PERFORMANCE-BASED PAY PLAN ADVANCES

"Define and implement a system of performance-based pay for all state employees." Policy Foundation research report,¹ 1998

"The most common piece of feedback received from interviews and survey respondents was that the current salary structure is inadequate. Salary raises are not tied to performance, resulting in employees moving across agencies to get an increase in pay grade." PricewaterhouseCoopers LLP report,² 2016

(June 2018) Two reports published 18 years apart set the stage for the performance-based pay plan advanced in the past year by policymakers.

The plan allows Arkansas state agencies to "grant performance-based raises to their employees of up to 2.8 percent of each agency's total annual base salaries," with a "maximum-authorized" 10 percent raise, a state Department of Finance and Administration memo notes.³ The plan covers more than 25,000 full-time state employees at agencies that report to freshman Republican Gov. Asa Hutchinson.

Murphy Commission Report

Performance-based pay was a key reform advanced in a 1998 report for the Murphy Commission, a Policy Foundation project. The report noted:

"Pay-for-performance systems have become widespread in the U.S. The vast majority of private sector firms operate under a system in which compensation and advancement is tied directly to an individual's personal and professional ability to effectively accomplish the job to which he or she is assigned. The Federal government has also implemented performance-based pay for members of its Senior Executive Service. At the state level (the idea) of paying employees based on performance is gaining momentum. Georgia, Colorado, Michigan, California, and Idaho are among the leaders ... "

"Pay-for-performance means employees advance in their organization and gain in pay according to how well they do their jobs according to defined performance outputs that can be measured. Moreover, they fully understand how their jobs relate to achieving the greater vision expressed in their organization's mission statement; how they are tied to that mission, and how it--in turn--relates to broader performance measures that define organizational success. Performance pay encourages in all employees a constant devotion to improvement and quality in both job performance and skills enhancement."

PricewaterhouseCoopers LLP Report

The Policy Foundation retained PricewaterhouseCoopers LLP, an international management consulting firm to assist it with the Efficiency Project announced by Gov. Hutchinson at APF's 20th anniversary celebration in 2015.

PwC's report, completed in 2016, noted the need for a comprehensive solution to the problem of Arkansas state employee compensation. The report noted:

"In addition, retirement costs are on the rise due to increasing retiree lifespan and premiums. In addition, changing interest rates and roller coaster asset returns contribute to persistent cash and financial statement cost volatility. In addition, changing interest rates and roller coaster asset returns contribute to persistent cash and financial statement cost volatility. Many employers in both the private and public sector are actively taking steps to mitigate risk."

The firm made the following performance-based pay recommendations :

"Assess existing pay structure and roll out recommendations from review ... Consider as a part of pay structure review increasing management authority to make salary and position decisions and flexibility with budget; aligning salary increases with performance; decreasing the number of pay grades. While examining the employee classification and pay structure, DFA should develop mechanisms to address highly technical and skilled position needs. It is important to note, however, that simply increasing salaries alone is not likely to result in improved performance – compensation package alteration will achieve highest benefits when rolled out in tandem with an overall improved human resources strategic plan."

"Pursue additional opportunities to further modernize existing retirement and other employee benefit plans (e.g., health care) to ensure their competitiveness while reducing related costs."

The performance-based pay plan advanced in the past year by policymakers occurred in response to PwC's first recommendation. The second recommendation will advance as policymakers continue efforts to transform Arkansas state government.

--Greg Kaza

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¹ Making Arkansas' State Government Performance Driven And Accountable: Four reforms state government can implement now to save taxpayers millions (September 1998) Murphy Commission

² Efficiency Review of Arkansas State Government (July 2016) PwC report prepared for the Policy Foundation

³ Arkansas Democrat-Gazette, "Memo: State OK'd to grant raises to some; $27.5M yearly cost forecast," May 30, 2018