Performance measurement practice. The use of sanctions and rewards in the public sector

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1 Performance measurement practice The use of sanctions and rewards in the pubic sector

2 The foowing individuas contributed to this report: Sascha Kiess, Diane French, Nick Soan, Dan Vaance, Daniee Wiiams. The Nationa Audit Office scrutinises pubic spending on behaf of Pariament. The Comptroer and Auditor Genera, Tim Burr, is an Officer of the House of Commons. He is the head of the Nationa Audit Office which empoys some 850 staff. He and the Nationa Audit Office are totay independent of Government. He certifies the accounts of a Government departments and a wide range of other pubic sector bodies; and he has statutory authority to report to Pariament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. Our work eads to savings and other efficiency gains worth many miions of pounds; at east 9 for every 1 spent running the Office.

3 Contents Executive Summary 2 Part One Introduction 5 Part Two How sanctions and rewards are currenty used 12 Part Three The effectiveness of forma sanction and reward mechanisms 18 Annex 1 Methodoogy 38 Annex 2 Different types of sanctions or rewards 40 Annex 3 Guidance for deveoping and impementing sanction 45 and reward mechanisms Annex 4 Performance evers 50 Annex 5 Bibiography 54

4 Executive PART ONE Summary Executive Summary 1 This report is a review of the use of sanctions and rewards based on academic research and an NAO survey of their use in centra government. The NAO undertook this to inform the debate on incentivising pubic sector performance. Whie many commentators discuss pubic sector performance, they have not systematicay reviewed the use of sanctions for faiure or rewards for success. The purpose of this report is to bring together the evidence on the effectiveness of sanctions and rewards, summarise the resuts of our survey on their use in centra government, and to provide a practica guide on how to use them we. Key findings 2 Government bodies have to manage performance through deivery chains, often having imited contro over those in the chain. They usuay choose funding or reguatory instruments constructed so that they provide a degree of everage over performance. But such evers are often insufficient to secure a the desired resuts. That has ed to increased emphasis on sanctions and rewards, incuding the introduction of high profie schemes such as the earned autonomy of Foundation Trusts and the reward grant attached to achievement in Loca Area Agreements. At a ower eve, sanctions and rewards are being considered in reation to a variety of behaviour change initiatives, incuding sanctions for not recycing, financia incentives for businesses to move freight by water, and criminas being offered reduced prison sentences in exchange for peading guity as eary as possibe. 3 Despite this greater emphasis, there are few empirica assessments of the effectiveness of sanctions and rewards. The evidence that does exist shows that pubic sector agents organisations, teams and individuas do respond to incentives, and that those incentives can promote or hinder enhanced effort and performance, depending on how we they have been designed and impemented. 4 As we as reviewing evidence within the academic iterature, we conducted a survey of 145 government programmes to understand how sanctions and rewards are currenty used in the UK pubic sector. It identified three broad types of mechanisms: financia (e.g. bonuses or penaties); operationa (e.g. granting organisations greater or esser autonomy from inspection); and reputationa (e.g. the pubication of eague tabes). 2 The use of sanctions and rewards in the pubic sector

5 EXECUTIVE Summary Use of sanctions and rewards 5 Our survey showed: The overa use of sanction and reward mechanisms is ow. Ony around 40 per cent of those who responded to our survey reported using an expicit sanction or reward mechanism somewhere in their programme. To some extent, this refects a ack of famiiarity with the terminoogy: in a number of cases, foow-up to the survey uncovered that sanction and reward mechanisms were being used where none had been reported. Such responses, however, raise questions over the extent to which programme managers have systematicay considered the use of incentives. The use of sanction and reward mechanisms is more common in service deivery programmes. Neary 60 per cent of UK government programmes that deiver services reported using expicit sanction or reward mechanisms, compared to just 25 per cent for programmes that aim to buid capacity, and 21 per cent that seek to infuence outcomes. More sanction and reward mechanisms are aimed at the organisationa eve rather than the team or individua empoyee eve. This refects, among other things, the intrinsic difficuties of measuring the contribution of individua empoyees to many pubic sector outcomes. Financia and reputationa mechanisms are far more common than operationa ones. Our survey identified 26 financia mechanisms, 21 reputationa, but ony seven operationa. Effectiveness of sanctions and rewards 6 There have been few pubished empirica studies of the effects of sanctions and rewards in the pubic sector, and those that have been done focus on US institutions. There have been a number of further reviews and studies which provide some reevant evidence, however, as we as practitioner or expert judgements. Our survey showed a simiar picture. More than 60 per cent of those using sanctions or rewards (22 out of 35) beieved that their use had improved performance. Interviews with the respondents showed, however, that these opinions were based on subjective judgements. We found no quantified evidence of the effect of sanctions and rewards on eves of performance for the programmes in the survey. 7 If the evidence on the effectiveness of sanctions and rewards is imited, it does permit a number of observations: Peope in the pubic sector respond to sanctions and rewards, if they regard them as significant. Athough pubic sector workers may we have a variety of motivations to perform we, financia rewards can improve performance. If stakehoders have a mix of sef-interested and atruistic motives, then the design of sanction and reward mechanisms must recognise that mix, to avoid reducing overa motivation by focusing on one aspect to the excusion of the other. Because performance in the pubic sector has a number of dimensions, it is important that the definitions used for sanctions or rewards capture a significant aspects of performance, to minimise the scope for perverse effects. If performance is difficut to measure, or where the contribution of a stakehoder is difficut to attribute to performance, then sanction and reward mechanisms which have dramatic financia or persona effects shoud be avoided. Good practice checkist 8 The tabe beow summarises the main practices which emerge from the research and guidance. More comprehensive guidance is avaiabe at Annex 3. The use of sanctions and rewards in the pubic sector 3

6 Executive Summary Tabe 1 Guide for incentivising a deivery chain Objective 1 Ceary define a measurabe objective. Map the strategy 2 Identify the activities and the outputs that are needed to achieve the objective (see the exampe Strategy Map in figure 1). [p. 7 and 47]. Map the deivery chain 3 Identify and engage with the key stakehoders, map the performance evers and incentives in use (see the exampe Deivery Map in figure 2). [p. 8 and 48]. 4 Use the deivery map to undertake a stakehoder anaysis. Identify where the main barriers are, and the evidence on the effectiveness of the current programme, the performance evers, and their associated sanction or reward mechanisms (see Stakehoder Anaysis tempate in Annex 3). [p. 49]. Designing sanction and reward mechanisms 5 Understand the fu range of sanction or reward mechanisms avaiabe financia, reputationa and organisationa (see Annex 2). [p. 40]. 6 Assess the motivations of the key payers. Assess the baance between financia and atruistic motivations, and whether they operate at organisationa, team or individua eve. [p. 26 and 40]. 7 Identify outcomes over which the payers have contro or significant infuence. [p. 27]. 8 Link the incentives to performance measures which ead to the desired (ong-term) outcomes in a predictabe way. A singe measure may not capture the reevant aspects of performance, but any set of measures must be kept manageabe. [p. 28]. 9 Ensure the rewards and sanctions are cost-effective. Where they invove financia eements, it may be sensibe to mode the operation of the system to hep define appropriate vaues or ranges. [p. 30]. 10 Introduce safeguards to prevent unintended behaviours. Approaches can incude maintaining a degree of independence in performance assessment and vaidating key performance measures. [p. 32]. Measure performance 11 Deveop and impement data systems that coect and anayse timey and reiabe performance data. [p. 33]. Appy the sanction or reward 12 Deveop the expertise to appy the sanctions or rewards in a timey, consistent and transparent manner, especiay when using compex contractua arrangements with deivery agents. [p. 34]. Review effectiveness 13 Buid reguar interna and externa reviews of the effectiveness of the sanction or reward mechanism into the programme s overa performance management cyce. [p. 35]. Impement 14 Where possibe, phase in new sanction or reward mechanisms graduay, or on a piot basis, to identify and address any dysfunctiona behaviour. [p. 37]. 4 The use of sanctions and rewards in the pubic sector

7 Introduction PART ONE Introduction UK pubic sector context 1.1 This report contributes to the debate on incentivising pubic sector performance. It examines the various evers used by government to meet the ambitions set out in Pubic Service Agreements (PSAs) and other major programmes of work, and asks whether the effectiveness of these evers coud be enhanced by the use of expicit or forma sanctions and rewards. Whie there has been much commentary on pubic sector performance, there has been imited systematic review of the use of sanctions for faiure, or rewards for success, in achieving progress. 1.2 The Government s approach to pubic service reform since 1997 has changed the reationships between centra government, oca government, and the many other organisations and citizens invoved in deivering government objectives. Cabinet Office (2006) summarised it as comprising four eements: Top-down performance management, such as PSA targets, reguation/minimum standards, performance assessment, inspection, and intervention to tacke poor performance. Introduction of greater competition and contestabiity in the provision of services. Introduction of greater pressure from citizens (choice and voice). Measures to strengthen the capabiity and capacity of civi and pubic servants. 1.3 The Government has aso promoted the merits of ocaism the devoution of performance management to a oca eve, with ess centra dictation of priorities: Our ong term objective has aways been to match ambitious nationa standards with a vigorous oca autonomy and fexibiity whereby we maximise efficiency, equity and a personaised service for the patient, the pupi and the citizen generay. This opens up a chaenging agenda for the second stage of modernisation and reform. It incudes far more radica devoution of responsibiities from Whiteha as we give the roe of Whiteha a sharper focus. It aso demands greater transparency, proper audit and new incentives and an ambitious agenda to encourage oca autonomy and manageria fexibiity. (HM Treasury, 2004a). The use of sanctions and rewards in the pubic sector 5

8 PART ONE introduction 1.4 The Treasury goes on to argue that this devoution of performance management needs to be accompanied by stronger oca accountabiities and incentives for deivering improvements: Credibe incentives in the form of rewards and sanctions must be made avaiabe such that intervention by centra government ony takes pace in cases of cear under-performance that the intermediate tier has not been abe to correct. 1.5 Exampes of expicit sanction and reward mechanisms incude: contracts with private sector firms, where financia bonuses and penaties are specified for performance; tying the degree of externa inspection to performance, as in the case of the Audit Commission with Loca Authorities; and the use of pubic benchmarking, such as schoo eague tabes. In other cases, incentives are not reiant on expicit sanctions and rewards, such as the egisation that requires Loca Authorities which underperform against air quaity targets to pubish action pans. Deivery chains 1.6 Most government objectives cannot be deivered by government Departments aone, but require a compex network of organisations, incuding centra and oca government, government agencies, and bodies from the private and third sectors. In the iterature these inks have been anaysed by reference to Principa-Agent theory, which describes the issues faced by one party (the Principa ) when it needs another party (the Agent ) to deiver its objectives. If Departments are the Principa, then the Agents are the empoyees, organisations or citizens that Departments need to work with to deiver their objectives. NAO (2006) ists four basic types of inkages or reationships within these deivery chains. Different types of ink need to be managed in different ways. For exampe: Interna inks; where one part of the chain directy manages another. These can be managed through a standard management review process. The Principa sets objectives for the Agent, who then carries out the activities and reports progress back to the Principa. If performance is poor, the Principa works with the Agent to improve performance. However, this can be very resource-intensive. Contractua or reguatory inks; where one part of the chain defines through aw, and/or funding, how another part operates. These are often managed more at arms-ength, where the Principa formay deegates responsibiity for certain outcomes to the Agent. The Principa wi often use sanctions or rewards as a way of motivating the Agent to deiver on objectives, avoiding the need for resource-intensive performance management. Given the move towards ocaised performance management in the pubic sector, there has been an increase of interest in the potentia for using sanctions and rewards. Links of common purpose; where two bodies have parae missions to work towards the common good, such as between two government Departments, or between a Loca Authority and a charity. These rey more on partnership working and trust, as there is no cear Principa or Agent. However, these inks can be strengthened through more forma instruments, such as Memoranda of Understanding, in which parties set out their commitments to each other. As with contracts, they may incude Service Leve Agreements to carify and strengthen these commitments. Links to the wider community; where one part of the chain has no forma authority over the groups or individuas with which it wishes to work, and is therefore reiant on persuasion. Here there is a need to rey on softer evers, such as providing forma education or information as a means of persuading Agents to behave in a certain way. Advertising campaigns or pubic information eafets are commony used for this purpose. 6 The use of sanctions and rewards in the pubic sector

9 Introduction PART ONE Strategy and stakehoder mapping 1.7 It foows that designing effective incentives depends on a good understanding of the context, identifying the various performance evers avaiabe, understanding the motivations of the deivery agents, assessing the strengths and weaknesses of the evers, and identifying opportunities to strengthen the evers to achieve the desired eves of performance. These steps to panning the deivery of government programmes were formaised within Departments Deivery Agreements, which were pubished for each of the 30 Pubic Service Agreements under the government s 2007 Comprehensive Spending Review. The key eements in this process are summarised beow. 1.8 Figure 1 shows a generic strategy map for an objective. It shows how an organisation can take an objective, and identify the combination of activities and outputs that shoud hep to achieve it. It shoud be based on evidence, or at east on expert judgement, on what drives the outcome. This sort of mapping is designed to hep the owner of an objective create a programme structure that is ikey to achieve the objective in a cost-effective way. A strategy map can aso be used to structure the performance measurement framework, as it identifies the outputs and outcomes that are important to measure. These indicators are aso ikey to feature in any sanction and reward mechanisms. 1.9 Having identified the activities needed to deiver an objective, suitabe organisations and stakehoders can be chosen to perform those activities. It is then hepfu to map the reationships between them incuding the performance evers that are used and any sanctions or rewards that are attached to them. This type of deivery map can hep identify where there is insufficient everage over performance, and where introducing expicit sanctions or rewards is ikey to have the greatest impact. It can aso be used to ensure coherence of incentivisation across the deivery chain, and as a basis for considering the ikey motivations of individua organisations or stakehoders. 1 Strategy Map Objective Intermediate outcome 1 Intermediate outcome 2 Intermediate outcome 3 Intermediate outcome 4 Output 1 Output 2 Output 3 Output 4 Output 5 Output 6 Activity 1 (Organisation 1) Activity 2 (Organisation 2) Activity 3 (Organisation 3) Strong infuence Moderate infuence Weak infuence Source: Nationa Audit Office The use of sanctions and rewards in the pubic sector 7

10 PART ONE introduction 2 Deivery Map Funding Performance Management Organisation 1 (Activity 1) Funding Pubished performance eague tabes Department Organisation 2 (Activity 2) Education Contract Organisation 3 (Activity 3) Education Target popuation Financia bonus Taxation Externa infuences Performance ever Sanction or reward Strong infuence Moderate infuence Weak infuence Source: Nationa Audit Office 1.10 Tabe 2 iustrates some of the evers which exist and how they might be used with, or without an expicit sanction or reward. (Further discussion of performance evers is avaiabe at Annex 4). The main motivations for using sanction or reward mechanisms incude: To improve the performance of individua units in comparison to overa performance for exampe, of an individua hospita reative to other hospitas. To improve the performance of a wider system for exampe, to improve the performance of the heath system to dea with the threat and occurrence of strokes. As a means of aocating resources to more efficient providers for exampe, to enabe funding to be aocated to a number of different providers based on their performance. (Propper and Wison, 2003). 8 The use of sanctions and rewards in the pubic sector

11 Introduction PART ONE Tabe 2 Performance evers Performance ever Without expicit sanctions or rewards With expicit sanctions or rewards Taxation which, as we as raising government revenue, can be an effective means of incentivising certain behaviours by increasing or decreasing the costs associated with them. Taxes on acoho, tobacco and fue hep to raise income for the government. Because the amount of tax individuas pay for these goods is directy inked to the amount they consume, it has an intrinsic effect of motivating consumers to buy ess, and so can be used as a performance ever. Lower rates of Vehice Excise Duty are offered to Heavy Goods Vehice operators who achieve target eves of emissions and obtain a Reduced Poution Certificate. Pubishing performance data which, in a competitive environment, heps service users make an informed choice, and so can be used to encourage competition between individuas and organisations to perform better. Legisation which sets the overa ega framework for deivery chains and can enabe the use of other evers. Reguation and standards which can be used to specify the quantity, quaity and/or type of service that providers shoud offer users. Inspection and review which is used to check the quaity of deivery or the standards of performance. Targets which, combined with the pubication of associated performance indicators, are intended to focus attention on key outcomes and to enhance transparency and accountabiity. Funding which can be inked to various measures, such as past performance, organisationa capacity, and the achievement of targets. Train Operating Companies are required to pubish their environmenta poicies, as we as their performance against key envinromenta indicators. By aowing greater pubic scrutiny, it is hoped to encourage the companies to deveop sound poicies, and perform we against them. The 1995 Environment Act requires Loca Authorities to assess their air quaity. There are no forma sanctions if poution is excessive, but the area wi be designated an Air Quaity Management Area and an action pan must be drawn up. Ofgem sets price caps for eectricity and gas companies, which incentivises efficiency and contributes to the government s objective of maintaining the competitiveness of the UK s energy markets. Pubication of the resuts of Department Capabiity Reviews provides greater transparency of the performance of individua government Departments. Loca Authorities were given efficiency targets foowing the Gershon Review. Performance against these targets was monitored but there was no forma consequence for non-achievement. Centra government Departments are aocated funding dependent upon their performance in the two previous years, but the ink between performance and funding eves is not made expicit. Converting basic performance information into composite indicators such as Loca Authority assessments or hospita star ratings makes it cear who is performing better or worse overa, and adds further motivation to perform we. Loca transport authorities are entited to estabish statutory Quaity Partnership Schemes with bus operators to require them to provide services of minimum standard to ensure contract renewa. The Environment Agency can withdraw the operating icences of arge-scae industria pouters such as car producers and hauiers if they fai to compy with minimum standards. Linking Loca Authorities Comprehensive Performance Assessment scores to the degree of intervention and inspection by the Audit Commission. Pubishing the ranking of schoos against the target for getting 60 per cent of pupis aged 16 to achieve the equivaent of five GCSEs at grades A* to C. Ranking schoos against target achievement rewards higher performers by attracting more pupis, bringing greater revenue. Reward grants for Loca Authorities, such as the Panning Deivery Grant the size of which depends on performance against expicit targets. The use of sanctions and rewards in the pubic sector 9

12 PART ONE introduction Tabe 2 continued Performance evers continued Performance ever Without expicit sanctions or rewards With expicit sanctions or rewards Interna performance and staff management organisations throughout the deivery chain use a variety of interna performance mechanisms (such as risk management) and staff management systems (such as annua performance reviews) to improve capacity and performance. Many staff appraisa systems use assessments of individuas performance against non-quantified objectives to manage and motivate the desired behaviour. Performance Reated Pay for Permanent Secretaries is partiay inked to performance against specificay quantified diversity targets. Contracts which formay deegate responsibiities for achieving certain eves of outputs or outcomes to third parties. Partnerships and Memoranda of Understanding which can be estabished where two or more bodies in a deivery chain have inks of common purpose or parae missions. Education and information which can be used to reinforce the effectiveness of other evers, and to change attitudes and behaviours. Informa incentives can be created by the threat of faiing to extend a contract beyond its minimum period, such as Capita s contract with the Department for Chidren Schoos and Famiies to run the Nationa Strategies programme. Amost a Pubic Service Agreements are now shared between Departments, and formaised through jointy agreed deivery pans. Pubic information campaigns such as the drink-driving campaign are aimed at incentivising a change in behaviour. Transport for London contracts contain financia bonuses and penaty deductions for bus operators, reated to their performance against agreed metrics. These types of evers typicay do not incude forma sanctions and rewards, uness both parties agree to introduce a contractua eement. Not appicabe. Educating and informing organisations and individuas is ikey to support one or more of the other performance evers described above. Study objectives and scope 1.11 Against this background, which impies that a degree of deivery chain anaysis wi have been performed, the objectives of this study are: to identify and cassify the sanction and reward mechanisms used in both the pubic and private sectors; to assess the evidence on the effectiveness of different sanction and reward mechanisms in different contexts; and to provide some guiding principes to be considered when designing and impementing a system of sanctions or rewards We use the term incentives to incude a mechanisms by which organisations and individuas are motivated to perform. We differentiate between two forms of incentives: performance evers such as the existence of targets or the routine pubication of performance data, which may impicity motivate performance but are not deiberatey or primariy designed for sanctioning or rewarding purposes; and sanctions and rewards which are designed to strengthen these performance evers by penaising or rewarding certain eves of performance or discrete actions. We identify three types of sanctions and rewards: 10 The use of sanctions and rewards in the pubic sector

13 Introduction PART ONE financia for exampe bonuses or penaties based on performance; operationa this incudes granting organisations greater or esser autonomy from inspection, or promoting individuas on the basis of their performance; and reputationa such as the pubication of eague tabes or offender photographs. This study focuses on the use of sanctions and rewards, but many of the principes and techniques are aso reevant to the performance evers that underpin them. Our approach 1.13 Our approach has combined: desk-based research on the evers used in the pubic sector, focusing particuary on the use and effectiveness of sanction and reward mechanisms; a survey of centra government Departments on the sanction and reward mechanisms used in some of the government s key programmes; and structured interviews with poicy eads in Departments, and key deivery officias, for eight of the government programmes that responded to our survey. Annex 4 describes in detai our methods and the process of seecting the case studies. The use of sanctions and rewards in the pubic sector 11

14 PART two ONE How sanctions and rewards are currenty used How sanctions and rewards are currenty used 1. Government programmes were identified through the Pubic Service Agreements in operation in winter Whist the PSA framework changed in Apri 2008, the major programmes of Departments have continued; often now defined as Departmenta Strategic Objectives. Overview 2.1 This Part describes how some of the government s key programmes are deivered, and presents the resuts of our survey of government programmes. We use these resuts to highight, describe and interpret the various uses of sanctions and rewards. The use and non-use of sanctions and rewards 2.2 To understand how sanctions and rewards are currenty used, we surveyed 145 government programmes 1. We received 91 responses a response rate of 63 per cent. Of these, 56 (61 per cent of those that responded) reported that they do not use any forma sanction or reward mechanisms. We categorised the surveyed programmes according to whether they were primariy deivered through services, by infuence (e.g. to change peope s behaviour), or by buiding capacity. Figure 3 shows that expicit sanctions or rewards are more ikey to exist within deivery chains that are focussed on deivering services. 3 How frequenty sanctions and rewards are used for different deivery methods Number of government programmes Infuencing Not used Used Deivering services Buiding capacity Source: Nationa Audit Office survey of Departments, and anaysis of UK government deivery chains 12 The use of sanctions and rewards in the pubic sector

15 How sanctions and rewards are currenty used PART two 2.3 This pattern is probaby due to the difficuty in attributing actions to outcomes. It is easier to observe, measure, and therefore incentivise the contribution that individuas and organisations make when deivering a service, than when they are infuencing outcomes. Tabe 3 ists a sampe of sanction and reward mechanisms that are used in UK pubic sector programmes. Tabe 3 Exampes of sanctions and rewards used in the UK pubic sector Renewa of Air Quaity Grants to Loca Authorities is dependent upon achievement of the targets specified in the origina grant. Deductions from out-of-work benefit payments by the Department for Work and Pensions in the event of non-compiance with mandatory activities, such as attending job interviews. Bonus funding above a standard amount through the Panning Deivery Grant to Loca Authorities, based on performance criteria reated to the speed of processing appications. Financia incentives offered by the Department for Work and Pensions to recipients of incapacity benefits or one parent benefits, to hep them move into and remain in work. Bonus of up to 7.5 per cent paid to teams in Jobcentre Pus on achievement against five performance criteria. Green Fag Award for good management of parks and open spaces, given by the Department of Communities and Loca Government to Park Management and Maintenance. Decreased oversight and greater freedom from centra management given to hospitas who attain Foundation Trust status by meeting certain performance standards. (For a wider ist of exampes see Annex 2). 2.4 Survey responses showed that more than haf of government programmes did not use expicit sanctions or rewards. However, it is possibe that this is an overstatement, as further research into those programmes uncovered a number of ow profie mechanisms which had been overooked by those competing the surveys. We seected eight programmes that responded to our survey for further research four that reported using sanctions or rewards, and four that did not (Annex 1). Of the four programmes that reported not using sanctions or rewards: The first exampe occurred as part of the Department for Communities and Loca Government s objective to reduce homeessness. It reported funding, partnership working, and good reationships with Loca Authorities as primary evers, and fet that the strength of these primary evers mitigated the need for forma sanctions and rewards. However, one Loca Authority cited a eague tabe which is circuated by the Department, and ranks a Authorities according to the number and percentage of famiies they have managed to move from temporary to permanent accommodation as a big incentive: Athough the performance measures aren t perfect, nobody wants to come ast. In the second exampe, the Department for Environment Food and Rura Affairs is renegotiating Service Leve Agreements with its three partner agencies Natura Engand, the Regiona Deveopment Agencies, and the Rura Payments Agency. These Service Leve Agreements wi enabe the Department to recaim greater eves of funding if the required eves of performance are not met. The use of sanctions and rewards in the pubic sector 13

16 PART two How sanctions and rewards are currenty used 2. Reserve powers aow Secretaries of State to intervene in Loca Authorities. The third programme we examined cited the existence of a strong primary ever in the form of egisation as a reason for not yet having introduced expicit sanctions or rewards. The Department for Environment Food and Rura Affairs has a egisative ever to improve air quaity through the Environment Act. If Loca Authorities exceed certain concentration eves in any of the seven poutants, they need to produce a more detaied assessment of the probem. That may ead to a Loca Authority having to produce an Air Quaity Action Pan, with annua progress reports. Athough the Department has no forma enforcement powers as a reguator, it has the potentia to use reserve powers 2 in the case of non-compiance or where it considers that further measures are required. In practice these powers are amost never used, being seen as an extreme step in the context of devoved government. The Department notes, however, that the quaity and speed with which the Air Quaity Action Pans are produced, and soutions impemented, are variabe. The egisative ever aone, athough strong in principe, has not in practice ed to consistenty good performance. The Department is considering the scope to use further sanctions or rewards. The fourth programme reates to the Home Office objective to improve the perceptions of the pubic about drug misuse in their area. Perception measures can be used in two ways: as proxies for a more substantive outcome; or as outcomes in their own right. Initiay, the Department viewed pubic perception of the drug probem as a proxy for the probem itsef. It chose not to use any sanctions or rewards around the proxy measure, primariy because at the time perceptions were not a high priority, but aso because of the risk of creating incentives to improve perceptions in ways which did not reduce the underying probem. Subsequenty, the Department came to view perception as an outcome in itsef. To achieve a sustained improvement in perceptions, research shows that the substantive issues sti need to be addressed whist aso engaging oca communities in deveoping a shared understanding of the probems, deveoping oca soutions and communicating the outcomes of oca action. It has now incorporated the perception measure in the arge set of indicators used to provide sanctions and rewards for Loca Authority performance. This approach recognises the intrinsic vaue of improved perceptions, whie reducing the ikeihood of perverse effects by its incusion with a broader set of measures. 2.5 One of the issues surrounding the extent to which sanctions and rewards were used concerned the baance between centra direction and oca choice. In moving to more devoved decisionmaking, the Treasury identified an increased opportunity to incentivise performance, incuding the use of sanctions and rewards. This position is supported by the iterature and the ogic of incentivising, rather than directy managing, performance. In some cases, however, Departments reported that this devoution of priorities and budgets reduced their abiity to use sanctions and rewards to incentivise the deivery of nationa priorities. This highights the impicit tension in setting nationa priorities that can be impemented at oca discretion. To manage this tension centra government needs to deveop information systems to anayse whether oca needs have been accuratey determined and use this information to infuence oca bodies. 2.6 The cases where sanctions and rewards had been used are discussed throughout the remainder of this paper. The foowing exampe shows how sanctions and rewards have been added to primary evers to address a specific performance concern one of the more common ways they have been brought into use. The Nationa Treatment Agency is a key stakehoder in the government s objective to reduce the harm caused by drugs. For many years, it and the Department of Heath used the provision of guidance, the distribution of ring-fenced funding, and performance management as its primary performance evers. However, a review of unit costs showed a substantia variation in the average 14 The use of sanctions and rewards in the pubic sector

17 How sanctions and rewards are currenty used PART two amount of money being spent on each patient treated a variation that coud not be expained by oca circumstances, and therefore demonstrating a variation in performance. The Agency and the Department of Heath concuded that the evers used thus far coud be compemented by additiona incentives through the aocation process to generate a change in efficiency. For the panning round, the Department of Heath changed its funding formua towards a more eve contribution per individua treated. This has the effect of rewarding the more efficient areas, and sanctioning the ess efficient. This exampe demonstrates how two organisations have gone through a process of identifying a desired outcome, understood what motivates the deivery chain, measured the performance of the deivery chain, and used an incentive mechanism to address a shortfa in this case, the variabe efficiency of the deivery bodies. 2.7 The discussions we had with stakehoders as part of this exercise yied a number of propositions about use and non-use of sanctions and rewards: There may be occasions where the strength of the primary evers over performance, or the nature of the performance measures avaiabe, mean that sanctions and rewards are not needed, or not desirabe. But these issues have rarey been anaysed in depth. In the course of running a programme of work, Departments frequenty find the evers avaiabe to them insufficient to obtain the desired eves of performance. Sanctions and rewards do not aways need to be high-intensity financia bonuses or penaties, or widey pubicised programmes of naming and shaming. Even subte mechanisms, such as the reputationa impact of internay pubished benchmarking data, can have an impact. Which performance evers sanctions and rewards support 2.8 Our survey shows that targets are the singe most common performance ever in deivery chains that use sanctions and rewards (Figure 4), with a fairy equa use of contracts, partnerships, reguation and egisation. Types of sanctions and rewards used 2.9 From our review of the iterature and our own survey work we have identified three types of sanctions and rewards: Financia these are perhaps the most expicit, in which bonuses are offered, or fines imposed, depending on the Agent s performance. Reputationa these try to motivate behaviour through exposing Agents performance. This can be done through, among other things, the pubication of eague tabes, the giving out of awards, or naming and shaming. Operationa these can incude the amount of audit or inspection burden, or the amount of operationa freedoms granted to an Agent. 4 Legisation 13% Programmes that used sanctions or rewards aso used the foowing evers Other 7% Education 6% Targets 29% Whie in principe sanctions and rewards can hep resove tensions between centra and oca priorities, in practice the abiity to use them depends on the precise nature of wider funding and measurement arrangements. Reguation 15% Partnerships 15% Source: Nationa Audit Office survey of Departments Contracts 15% The use of sanctions and rewards in the pubic sector 15

18 PART two How sanctions and rewards are currenty used 3. Tough action against underperforming hospitas and trusts. Press Reease. Department of Heath. 4 June Financia and reputationa sanctions or rewards are the most common, and very itte use is made of operationa mechanisms (Figure 5) athough the Department of Heath has recenty announced the intention to make it easier for the NHS Chief Executive to impose operationa sanctions on underperforming Trusts. These woud aow the NHS Chief Executive to remove Trust management teams and chairs who fai to meet certain minimum safety, quaity and financia management standards, without having to make arge payoffs Within the broad categories of financia, reputationa, and operationa, we have found many different types of sanction and reward mechanisms. Tabe 4 ists some of the different types of mechanisms we have encountered specific exampes of these different mechanisms in practice are avaiabe in Annex Reputationa mechanisms are more ikey to be used when infuencing the deivery chain or buiding capacity, but financia mechanisms are by far the most common form for service deivery, making up 76 per cent of the mechanisms used in that category (Figure 6). Who uses sanctions and rewards 2.13 We identified four genera categories of stakehoders in a standard pubic sector deivery chain: centra government Departments; intermediary bodies such as Strategic Heath Authorities and reguators; deivery bodies such as hospitas and schoos; and citizens or participants often grouped by demographic, such as schoo pupis or benefit caimants. 5 Tabe 4 Category Financia The types of sanction and reward mechanisms used Number of sanction and reward mechanisms Reputationa Operationa Financia Reputationa Source: Nationa Audit Office survey of Departments Categories of sanctions and rewards Type of sanction or reward mechanism Contract or grant renewas. Hoding back payments. Absoute bonuses or penaties based on reaching certain performance threshods. Unit-based bonuses or penaties that vary continuousy according to the eve of performance. Discretionary ad hoc bonuses, in the form of cash or vouchers. Sharing profits or cost savings. Reduced charges, such as tax concessions. Pubic scoring and ranking, such as schoo eague tabes. Pubic recognition, through awards or kitemarks. Varying the eves of oversight through audit and inspection. Operationa Direct interventions, such as interimmanagement, dismissa or promotion. 16 The use of sanctions and rewards in the pubic sector

19 How sanctions and rewards are currenty used PART two 2.14 Our survey (Figure 7) shows that most of the sanction or reward mechanisms are used by intermediary bodies to infuence deivery bodies. This pattern is understandabe, given the reativey arge number of intermediary bodies reative to Departments of State Figure 7 does not show to what extent Departments themseves are incentivised to achieve their key objectives. The Treasury describes a number of evers that exist to motivate performance at Department eve: Financia. Performance against Pubic Service Agreements may have an impact on a Department s resource aocation in the next spending review, but the reationship between previous performance and future funding is not expicit or formaised. Staff performance. This makes up one eement of the appraisa process which infuences pay but in a subjective rather than an objective way. Performance management. Nominated Senior Responsibe Officers are made accountabe for each Pubic Service Agreement, and chair a Deivery Board within each Department. They then report to their Cabinet Committees, as we as the Prime Minister s Deivery Unit. Reputationa motivations. Performance is reported in Department Annua and Autumn Performance Reports, which are scrutinised by Ministers and Department Seect Committees, as we as by the pubic and media. Our survey shows that Departments, their intermediary bodies, and deivery bodies, use expicit sanctions or rewards aong the deivery chains, but we have found itte evidence of their existence at a Departmenta eve. 6 The types of sanction and reward mechanisms used for different deivery methods Number of sanction and reward mechanisms Source: Nationa Audit Office survey of Departments, and anaysis of UK government programmes 7 Infuencing Operationa Reputationa Financia Service deivery Buiding capacity The eve at which sanctions and rewards are appied Number of sanction and reward mechanisms Department on an intermediary body Department on a deivery body Intermediary body on a deivery body Source: Nationa Audit Office survey of Departments Deivery body on a citizen The use of sanctions and rewards in the pubic sector 17

20 PART three The effectiveness of forma sanction and reward mechanisms The effectiveness of forma sanction and reward mechanisms Overview 3.1 This Part summarises the research on the effectiveness of sanctions and rewards. Based on our iterature review, survey, and interviews with government programmes, we then provide guidance on how organisations can manage five key eements of a sanction and reward mechanism: design; measurement; appication; review; and impementation. What is meant by effectiveness 3.2 There are a number of dimensions in which improved performance may be measured: An increase in voumes: for exampe, the increase in the number of hip operations, or in the number of peope ooked after by Socia Services. An increase in efficiency: the same service may be provided at a ower cost, or more services provided for the same cost. An increase in user satisfaction: the quaity of the pubic service may increase, eading to higher eves of user satisfaction. 3.3 The first three of these dimensions aign with the standard three Es framework for assessing vaue for money: economy; efficiency; and effectiveness. A higher voume of inputs for the same cost represents an improvement in economy. Deivering the same, or more, service outputs for ower costs is an improvement in efficiency, whie an increase in user satisfaction is one way to measure improvements in the way outputs are transated into outcomes or effectiveness. 3.4 Equity objectives can sometimes confict with efficiency objectives or dimensions. For exampe, increasing equity in educationa outcomes may require skewing inputs heaviy towards the east abe pupis, whereas efficiency considerations woud suggest focusing teaching inputs on to pupis in the midde of the abiity spectrum. If equity concerns are important to the overa objectives of the pubic service which the sanction or reward mechanism is intended to support, then they must be considered at the time the mechanism is designed and reviewed. An improvement in equity: the distribution of users of a pubic service organisation is shifted towards the more disadvantaged for exampe, an educationa scheme may seek to target more users from minority groups. 18 The use of sanctions and rewards in the pubic sector

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