaps also public) pressure for equality in the public sector, gives insufficient weight to regional variation.
It is likely that public sector pay regulation affects the ouput of teachers, policeman and other public sector workers in a similar way, though this is still to be confirmed.
This all suggests that in addition to examining the level of public sector pay, Hutton should be equally concerned with the variation in pay across regions. One solution might be to deregulate pay altogether and let each employer negotiate with their local workers. However, this also has costs. First, and most obviously, such wage negotiations are costly for both employers and workers in terms of time and the need for each employer to employ HR personnel skilled in wage negotiation. But second, in labour markets in which there is a shortage of workers, negotiations between single employers and their workers may simply drive up the price of labour for all local employers as employers seek to outbid each other to attract staff. This means that no single school or hospital will wish to engage in such negotiation, because any advantage they initially get from offering a higher wage, will be quickly eroded as other local employers follow suit. Whether for the first and/or the second reason, it is the case that hospitals in England, when given the freedom to negotiate local wages in various NHS reforms have generally not done so.
The solution might be therefore to retain the pay review bodies but to ensure that they allow for much large wage differentials across the country. In so doing, they will have to resist calls from the unions – and possibly the public – for equity in pay setting. But far from being fair, such equity penalises public sector workers in high cost areas, over-reward those in low cost areas and probably harm the users of the services these workers provide.
The coalition government plan to implement substantial cuts in spending on public services, with most departments having been asked to find budget cuts of 25%. The government hopes to achieve these cuts without such radical effects on what it delivers. The up-coming Spending Review aims to make efficiency savings and “to consider how to deliver a step change in public sector productivity”(i.e. the ratio of public sector outputs to inputs).
Public service reforms may deliver genuine efficiency improvements, but even in their absence the spending cuts are is likely to be successful in increasing measured productivity in the public sector. The graph shows the National Statistics measure of public sector productivity from 1997 to 2008. Productivity falls as the increase in inputs outstrips the growth in measured output. As inputs decrease this is likely to be reversed. Measuring the quality of public sector outputs is extremely difficult – just as the numbers may not include all quality improvements as inputs rose, the output measure may miss any deterioration in service quality as inputs fall, leading to an increase in measured productivity.
With the prospect of public sector pay freezes, quality decreases may arise through talented staff leaving for the private sector. Research suggests that remuneration over the lifetime is roughly similar in the public and private sector with a small public sector premium. Hence there is a risk, with public sector pay frozen, and if jobs become available, that quality will decrease if some of the most able employees go private.
Shifting a substantial fraction of activities out of the public sector, for example to be delivered by charitable organisations, could also increase public sector productivity if those services were relatively resource intensive and low productivity. But then comparing the performance of total publicly-provided services over time, and inherently the performance of successive governments, would not be meaningful as the measure would not be comparing like with like.