Report No: AUS3494 Republic of the Philippines Philippines: Improving Bureaucratic Performance Assessment of the Performance-based Bonus Scheme June 2014 GGODR EAST ASIA AND PACIFIC Document of the World Bank Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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Contents Executive Summary........................................................................................................................................ i Introduction .................................................................................................................................................. 1 The fiscal space for pay reform ..................................................................................................................... 1 Measuring performance ............................................................................................................................... 3 Results from the WB survey.......................................................................................................................... 4 Perceptions of the Performance-based Bonus ............................................................................................. 8 Recommendations ...................................................................................................................................... 13 Figures Figure 1: There is limited fiscal space to increase pay levels without crowding out other key expenditures ...................................................................................................................................................................... 2 Figure 2: The PBB is a small component of the wage bill ............................................................................. 2 Figure 3: Perceptions of Salary Levels for Comparable Private Sector Jobs ................................................. 5 Figure 4: Satisfaction with pay levels ............................................................................................................ 6 Figure 5: Perceptions of Salary Levels for Comparable Private Sector Jobs ................................................. 6 Figure 6: Recruitment and retention in the public sector ............................................................................ 7 Figure 7: Reasons for joining and continuing to work in the public sector .................................................. 8 Figure 8: Staff are very favorable of the PBB scheme. Perceptions of staff in the 7 departments (left panel) and of teachers (right panel) ............................................................................................................. 8 Figure 9: Perceptions of the impact of PBB on management practices ....................................................... 9 Figure 10: Perceptions of the impact of PBB on management practices of schools .................................. 10 Figure 11: The impact of PBB on motivation .............................................................................................. 11 Figure 12: Fairness of the pay system since PBB ........................................................................................ 11 Figure 13: Transparency of the PBB ratings process................................................................................... 13 Figure 14: PBB is relatively small as a percentage of total pay, particularly for higher salary grades ....... 13 Figure 15: PBB reform options and cost estimates..................................................................................... 14 Figure 16: Teachers are not averse to being ranked but do not wish to have the PBB tied to these rankings ....................................................................................................................................................... 15 Figure 17: Limiting school performance categories.................................................................................... 16 Executive Summary This policy note presents the results from a recently completed WB survey of government officials that, among other issues, assessed the impact of the Performance-Based Bonus (PBB) scheme on staff perceptions of various human resource management practices. This assessment was done at the request of the Department of Budget and Management (DBM). The overall findings of the survey are that the PBB scheme is starting to have a positive impact on government performance, as measured by the perceptions of departmental staff of a variety of human resource management dimensions. Specifically:  Support for the PBB is strong across all departments, bureaus and performance ratings;  Staff report that PBB has induced improvements in management practices: greater teamwork, better target setting and monitoring, and fostering trust within units;  Staff do not believe that PBB has decreased motivation or increased the perceived unfairness in pay;  Teachers believe that the PBB is having a positive impact on recruitment; staff in other departments however, do not report any such impact yet;  The one area of concern is the perceived lack of transparency of the individual rating process. These positive findings overall suggest that the PBB should be both increased in size and reformed to further extend its positive aspects on management and mitigate some of the problems pointed to by staff on individual rankings criteria. The advantage of the PBB, as opposed to other types of pay increases, is that it has the potential for significant productivity improvements at relatively less cost, which is important given the limited fiscal space available. Our recommendations are:  Increase the size of the PBB and make it a percentage of base pay to redress the current bias against more senior staff;  Restructure the PBB to give greater weight to the group-based bonus vs. the individual bonus in the departments to further put the spotlight on management as the key factor enabling departmental performance improvements;  Avoid individual ranking of teachers for the PBB as the current system is working by fostering teamwork in schools;  Reduce the number of school performance categories to 3 with large increases in the bonus across the categories to incentivize performance improvements;  Gradually relax the Good Governance conditions as the current criteria are too strict and hold the whole department responsible for tasks that are the responsibility of a few specific units, and are very time consuming and detract from the focus on achieving core departmental performance targets;  Increase public disclosure on the individual ranking criteria and on individual rankings;  Strengthen review and independent validation by DBM and the IATF secretariat to minimize the risks of “gaming”. i Introduction 1. The Aquino administration has a little over two years left in office to deliver on its Social Contract with the Filipino people. This contract is centered on inclusive growth, poverty reduction, and transparent and accountable government. Achieving each of these objectives is conditional on improving the performance of a government bureaucracy of roughly 1.2 million workers. The Performance-Based Bonus (PBB) scheme, launched by the President in his State of the National Address in July 2012 and elaborated in Executive Order 80 that shortly followed, is one of the major initiatives of the Government to improve public sector performance as it links a portion of civil servants‘ pay to the achievement of individual and working unit targets. 2. The PBB is the first performance incentive scheme of any significance introduced in the government, and applies to all departments as well as state universities and colleges, and government owned and operated corporations. It complements a number of regulatory, organizational, and budget reforms, which include the identification of five key Presidential priorities, or Key Results Areas (KRAs), to concretize the mission of the administration1; the organization of the Cabinet around these priorities; the identification of 16 sectoral goals linked to the KRAs in the Medium-Term Philippine Development Plan (MTPDP); the move to Performance Informed Budgeting (PIB) in the 2014 budget; and the strengthening of the Organizational Performance Indicator Framework (OPIF) specifying agency performance indicators and targets. 3. The objective of this policy note is to provide an empirically-based assessment of the PBB initiative with the aim of providing recommendations on further improving the scheme, if necessary, for the remaining duration of the Aquino administration and beyond. The assessment is based on a large survey of government officials conducted by the World Bank from September 2013 to March 2014, in collaboration with the Department of Budget and Management and the Inter-Agency Task Force (IATF) on government performance.2 4. The note is structured as follows: the next section provides the fiscal context for the PBB, which is followed by a brief description of the survey methodology. The survey was not limited to the PBB but explored broader perceptions of pay levels as well as of other human resource management practices. This note however, focuses on the assessment of the PBB which is covered in the next section that details the main findings of the survey. The final section presents recommendations, and these recommendations are all for the immediate term given the limited time left for the Aquino administration. The fiscal space for pay reform 1 Good Governance and Anti-Corruption; (ii) Human Development and Poverty Reduction; (iii) Economic Development; (iv) Security, Justice and Peace; and (v) Climate Change Adaptation and Mitigation. 2 The roles and responsibilities of the IATF are set out in Administrative Order 25 of 2011. 1 1. There is limited fiscal space for significant salary increases in the Philippines which implies that any pay reform should yield significant productivity improvements Figure 1: Limited fiscal space to increase pay levels 45 350 Personal and capital expenditures Growth in GDP and expenditures (2006 = 100) 40 300 35 30 250 25 200 20 150 15 10 100 5 50 0 2006 2007 2008 2009 2010 2011 2012 2013 0 2006 2007 2008 2009 2010 2011 2012 2013 Personal exp. (as % of GDP) Capital exp. (as % of GDP) Personal exp. (as % of revenues) Capital exp. (as % of revenues) Nominal GDP Personal exp. Capital exp. Source: WB staff calculations based on DBM and DoF data 5. Any discussion of pay reform has to Figure 2: The PBB is a small component of the wage bill grounded in an assessment of what is affordable. Largely on account of low revenue mobilization, Components of the wage bill, 2013 the Philippines government has limited fiscal Basic salaries space for significantly increasing overall salary 10% 1% Common allowances and levels in the public sector (Figure 1, left panel). 11% benefits PBB While the wage bill (“personal expenses” as per 641 billion 51% the government’s classification) is modest as a 8% Pesos Other compensation for 2% specific groups share of GDP (approximately 5 percent) it is Benefits significant as a share of revenues (over 35 17% Pensions percent), leaving limited room for other Compemsation for non- important expenditure items such as capital permanent positions outlays (approximately 2.5 percent of GDP and 15 percent of expenditures). The Government Source: WB staff calculations based on DBM data has been successful over the past decade in ensuring that the wage bill grows in line with nominal GDP, which has created the fiscal space to increase capital expenditures (Figure 1, right panel). 2. The goal of the PBB is to deliver big productivity improvements cost effectively 6. This limited fiscal space implies that pay increases need to be designed so as to have a big productivity impact. This is precisely the approach that the Government has taken with the PBB scheme, which has a very modest budgetary outlay (2 percent of the wage bill in 2013, Figure 2), does not generate pension liabilities, but which the Government believes can deliver large improvements in 2 performance. The WB survey is designed to measure whether or not the scheme is achieving this stated objective. Measuring performance 3. The WB survey measures performance by (a) the ability (skill levels) of the personnel in the government; (b) their “mission orientation” and motivation levels; and (c) the quality of management to ensure that staff work together well to achieve organizational goals. Financial incentives like the PBB can potentially impact each of these three elements of performance. 7. Ideally, the performance of the government should be assessed through improvements in outcomes (improvements in student learning, reductions in child mortality, reductions in the cost of transport etc.). However, the “results chain” between a policy intervention such as the PBB and the improvement of an outcome is a long one with many additional intervening factors, many of which are beyond the control of the government. The second best alternative of quantifying whether the PBB resulted in improvements in government outputs (students enrolled, roads built etc.) is also very difficult because of the very recent introduction of this reform, and a variety of methodological problems in establishing attribution of any improvements to the PBB. 8. Given these difficulties, the approach taken in the survey is to measure performance through staff perceptions of changes in behavior. Specifically, the survey focuses on perceptions of:  Improvements in the quality of employees in a department through the recruitment and retention of more skilled personnel;  Improvements in employees’ “effort.” Because measuring effort across diverse jobs is difficult it is often necessary to use proxies concerning the motivation and mission orientation of staff;  Improvements in management practices in the department, particularly around focus of managers on the mission of the department, the monitoring of achievement of departmental Major Final Outputs (MFOs), encouraging teamwork to deliver on these objectives, and improving the individual performance appraisal process. 9. The underlying assumption is that improvements in the quality of the workforce, in their motivation and mission orientation, and in management so that the workforce works better together to deliver results are all necessary conditions for improving government outputs and ultimately outcomes. 4. The survey was of 4500 government officials in 8 departments in 2013-14 to gauge the impact of the PBB on these staff perceptions and therefore to assess whether or not the PBB was meeting this stated objective 3 10. The WB survey was designed to investigate whether or not the PBB had this desired effect. The survey consisted of two modules, the first covering 7 departments and with a sample of 2573 staff, and the second focusing on teachers only in the Department of Education with a sample of 1903.3 Two separate modules were necessary given the differences in the PBB scheme between teachers (the incentive was based only on school rankings and not individual ranking of teachers) and the rest of the civil service, and to explore issues particularly relevant to teaching. 11. The sample for the seven departments was designed to be representative of each of the 9 performance categories (Good/Better/Best individual and Good/Better/Best bureau), and of each individual department. The department sample is thus a proportional sample where the proportions are based on the individual/bureau rating categories. Most of the departments surveyed had presence mainly in the NCR region. For departments with national coverage (DPWH, for example) we restricted the sample frame to the NCR, Cebu, and Davao regions, yielding large (but incomplete) coverage in these cases. 12. The sample for the Department of Education is different due to the size of the department, and the different ratings process. The Department of Education rated schools based on 8 performance categories corresponding to the size of the PBB. Due to the size of these groups, and to keep the survey activity under budget, we restricted our sample to both urban and rural schools in the NCR, Cebu, and Davao regions (though there are far fewer rural schools than urban in these regions). Furthermore, the school ratings were also collapsed into four categories: Top (includes schools rated Exceptional, Outstanding, and Excellent); High (includes schools rated Superb and Brilliant); Middle (includes schools rated Great, and Good); and Low (includes schools rated Satisfactory). This yielded a total sample of 688 schools. Three randomly selected teachers from each school were invited to participate in the survey (a randomly selected subset sent two teachers instead of three), yielding the final sample of 1,903. Note that the schools were representative of the collapsed performance category and proportionally sampled according to the distribution of the schools across the three regions. Results from the WB survey 13. The WB survey focused on a variety of human resource management issues including pay levels, motivation, career incentives, and the recruitment and retention of quality staff. Results (by individual/group ratings) reported in this brief control for either Department-level fixed effects (in the case of results of the seven departments surveyed) or seniority fixed effects (in the case of results for the Department of Education)4. Results reported by department do not control for fixed effects, 3 Therefore in total the following 8 departments were surveyed: Bureau of Internal Revenue; Bureau of Treasury; Department of Budget and Management; Department of Finance; Department of Trade and Industry; Department of Labor and Employment; Department of Environment and Natural Resources; and Department of Education. 4 Standard regression analysis assumes observations from each Department to be the same. However, departments vary greatly in terms of their outputs, staff, a nd culture. “Fixed effects” is a statistical technique that we use to control for department-level variation in the responses (or rank level variation in the case of teachers). Put simply, fixed effects models control for all the factors specific to particular departments/ranks. 4 however. Additional controls for gender, age, and socio-economic variables do not significantly alter our results. 5. Government officials report dissatisfaction with pay levels and perceive large increases in income from moving to the private sector 14. The first question that we address is the perceived adequacy of pay levels in the civil service. To measure this, we asked public officials “If you left your job for the private sector, how much of a salary increase would you expect?” with response options ranging from “I would not expect an increase” to “more than double my current salary.” Figure 3 displays the results for the percentage of respondents expecting an increase of 50% or more by switching to the private sector across all seven departments. 15. As the figure makes clear, more than Figure 3: Perceptions of Salary Levels for Comparable 50% of staff across all seven departments find Private Sector Jobs pay levels inadequate when compared to similar jobs in the private sector. There is some department level variation in the responses, with respondents from the Bureau of Internal Revenue perceiving higher levels of private-public salary disparities. 16. The survey reveals that perceptions of pay in the private sector are well above pay in the public sector. This view does not necessarily imply dissatisfaction with pay as most public sector employees know (and are Source: WB survey comfortable with) lower salaries in exchange for other benefits that public sector jobs provide. In order to measure satisfaction with pay levels directly, we asked the respondents whether they agree with the following statement: “you are satisfied with the pay you receive for your work.” Figure 4, left panel displays the results for the 7 departments, and the right panel displays the results for the department of Education. 17. The data reveals that a relatively small proportion of staff (well below 50% in most departments) are satisfied with the level of pay across all departments (with DOLE as the notable exception). This highlights one of the major problems with current levels of pay in the public sector, most notably driven by the perceptions of higher pay in the private sector. 5 Figure 4: Satisfaction with pay levels 7 Departments (excluding DepED) Teachers Source: WB survey 18. Another important metric is staff Figure 5: Perceptions of Salary Levels for Comparable perceptions of the pay levels of top Private Sector Jobs management in the organization which is indicative of the career prospects of public sector professionals, and has important implications on employee retention. In order to capture these perceptions, we asked respondents “how would you estimate the total job-related income of higher officials in your department relative to those of private sector employees with roughly comparable qualifications and responsibilities?” This question directly measures the perception of career prospects of public officials. Responses Source: WB survey for this question ranged from “less than 50%” to “comparable” and “higher.” Figure 5 displays the results by department. Note that around a third of staff across departments report that salaries of higher officials are comparable or higher than the private sector, while a majority perceive salaries to be less than 50%. 6. Government officials report that both recruitment and retention are a problem for their department 19. This perceived inadequacy of pay can potentially lead to a lower quality workforce with pay levels being unattractive to new talent and not sufficient for retaining skilled staff. To capture these aspects, the survey asked respondents whether they agreed with the following statements: “ among graduates from the country's most elite universities, the best and brightest join the private sector,” and 6 “your department has no problems retaining high quality staff.” Figure 6 displays the percentage of staff responding with agreement to both these statements. According to the survey, recruitment is clearly an issue across all departments (with the exception of the Department of Education). More than 50% of staff agree that the best and brightest graduates join the private sector. Similarly, , less than 50% of staff agree that the department is able to retain high quality staff. Figure 6: Recruitment and retention in the public sector Source: WB survey 7. Job security is the main motivating factor for most employees of the public sector, while mission is significantly more important for teachers 20. Note that recruitment and retention issues are not reported to be stark problems in the Department of Education (at least amongst teachers). Given similar dissatisfaction levels with pay, this poses a puzzle. In particular, since pay is apparently not the major motivating factor for public officials, we can ask what the motives of public officials are when choosing to work in the public sector. In order to address this, we asked respondents to tell us their motivation for working in the public sector by asking: “please tell us why you chose to (and continue to) work in your job” and asked them to select all the appropriate reasons from a list of motivations relevant to public sector work. The list included salary, benefits, and other motivational factors (including personal satisfaction and mission). 21. Figure 7 displays the results from all the departments. The graph reports the percentage of staff naming the appropriate reason from the list. The most striking finding here is that an overwhelming majority of staff in the seven departments (close to 80%) report job security as their core motivation for joining (and remaining in) the public service. Employees report personal satisfaction as the next most frequent reason, followed by benefits. It is notable that teachers are different in their stated motivation, citing “mission” as an important motivating factor (in addition to benefits). Thus, clearly, the motivation of teachers is different from the other public sector counterparts. 22. In sum, pay levels are a significant problem in the public sector with a high proportion of staff reporting dissatisfaction with current pay levels, high perceptions of the public-private pay gap, which persist even when asking about senior positions in the department. This leads to problems with both 7 recruitment and retention of quality staff. In fact, the main motivation for joining the public sector is reported as “job security” rather than the mission of the organization, symptomatic of a generally low performance orientation in the public sector, with the notable exception of teachers. Figure 7: Reasons for joining and continuing to work in the public sector 7 Departments (excluding DepEd) Teachers Source: WB survey Perceptions of the Performance-based Bonus 8. The WB survey reveals that, for the most part, the PBB is succeeding in its objective 23. A strong majority of staff in the 7 departments and amongst teachers, and across all unit and individual performance categories, either agreed or strongly agreed with the survey question on whether the PBB was a good idea overall (Figure 8). Even in the “good” bureau and individual rating groups, support for the reform is well above 50% indicating a high level of acceptance by staff across all departments. Figure 8: Staff are very favorable of the PBB scheme. 7 Departments Teachers Source: WB survey 8 9. The most positive views are on the effect of PBB on management 24. The most positive views relate to management practices, specifically on whether or not the PBB has encouraged managers to foster teamwork, to be more diligent in setting performance targets for the unit, in monitoring accomplishment against those targets, and in building trust within the working unit. In general, more than 70% of staff agree or strongly agree that the PBB has had each of these effects on management practices (Figure 9). For the panel on the left, staff were asked whether they agree with the statement: “since the PBB system was announced, the staff in your bureau are working together better to achieve targets for your department,” while for the panel on the right, staff were asked whether they agree with the statement: “since the PBB system was announced, management is more diligent in setting performance indicators and targets.” Figure 9: Perceptions of the impact of PBB on management practices Source: WB survey 10. For teachers, school rankings appear to be achieving strong results in terms of better management, trust, and teamwork within schools 25. The Department of Education implemented the PBB at the group level, rating schools against each other and forgoing the individual forced ranking of teachers. Given the positive responses of the PBB from the other seven departments, there is some concern in the IATF about not ranking teachers. In order to evaluate the impact of the (different) PBB scheme on teamwork and trust within schools, we asked teachers whether they agreed with the following statements: “since the PBB system was announced, the teachers are working together better to achieve targets for your school,” and “since the PBB system was announced, you are more likely to trust teachers in your school.” The results are displayed in Figure 10. The results show very strong agreement by teachers on both counts, with over 92% agreeing that teamwork has improved, and over 77% agreeing that trust has improved as a result of the PBB. In addition to this, we also asked whether teachers agreed with the following statement: “the PBB should be shared equally amongst everyone in the school.” Over 76% of respondents agreed with this statement, providing evidence for excluding the department of Education from individual forced 9 rankings. We conjecture that this is due to the client-facing nature of jobs in education, coupled with a high degree of motivation for the mission of the department of Education, leading to concerns of demotivation were individual rankings be used for bonus purposes. Figure 10: Perceptions of the impact of PBB on management practices of schools “Since PBB… the teachers are working together “Since PBB… You are more likely to trust teachers in better to achieve targets for your School” your School” Source: WB survey 11. A relatively small number of staff report negative impacts of the PBB on staff motivation and fairness of pay 26. One of the primary concerns when implementing performance pay in public sector organizations is the impact these incentives have on staff motivation. The survey asked staff whether they agreed with the following statement: “since the PBB system was announced, others of the same level as you have become demotivated.” Figure 11 shows that a majority of staff in the seven departments and in DepED do not believe that the PBB has hurt the motivation of their co-workers — approximately 30% of respondents overall agree that since PBB staff have become demotivated, with individuals from the lower rated categories more likely to agree with this statement. 10 Figure 11: The impact of PBB on motivation 7 departments Teachers Source: WB survey 27. Another usual concern with performance incentives is the issue of the Figure 12: Fairness of the pay system since PBB perceived fairness of pay. Employee demotivation is often linked to perceptions of unfairness, which in turn is fundamentally linked to the perceived objectiveness (or lack thereof) of the process of employee performance evaluation. In order to evaluate the impact of PBB on perceptions of fairness of pay, we asked respondents whether they agreed with the following statement: “since the PBB system was announced, the pay system has become unfair.” Source: WB survey 28. Figure 12 presents the results for the 7 departments. Overall, we see little agreement with the statement; only about 32% of respondents agree with the statement, with the lower ranked individuals significantly more likely to report that the pay system has become unfair. There are similarly no significant perceptions of unfairness amongst teachers. 12. With the exception of Department of Education, PBB is not as yet having an impact on recruitment 29. The survey also enquired as to whether the PBB system was redressing some of the problems with recruitment identified earlier. We asked respondents in all departments whether they agreed with the following statement: “since the PBB system was announced, you are more likely to recommend jobs in your department [school] to your friends and family.” Rather than ask directly about the 11 attractiveness of public sector jobs among fresh graduates (which can take a longer time to generate impact than was available given the short time frame between PBB payments and the survey), the question focuses on word-of-mouth recruitment, which is a proxy for recruitment in general. Figure 12 presents the results for all departments. In the seven departments it shows that there is relatively little agreement that the PBB is increasing the likelihood of staff recommending jobs in their department. Just over a third of staff report that the PBB has made them more likely to recommend jobs (which does not vary substantially by performance ranking). Teachers, on the other hand, are more positive on this aspect, with 56% of teachers agreeing that the PBB has made them more likely to recommend jobs in their school. Figure 13: The impact of PBB on recruitment 7 departments Teachers Source: WB survey 13. Staff report transparency concerns in the rating process of the PBB 30. Another area of concern with the implementation of PBB is with the transparency in the ratings process. In order to gauge the level of transparency, we asked staff whether they agree with the following statement: “the ratings process for individual PBB is transparent.” Figure 14 present the results for all departments. Overall, about 40% of staff agree that the ratings process is transparent (43% for DepED), with the higher ranked bureau and individuals significantly more likely to agree (as expected). Therefore, a majority of staff do not agree that the ratings process is transparent, leading to areas of improvement in the implementation of the PBB, specifically in terms of communication between management and staff. 12 Figure 14: Transparency of the PBB ratings process 7 departments Teachers Source: WB survey Recommendations 31. The overall conclusion from the survey data is that the PBB is having a positive effect on government performance, and it is doing so primarily through the channel of better management and teamwork. It is therefore an initiative that should be scaled up and refined to address some of the concerns, particularly around the perceived lack of transparency of the individual ratings. We have seven recommendations to this effect, all of which are of high priority given the limited time left of the Aquino administration. Figure 15: PBB is relatively small as a percentage of total pay, particularly for higher salary grades 1. Increase the size of the PBB and make it a percentage of base pay 32. As noted, the PBB makes up 2% of the wage bill and as the bonus amounts are set in nominal terms (Figure 16) the incentive is biased against more senior staff and declines rapidly as a proportion of pay as one goes up the salary grade (Figure 15). This incentive is therefore small in monetary terms for technical and managerial staff. The bonus should instead be specified as a percentage of Source: WB staff calculations based on DBM data pay, as is the norm internationally, to redress this distortion and should be scaled up to further incentivize performance and to induce positive effects on recruitment which are currently absent. A rough rule of-thumb, drawing on international experience, is that the PBB be increased to at least one month’s total pay (basic pay plus standard allowances) on average for the higher performance categories, with appropriate differences in steps between the different ratings. 13 2. Increase the weight of the group bonus 33. The survey shows that the positive aspects of PBB are primarily the improvements in management that it has induced. Increasing the weight of the group bonus will further put the spotlight on managers to encourage teamwork and focus on achieving the unit and departmental targets. Individual ratings are still important, to discourage free-riding behavior and to incentivize managers to spend more effort on the annual performance appraisals of staff. The individual rating process should also improve with the rollout of the new Strategic Performance Management System (SPMS) individual performance appraisal tool which is a results-based tool and a significant improvement on the trait-based one that is currently being used. Figure 16: PBB reform options and cost estimates Current scheme Option 1 Option 2 (Pesos) Individual ranking (Percentage of (Percentage of Individual ranking Individual ranking total pay) total pay) Working unit Best Better Good Working unit Best Better Good Working unit Best Better Good ranking performer performer performer ranking performer performer performer ranking performer performer performer Best Bureau 35,000 20,000 10,000 Best Bureau 18% 12% 6% Best Bureau 20% 14% 8% Better Bureau 25,000 13,500 7,000 Better Bureau 12% 8% 4% Better Bureau 14% 10% 6% Good Bureau 15,000 10,000 5,000 Good Bureau 6% 4% 2% Good Bureau 8% 6% 4% PBB Cost Projection Estimate (in Bn. Pesos) 40.00 34.06 30.00 23.08 24.30 20.00 16.47 9.97 10.00 - Total PBB Cost (Current) Proposal 1 Proposal 2 Projected PBB Estimate Source: WB staff calculations based on DBM data 34. The variation in the PBB is at present higher across individual performance ratings than across unit performance ratings. For any given individual ranking the PBB is roughly twice as high for a best bureau as compared to a good bureau; by contrast for any given bureau ranking the PBB is thrice as high for the best individual rating as compared to a good individual rating (Figure 16). We would recommend that the individual and group ratings be balanced so that there are equal variations in the PBB amount as one moves across individual and group ratings. 35. Figure 16 provides two options that increase the size of the PBB, make it as a percentage of pay, and increase the weight of the group-based bonus so that it balances the individual rating based bonus. Taken together these recommendations imply a modest increase in the PBB from the current budgetary 14 allocation of almost 10 billion pesos to between 17 billion and 34 billion pesos depending on the option chosen. Even the higher option would only increase the overall wage bill by less than 5%, and would reduce the available fiscal space by only 1.4 percentage points (i.e. increasing the wage bill as a percentage of revenues from the current 37.4% to 38.8%). 3. Continue to not force-rank teachers for the PBB 36. DepEd does not force rank teachers and the positive responses from the survey suggest that this policy should be continued. The strong effects of the PBB on promoting teamwork, trust, and principals and teachers working together to achieve performance targets for the school suggest that the basic design of the PBB scheme should not be altered. Teachers are not averse to being individually ranked with the majority of survey respondents supporting both school and teacher ranking (Figure 17 left panel) ; but they do not want to have the PBB be distributed based on individual ranking and instead prefer the bonus to be shared equally among all teachers in a school (Figure 17 right panel). Figure 17: Teachers are not averse to being ranked but do not wish to have the PBB tied to these rankings The PBB should be shared equally amongst everyone in the school. Source: WB survey 37. This exception for teachers from the general PBB scheme implies that the inter-agency task force should establish clear criteria for when departments, or more precisely units within departments, can be allowed to have only a group-based bonus scheme. Group-based schemes should be an exception rather than a rule because individual rankings serve two important purposes: they ameliorate free-riding behavior within groups and they incentivize managers to make more effort on individual performance appraisals and therefore support the rollout of the SPMS. Only departments that meet the following criterion should be eligible for only a group-based scheme:  Units within the department that are being ranked are functionally identical: they have exactly the same MFOs and performance indicators which implies that group ranking can generate the necessary competition to incentivize performance. 15 38. Almost by definition this criterion would imply that the group-based scheme be limited to citizen-facing, deconcentrated units of departments, such as schools, regional tax offices, basic health centers, and district engineering offices. 4. Limit the number of school performance categories to three 39. Continuing with only school based rankings for teachers should be accompanied by a reduction in the number of school categories from the current 8 to 3. The 8 school rankings are admittedly a stop-gap measure by the IATF and a mapping of the 3 by 3 matrix of individual and group rankings which results in 8 different levels of the PBB onto school rankings. As a result the size of the bonus increases by very small increments between school rankings and therefore may not serve as a big enough incentive to warrant the extra group effort by teachers (Figure 18 left panel). Instead, drawing on the options presented above, larger bonus increases (set as a percentage of pay) across three school categories can provide big financial returns to extra effort (Figure 18 right panel). Figure 18: Limiting school performance categories Current school rankings Proposed school rankings Percentage of Option 1 Option 2 total pay Best school 18% 20% Better school 8% 10% Good school 2% 4% 5. Improve the disclosure and communication around the individual ranking criteria 40. The positive effects of the PBB are occurring primarily through improved management, specifically with regards to goal setting and teamwork; but management has been found wanting in the area of transparency and communication on individual rankings. In order to impact individual productivity effectively, the PBB scheme needs to have clear transparent goals that are communicated to staff. It is important that staff know exactly what they need to do to improve their ratings. 41. Our recommendation would be to improve transparency and communication regarding the criteria for individual ranking. Employees should be given clear goals with regards to what is expected of them at the beginning of the rating period, and then provided with details as to why they were rated the way they were. In addition, performance ratings could be made public so as to tap into further social aspects of the rating process (as in improved efforts through status effects) along with a formal grievance process for employees to challenge their ratings. Some departments, such as DOLE and DENR, are already have already made these rankings public and score higher on the transparency related questions in the survey. These management reforms will further enhance the positive impact of the pay, and allow for a more thorough discussion of performance between management and staff. 16 6. Gradually relax the Good Governance conditions 42. The PBB scheme, as currently designed, is aimed at achieving three objectives, not all of which are explicitly stated in the policy guidelines: (a) improving agency performance as measured by the achievement of departmental MFOs and key presidential priority programs; (b) improving individual performance; and (c) improving agency compliance with existing governance-related laws and regulations to meet the five good governance conditions.5 43. As the scheme evolves, the Government may consider increasing the emphasis on departmental and individual performance, and reducing the emphasis on enforcing compliance. Some of the compliance measures, in particular the posting of procurement information on PhilGEPS, have stronger links to departmental performance than others, such as the liquidation of cash advances or the establishment of the Citizens Charter.6 These should be retained. But the current tendency to use the scheme to enforce compliance with existing laws — e.g. the Audit Law for the liquidation of cash advances, and the Anti-Red Tape Act (ARTA) for the posting of the Citizen’s Charter — should be avoided. Adding additional compliance requirements significantly increases the administrative burden of implementing the PBB scheme, and detracts from the objective of focusing on performance as measured by outputs and outcomes and not compliance with procedures. Instead other regulatory vehicles should be used to enforce compliance with the laws. 44. The good governance conditions are also stricter than MFOs and require 100% compliance. This is perceived as unfair by many departments and agencies. For example, the responsibility to meet the conditions rests with specific bureaus or services within departments (e.g. finance services for the transparency seal and the liquidation of cash advances; the bids and awards committee for the PhilGEPS posting; and the administrative service for the citizens charter) but the entire department is penalized if these are not achieved. Many agencies also reported that ensuring compliance with the good governance conditions took more time and effort than ensuring achievement of the performance targets. A process review conducted by the WB in 4 departments revealed that on average it takes 3 to 5 months to finish all the validation exercises for the good governance conditions, with delays caused by partial or incomplete data submission by the agencies, the need for actual physical validation (in the case of the citizens charter) with limited staff to do so, and poor flow of communication between the validators and the agencies. 45. In light of these problems, our recommendation would be to 5 Establishment and maintenance of transparency seal; posting in the Philippine Government electronic procurement system (PhilGEPS); liquidation of all cash advances; establishment of the Citizen’s Charter; and submission of asset and income declarations of public officials. 6 The cash advances that need to be liquidated are for officials’ travel and for special activities and projects. The Citizens Charter is an information billboard that needs to be physically placed in department offices and details the vision or mission of the agency, the services offered, the procedures for the services, and the required documentation and fees. 17  Rather than penalizing the entire department for failure to meet the good governance conditions, integrate these with the Support to Operations and General Administrative Conditions of the relevant units within departments. So if the concerned unit, such as the financial service, fails to meet the conditions then it would be ranked as a poor performing unit with a low PBB.  Once departments have established a good track record of compliance, relax the annual validation process (and replace with more infrequent reviews) or consider dropping the condition altogether.  Avoid adding more good governance conditions. In the 2013 PBB guidelines the number of good governance conditions increased from 4 to 5. As noted, the compliance, review, and validation of these conditions takes time and effort away from the more important task of focusing on the MFOs 7. Strengthen DBM and IATF Secretariat’s capacity for review and validation 46. The PBB scheme is in essence based on self-validation by the departments and constituent delivery units on the achievement of performance targets. While an elaborate review and validation process has been set up, this process largely involves ensuring compliance with the documentary requirements, with some quality assurance of those targets that were greatly exceeded. It does not however, qualify as a robust validation mechanism that minimizes the risks of gaming or outright misreporting of physical accomplishments. On other hand, considerable effort is being spent on the physical validation of some of the good governance conditions, such as the posting of the Citizen’s Charter, which are less important from a performance standpoint and therefore point to a misallocation of effort. 47. The risks of “gaming” behavior will increase if the PBB is scaled up and therefore a mechanism for ex post evaluation of the achievements against the MFOs needs to be put in place. The IATF is currently contemplating enlisting civil society organizations (CSOs) to validate physical progress. While CSOs can certainly provide additional, independent opinions for small, less complicated activities, they will not have the capacity, and may lack the authority, to engage in a full-scale monitoring exercise. This validation is a technical exercise and, assuming that in-house government capacity is currently lacking, in the short term the services of technically qualified third parties should be contracted. In the medium term this capacity would need to be built in the DBM as part of its broader mandate on performance-informed budgeting. 48. Our recommendation therefore is that for the immediate term DBM should contract with independent consulting/audit firms for ex post validation of the accomplishments of the targets. 18