By Steve Kelman

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Why Rep. Rice is wrong about pegging feds' pay to economic growth

Wikipmedia image: Hugh Thompson

South Carolina Republican Rep. Tom Rice wants to link federal pay hikes to increases in the median household income.

Rep. Tom Rice  caused a stir in early March when he called for linking salaries of federal employees to the country’s economic growth rate. The congressman introduced a bill that would immediately institute an 8.7 percent salary cut for all feds earning more than $100,000 a year --  then tie future pay hikes to increases in the real median household income in the United States.

Arguing for this proposal, the South Carolina Republican stated the following about civil servants: “Since their salaries are not tied to economic success … bureaucrats do not have any skin in the game. Simply, they do not feel the consequences of the federal government’s grip on the economy.”

I think this is a bad idea, but I think it’s important to explain why. The reason is that understanding the problems with Rice’s argument actually teaches us something about the appropriate use of performance measurement in government in general, and pay for performance in particular.

And while I think Rice’s idea is bad, it is not crazy.

Think about growth in the median household income as a performance measure for government officials (ignoring for a moment whether the metric should be tied to pay, which is a separate issue). In many ways, this is an attractive performance measure. Performance measurement gurus always emphasize the importance of using outcomes as metrics, rather than inputs or outputs -- the police shouldn’t use number of officers on the streets or number of arrests as metrics, but rather the crime rate. Change in household median income is an outcome measure, exactly the kind that gurus like.

Furthermore, although tying pay to performance as a general matter is not entirely unproblematic -- and is politically controversial enough that I believe getting robust performance measurement systems in place should be a higher priority -- I regard pay for performance in principle as a promising idea for government.

So why do I think Rice is wrong?

The basic answer is that the contribution almost any individual civil servant makes to median household income growth in the United States is less than infinitesimal, and utterly undetectable. No matter how hard the vast majority of civil servants try, nothing they do as an individual will have an impact on this overall metric, which is influenced by so many things. So achieving good results on this metric is beyond the employee’s control.

Consider a private-sector analogy. Yes, it is true that top corporate execs do often have their pay tied partly to the company’s profits or stock market performance, even though performance on these metrics is by no means fully under the executive’s control. (It is influenced by the overall state of the economy, international tensions, etc. – ask a diligent CEO who led any company during the 2008 market crash.)

Executives agree to do so, even though performance is not fully under their control, because they are offered the potential of really big bucks in exchange for bearing the risk of being punished for things they can’t control. It is impossible to believe we would ever be willing to reward feds sufficiently if the economy grows fast to make them willing to accept the risk of never having their salaries go up if it does not.

Rice’s error has real implications for how we think about performance measurement in government. 

We should indeed be using outcome measures as metrics, including economic growth, because we do want to remind feds of why they are serving in the first place -- and outcome measures also encourage innovation in how to reach goals. But we should be wary of tying rewards or punishments, whether pay or promotion, to such metrics.

Posted by Steve Kelman on Mar 26, 2015 at 8:30 AM


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