PERFORMANCE-RELATED PAY SCHEME FOR GOVERNMENT EMPLOYEES IN CHILE: 1998-2004

PERFORMANCE-RELATED PAY SCHEME FOR

GOVERNMENT EMPLOYEES IN CHILE: 1998-2004

Alberto Arenas de MesaDeputy Director, Budget Office, Ministry of Finance of Chile

GOVERNMENT OF CHILEMINISTRY OF FINANCE

Budget Office

October 07, 2003

In the 1990s Chile began to modernise its public

sector management, starting, in 1998, with the pay

structure, by introducing a results-linked concept, or

performance-related pay (PRP). The reform process

took place in an economy with no fiscal deficit and

with the participation of the public sector workforce

unions, as players and beneficiaries of a modernised

state.

MODERNISATION OF THE STATE AND ITS FUNCTIONS

PUBLIC SECTOR ANTECEDENTS

Central Government 262,925 4.9Central Government Civilians 152,644 2.8Armed Forces and Police 110,281 2.0

Local Government 33,254 0.6

Decentralized Administration 152,400 2.8-Education 126,769 2.4-Health Services 23,645 0.4-Other Services 1,986 0.0

Total Government , Civilian 338,298 6.3Total Government 448,579 8.3

SECTOR Number % of the total occupation

PUBLIC SECTOR STAFF DISTRIBUTION: 2002

Public spending on human resources grew substantially between 1990 and 2002, by 124% in cumulative real terms, an annual real average increase of 6.4%.

Spending on central government staff was equivalent to 19.2% of total public expenditure in 2002 and to 4.4% of GDP. Specifically, between 1990 and 2002 salaries rose in cumulative real terms by 71%, well above the 47% real growth in national pay levels in the same period.

PUBLIC SECTOR ANTECEDENTS

CHILE’S CIVIL SERVICE REFORMS

1. 1998-2002: The Initial Stage2. 2003 onwards: Consolidating the Process

Unlike reforms in other countries, where civil service reforms have aimed to reduce the size of the public sector, exercise more control over expenditure and balance the fiscal finances, Chile’s reform process is directed mainly at strengthening management and administration capabilities in its public organisations.

The reform can be divided into two stages:

PERFORMANCE-RELATED PAY 1. 1998-2002: The Initial Stage

The PRP scheme was applied at the level of individual members of staff and of the organisations, and allowed regulated growth in pay rates. The aim is to reward good performance by individuals and organisations, raise the quality of public services, increase salaries, and motivate civil servants.

a) Base increment: The fixed component, paid in all cases to all employees:5.5% in 19986,0% in 1999-20028% in 200310% in 2004

b) Individual performance increment: PRP applied to each employee, awarded on the basis of individual performance ratings: i) 4% for the 33% of highly-rated staff in each workplace ii) 2% for the second, lower-rated group, up to a total 66% of the best-rated.

3. Institutional performance increment: PRP applied at organisation level. This introduces management by results in public organisations. Employees receive a pay increment related to their organisation’s performance on its management objectives, agreed in the management improvement programmes (MIP)

Compliance with the management objectives in an annual MIP gives agency employees the right to a 3% salary increase the following year, provided the agency has met at least 90% of the annual objectives. The increase is 1.5% if compliance is between 75% and 90%.

PERFORMANCE-RELATED PAY 1. 1998-2002: The Initial Stage

MANAGEMENT IMPROVEMENT PROGRAMS

• First two years: performance against quantitative goals, 1,200 indicators

• Budget unable to assess relevance and accuracy, 99.5% received maximum benefit

• In 2000 focus changed towards assessing progress in managerial systems development

• Managerial systems in 7 areas:– Human resources– Customer service– Strategic planning and management control– Internal auditing– Decentralization– Financial management– Gender focus

• For each of the above, previous regulations, directives, but little compliance


• Every area divided into systems• Progress in every system coded through descriptors• Government agencies assess their current situation and

propose next stage to attain

Areas SystemsI II III IV

Staff training X

Workplace safety X

Saff performance assesment X

complaints management X

Red tape X

STRATEGIC PLANNING/

MANAGEMENT CONTROL

INTERNAL AUDITING Internal auditing X

DECENTRALIZATION Decentralization programs X

Procurement and hiring X

Accounting X

GENDER FOCUS Gender focus X

Stage

HUMAN RESOURCES

CUSTOMER SERVICE

FINANCIAL MANAGEMENT

Strategic planning/management controlX


MANAGEMENT IMPROVEMENT PROGRAMSOperational Design

1. Preparation and approval of Framework Program

2. Preparation of agency MIPs and submission to Ministry of Finance

4. Preparation of MIP Decrees

3. Agency MIPs sent to Ministerial Committee for approval.

5. Evaluation

New Deal on Employment and the Senior Public Management System

Work continued in 2003 on improving public management to provide better public services. In 2001, after lengthy negotiations, the government and the public sector employees’ union, (ANEF) reached an agreement; in 2002 a new law was drafted and sent to Congress, in October, and finally came into force in June 2003.

The aim of the new legislation, known as the New Deal on Employment and the Senior Public Management System (Nuevo Trato Laboral y Sistema de Alta Dirección Pública), is to develop an integrated policy on public sector employment through improved incentives, and through major changes in the mechanisms for appointing senior civil servants.

PERFORMANCE-RELATED PAY 2. 2003 onwards: Consolidating the Process

Specifically, the new law strengthens the PRP scheme with higher incentives in the pay structure and increments for excellence at organisational level; sets up a permanent system of voluntary redundancy; and, in 2004, increases the modernisation allowance by 8%.

Modernisation allowance: 1998-2004

19,0%

15,0%

12,7%

11,0%11,0%11,0%

6,0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1998 1999 2000 2001 2002 2003 2004

PERFORMANCE-RELATED PAY

PUBLIC SECTOR PAY STRUCTURE, 2001

4%

73%

23%

Base SalaryPerformance-RelatedPersonal Allowances

PUBLIC SECTOR PAY STRUCTURE, 2004

8%

70%

22%

Base SalaryPerformance-RelatedPersonal Allowances

PERFORMANCE-RELATED PAY Public Sector Pay Structure : 2001 and 2004

a) Allowance for collective performance: PRP for team work. The increase is a new tool, applied on a decentralised basis by the heads of each organisation. The increment for collective performance is awarded to staff in teams, units or work areas depending on how well they meet their annual targets.

As from 1 January 2004, target fulfilment by such groups in the preceding year will give the staff involved a 4% rise where compliance is at or above 90%, and to a 2% rise where the level is below 90% but at or above 75%.

The head of each organisation will be responsible for defining annually the teams, units or work areas according to functional or territorial parameters, or both. Territorial parameters may be applied nationally or by region or province.


b) Annual prize for excellence in public organisations: This prize will be awarded to the organisation that has excelled in service to the public in terms of productivity and quality. It will be given, from 2003 onwards, when the organisation with the best results has achieved 100% or above of its MIP targets. The prize will consist of a 5% increment on the same base as the modernisation allowance. The National Civil Service Office will be responsible for managing and awarding the prize.

c) Senior executive allowance: With the implementation, in 2004, and development of the Senior Public Management System, top executives will receive a senior executives’ allowance, of which a percentage is variable, awarded on the basis of performance and target fulfilment set out in a specific performance agreement.


The new system covers civil servants in senior posts as heads of public organisations or their organisational units, and whose functions are chiefly the execution of public policies and the provision of services to the community, i.e. first and second level management.

The System is based on entry through open public competition, on the principles of transparency, equity and merit.

From 2004 onwards senior civil servants will receive a senior manager’s allowance of which part is performance linked. Heads of organisations and second level managers will receive the allowance depending on the percentage of targets met in their performance agreement of the preceding year, according to the following formula: i) a maximum 20% increment for meeting 100% or more of the targets, and ii) 50% of the maximum for meeting between 80% and 100% of targets.

Senior Public Management System

The implementation of the performance increment has been in force long enough to allow the organisations to draw some basic conclusions on both the drafting and the implementation, and for the staff organisations responsible for the technical and operational side of the programme to improve the processes and its tools.

Main Results:

DIFFICULTIES IN APPLYING PRP

Number % Number % Number % Number % 3.0% 90% -100% 164 93,7 161 92 116 66,3 139 791.5% 75% - 89% 10 5,7 6 3,4 29 16,5 28 160% < 75% 1 0,6 8 4,6 30 17,2 8 5

Total 175 100 175 100 175 100 175 175Source: Budget Office

2001 2002Bonus Allocation

for Agency Performance %

Compliance %

1999 2000

Management Improvement Programs: 1999-2002

General Summary of Compliance for Agencies


General Summary of Compliance for Agencies: 2001 and 2002

30 29

116

8

28

139

0

20

40

60

80

100

120

140

160

0% 1,5% 3%

Compliance %

17% 17% 17%

66%

79%

4%

Number

0% 10% 20% 30% 40% 50% 60% 70% 80%

2001

2002

95%-100% 80% 69%

90%-94% 6% 9%

89%-80% 4% 7%

<80% 10% 15%

2001 2002





From 2001 onwards a new methodology has applied for the MIP, which explains the drop in the number of organisations in the highest level. However, There were no major changes in the number of staff; 94% achieved the maximum allowance in 2002. The fall, in 2001, in the number of organisations achieving it is due to the impact on decentralised organisations in the regional and provincial governments when targets and control mechanisms were imposed centrally and external adjustments were made. This reduced their performance levels considerably.

95%

3% 2%

94%

6%0%

0%

20%

40%

60%

80%

100%

2001 2002

3%

1,50%

0%

General Summary of ComplianceStaff distribution



Summary of Fulfillment for Decentralized Agencies

No. % No. % No. % No. % 3.0% 90% -100% 82 92 78 87 40 45 65 731.5% 75% - 89% 6 7 5 6 20 22 17 190% < 75% 1 1 6 7 29 22 7 8

Total 89 100 89 100 89 100 89 100Source: Budget Office

Bonus Allocation for Agency

Performance % Compliance

% 1999 2000 2001 2002

Summary of Fulfillment for Centralized Agencies

Number % Number % Number % Number % 3.0% 90% -100% 164 93,7 161 92 116 66,3 139 791.5% 75% - 89% 10 5,7 6 3,4 29 16,5 28 160% < 75% 1 0,6 8 4,6 30 17,2 8 5

Total 175 100 175 100 175 100 175 175

2001 2002Bonus Allocation

for Agency Performance %

Compliance %

1999 2000

MANAGEMENT IMPROVEMENT PROGRAMS, 2001

SystemAverage com mitted stage

Average attained stage

Degree of accomplishment

Training 1,98 1,64 82,8%

Workplace safety 2,02 1,81 89,6%

Staff assesment 2,25 2,18 96,9%

Complaints management 2,07 1,63 78,7%

Red tape 1,91 1,49 78,0%

Strategic planning and monitoring 1,61 1,43 88,8%

Internal auditing 2,07 2,07 100,0%

Decentralization 1,41 1,41 100,0%

Procurement and hiring 1,86 1,69 90,9%

Accounting 2,69 2,17 80,7%

Average 1,99 1,75 88,2%

MANAGEMENT IMPROVEMENT PROGRAMS, 2002

SystemAverage Stage

Pledged Average Stage

Fulfilled

Fulfillment Percentage of Average Stage

Training 3.07 2.92 95%

Workplace Conditions 3.13 3.01 99%

Staff performance evaluation 3.27 3.02 98%

Information and Complaints Management

3.16 2.09 92%

Cutting Paperwork 3.07 2.93 95%

Management Planning/Control 2.75 2.51 91%

Internal Auditing 3.28 2.87 88%

Decentralization 4.00 4.00 100%

Procurement and hiring 3.05 2.71 89%

Accounting 3.58 2.95 82%

Gender Focus 1.01 1.09 99%

Average 3.04 2.83 93%

A significant challenge will be to apply the new PRP instrument for collective performance, which it is hoped will strengthen decentralisation and staff commitment to organisation goals.

The organisation performance allowance for heads of organisations should recognise the achievement of strategic goals set in the respective performance agreements.

The MIP management tool has not only reinforced the incentives for more effective and transparent management, but also forms a base from which to extend these efforts. In the short term, progress in meeting basic management system targets gives staff a financial increment. In the medium term, organisations that meet comprehensive targets or standards can then guarantee a level of management responsibility, which could give them differentiated institutional status.

CHALLENGES IN APPLYING PRP

The Ministry of Finance is considering eliminating some kinds of controls of a financial-operational nature, like the pre-established regulation on cash surplus transfers, and integrating budget sub-items for operational expenses, in order to allow organisations to reallocate resources autonomously within the authorised overall appropriations.

Work must continue on reviewing aspects of establishing MIPs in each organisation, and encouraging participation in, diffusion to and comprehension of the programme by employees and different managerial levels.

CHALLENGES IN APPLYING PRP

PERFORMANCE-RELATED PAY SCHEME FOR GOVERNMENT EMPLOYEES IN CHILE: 1998-2004

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