Why have not performance-related-pay methods in the civil service confirmed positive results obtained in private business firms? Are such methods effectively useful tools in human resources practices within public organisations? How should we introduce them in public organisations and which are particular problems we find respect on their use within business firms? This paper aims to answer such questions referring to the economic theory of incentives and contracts. In particular, an agency model with multidimensional effort is presented and it is then extended in order to analyse the effects produced on incentives by dimension plurality of social welfare, civil servants risk-aversion, difficulties in measuring public goals (which imposes the use of proxies of performance), and preferences heterogeneity of political and institutional principals holding Public Administration. Policy implications which derive are discussed. Although, in general, public sector results to be a less suitable environment for the use of performance-related-pay practices, some important institutional and managerial changes could contribute to improve their effectiveness. In particular, performance subjective evaluation by managers, administrative and bargaining de-centralisation, political and managerial separation, if well realised, can act in such a way.
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Paper provided by Dipartimento di Scienze Economiche (DSE), University of Pisa, Pisa, Italy in its series Discussion Papers with number
2003/3.
Find related papers by JEL classification: J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
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