BOOSTING PUBLIC SECTOR PRODUCTIVITY: Effective incentive schemes require careful design

Well-designed incentive schemes can raise productivity in public sector agencies, according to research published in the October 2017 issue of the Economic Journal.

Evaluating a pilot incentive scheme implemented by the Labour government in the late 1990s in JobCentre Plus (JCP) offices, the study by Professor Simon Burgess, Professor Carol Propper, Dr Marisa Ratto and Dr Emma Tominey finds that offering financial rewards to staff in return for hitting targets is effective only for small teams of employees and not for larger groups.

The JCP scheme, which offered financial incentives for frontline staff to place people into work, raised productivity by 21% in small offices (those with fewer than 12 frontline staff); but in larger offices, there was no effect on productivity. The incentive scheme in small offices was also very cost-effective: £74 per person placed into work.

Why are there positive effects only in small teams?

The researchers suggest two main reasons why the scheme was successful in smaller offices but had no effect in large offices:

• First, free riding: imagine that a worker earns 10 points towards their target from placing an individual into work. In a small team with a relatively small target, this contributes a greater percentage to the total target, which strengthens the incentives for workers in small teams. The opposite is true for large teams, where incentives are weaker.

• Second, monitoring: it is easier for workers to monitor the performance of their colleagues in small teams, making it much harder to shirk, and again strengthening the incentives of workers in small teams.

Team size varied hugely in JCP office and only 5 out of 17 districts in the pilot incentive scheme hit their productivity targets.

What about the effect on quality?

Often incentive schemes target just quantity – for example, the number of people put into work – with the result that quality declines. The JCP incentive scheme was designed with this in mind and there was no fall in quality to accompany the rise in quantity productivity in small teams – which is positive.

Details of the incentive scheme

Out of 90 districts, 17 were given incentives in the pilot scheme, and the evaluation compared ''treatment'' areas (those with incentives) with ''control'' areas (those without incentives).

There were five targets; a quantity target to measure people put into jobs where workers received more points for helping more vulnerable individuals. For example, a lone parent earned 12 more points than an employed individual.

Three other targets measured workers'' quality of work: customer service, employer service and other business delivery functions.

The final target, at the national level, measured monetary value of fraud and error. This target did not vary across treatment and control groups so it was impossible to include in the analysis.

The size of JCP offices varies greatly, which was useful for the purposes of this study. All workers within an office contributed to the team target and workers only received their reward if the team target was hit.

''Incentives in the Public Sector: Evidence from a Government Agency'' by Simon Burgess, Carol Propper, Marisa Ratto and Emma Tominey is published in the October 2017 issue of the Economic Journal. Simon Burgess is at the University of Bristol. Carol Propper is at Imperial College London. Marisa Ratto is at the Université Paris-Dauphine. Emma Tominey is at the University of York.