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Rethinking public pay

One of the biggest targets for reform in the pursuit of leaner government budgets is public sector pay and performance. Because of the crisis, some countries have frozen or even reduced salaries, while others have preferred to reduce benefits, even pensions. Others have decided to do nothing for the moment.

Public Sector Compensation in Times of Austerity takes a look at current trends in the compensation of public sector employees and offers new evidence-based thinking for addressing the issues.    Well in advance of the crisis, governments were on the lookout for ways to reduce public sector budgets and improve pay and management practices. Beginning in the early 1990s, an era of new public management brought private sector practices into public sector compensation policies. Since then, compensation management has been decentralised in some governments; the use of individualised pay, as opposed to standardised salaries, has risen; performance-related pay has become more commonplace; and executive pay schemes are now being used.

But reforming public sector employment, especially when a major goal is reducing spending, is a politically sensitive undertaking. It also affects governments’ most valuable asset and one of the most difficult to replace: its human capital. Little wonder so few countries have made great strides in this area. And the barriers are numerous. Pay is central to the psychological contract that public employers have with each employee. Meanwhile, loss of institutional knowledge, lost productivity while employees acquire new skills and learn new jobs, and management time lost on reorganisation can prove costly. But possibly the largest cost is the falloff in performance among employees who become discouraged in the face of often painful reforms. Twenty years after government salary programmes began to change, no single “best practice” model has stood out to help make pay reform a smoother undertaking.

OECD (2012), Public Sector Compensation in Times of Austerity, OECD Publishing

ISBN 9789264177734

©OECD Observer No 295, Q2 2013