Pay for Performance

Evaluating Performance Appraisal and Merit Pay

George T. Milkovich and Alexandra K. Wigdor, Editors, with Renae F. Broderick and Anne S. Mavor

Committee on Performance Appraisal for Merit Pay

Commission on Behavioral and Social Sciences and Education

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1991



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Pay for Performance: Evaluating Performance Appraisal and Merit Pay Pay for Performance Evaluating Performance Appraisal and Merit Pay George T. Milkovich and Alexandra K. Wigdor, Editors, with Renae F. Broderick and Anne S. Mavor Committee on Performance Appraisal for Merit Pay Commission on Behavioral and Social Sciences and Education National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1991

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. This project was supported by the U.S. Office of Personnel Management. Library of Congress Cataloging-in-Publication Data Pay for performance : evaluating performance appraisal and merit pay / George T. Milkovich and Alexandra K. Wigdor, editors, with Renae F. Broderick and Anne S. Mavor ; Committee on Performance Appraisal for Merit Pay, Commission on Behavioral and Social Sciences and Education, National Research Council. p. cm. Includes bibliographical references (p. ) and index. ISBN 0-309-04427-8 1. Compensation management—United States. 2. Merit pay—United States. 3. Employees—United States—Rating of. 4. United States— Officials and employees—Salaries, etc. 5. United States— Officials and employees—Rating of. I. Milkovich, George T. II. Wigdor, Alexandra K. III. National Research Council (U.S.). Committee on Performance Appraisal for Merit Pay. HF5549.5.C67P38 1991 90-25995 658.3'125—dc20 CIP Copyright © 1991 by the National Academy of Sciences No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise copied for public or private use, without written permission from the publisher, except for the purposes of official use by the U.S. Government. Printed in the United States of America First Printing, January 1991 Second Printing, December 1991

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay COMMITTEE ON PERFORMANCE APPRAISAL FOR MERIT PAY GEORGE T. MILKOVICH (Chair), Center for Advanced Human Resource Studies, Cornell University JAMES N. BARON, Graduate School of Business, Stanford University MICHAEL BEER, Graduate School of Business Administration, Harvard University CHARLES C. BROWN, Department of Economics, University of Michigan THELMA A. CRIVENS, Collective Bargaining/Labor Law Department, Industrial and Labor Relations School, Cornell University CHARLES E. FIERO, MLR Enterprises, Philadelphia DANIEL R. ILGEN, Department of Psychology, Michigan State University PATRICIA W. INGRAHAM, Department of Political Science, State University of New York, Binghamton WILLIAM A. MORRILL, Mathtech, Inc., Princeton, New Jersey KEVIN R. MURPHY, Department of Psychology, Colorado State University JAMES L. PERRY, School of Public and Environmental Affairs, Indiana University WALTER H. READ, IBM Corporation, Armonk, New York ALEXANDRA K. WIGDOR, Study Director ANNE S. MAVOR, Associate Study Director RENAE F. BRODERICK, Senior Research Associate CAROLYN J. SAX, Administrative Secretary

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay Contents     Preface   vii     Executive Summary   1 1   Introduction   7 2   The History of Civil Service Reform   13 3   The Nature of the Evidence   34 4   Performance Appraisal: Definition, Measurement, and Application   45 5   Pay for Performance: Perspectives and Research   77 6   Private-Sector Practice and Perspectives   102 7   The Importance of Context   122 8   Findings and Conclusions   135     References   167     Appendixes         A Survey Descriptions   191     B Biographical Sketches   197     Index   201

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Frank Press is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Robert M. White is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Samuel O. Thier is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Frank Press and Dr. Robert M. White are chairman and vice chairman, respectively, of the National Research Council.

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay Preface This report is the work of the Committee on Performance Appraisal for Merit Pay, which was established late in 1989 at the request of the Office of Personnel Management. The report analyzes contemporary research on the assessment of job performance and on the effectiveness of performance-based pay systems. It also describes in broad outline the systems adopted by private-sector firms to link pay to performance. The immediate impetus for the study that produced this report was the schedule for congressional hearings on the reauthorization of the federal Performance Management and Recognition System in the spring of 1991. The director of the Office of Personnel Management was anxious to bring to the policy deliberations whatever knowledge and insight can be gleaned from scientific research and, where research is silent, from the more pragmatic realms of everyday practice in private-sector firms. In preparation for what will be the third major examination of human resource management in the civil service since 1976, she turned to the National Academy of Sciences/National Research Council to provide the needed synthesis of research and practice. A committee of 12 experts was appointed to conduct the study, and their work was supported by a three-member research staff. As is true of all study committees of the National Research Council, care was taken to ensure that the committee not only met rigorous standards in terms of expertise, but was also balanced with respect to questions of compensation policy, workplace arrangements, and fairness or equity concerns. Each committee and staff member brought a special area of competence to our work—knowledge of private-sector compensation systems, research on performance appraisal, the scholar's understanding of how organizations work, the manager's experience

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay of human resource management in a multinational corporation. Several members offered expertise on the federal bureaucracy, from either personal experience or scholarly interest; likewise a good number had long experience in and intimate knowledge of private-sector firms. Each member of the committee and staff took an active role, both because there was a very large territory to cover in a short time and because the topic turned out to be extremely compelling. Our habit was to devote a portion of each committee meeting to the discussion of background papers produced by committee and staff members so that we all became conversant with new bodies of research, different research methods, and novel perspectives on performance appraisal and pay for performance plans. Many were involved in drafting portions of the final report, all were avid readers and commenters, and as a result this report is a consensus document in the best sense. In the course of its work, the committee benefited from the contributions of many individuals and organizations. John Bernardin, professor of research at Florida Atlantic University, got us off to a good start by sharing up-to-date and comprehensive bibliographies on performance appraisal and merit pay compiled for a book in progress. Two federal managers' associations made membership surveys on the Performance Management and Recognition System available to us. Representatives of five Fortune 100 companies conferred with the committee on their merit systems. Our thanks go as well to Andrew Klein and Robert Ochsner of Hay Management Consultants and Howard Risher of the Wyatt Company for sharing information and ideas. We are particularly grateful to the members of a liaison group made up of federal personnel managers that was established to ensure that the committee had access to those who really know and understand the workings of federal personnel and compensation systems. Its members were Donna Beecher, Office of Personnel Management; Frank Cipolla, U.S. Department of Defense; Kathleen H. Connelly, U.S. Department of Agriculture; Agnes D'Alessandro, Department of Defense Dependent Schools; Herbert R. Doggette, Jr., Social Security Administration; Barbara L. Fiss, Office of Personnel Management; Larry K. Goodwin, U.S. Department of Labor; Elizabeth Stroud, National Institute of Science and Technology; Dona Wolf (ex officio), Office of Personnel Management; and Brigitte W. Schay (ex officio), Office of Personnel Management. Our acknowledgments would not be complete without special thanks to the National Research Council staff members who worked with the committee: Anne Mavor, associate study director, who made valuable contributions throughout the project; Renae Broderick, whose prodigious writing efforts helped us cover more territory than seemed possible; Carolyn Sax, who provided administrative support and kept smiling right down to the end; and our always gracious editor, Christine McShane. GEORGE T. MILKOVICH, Chair ALEXANDRA K. WIGDOR, Study Director Committee on Performance Appraisal for Merit Pay

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Pay for Performance: Evaluating Performance Appraisal and Merit Pay Pay for Performance

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