New Public Management as Trust Problem: Explaining Cross-country Differences in the Adoption of Performance-related Pay in the Public Sector

Abstract

This paper aims to explain cross-country variations in a paradigmatic element of NPM reforms: the shift from low-powered incentives (i.e. flat salaries) to high-powered one (i.e. performance-related pay systems). The paper presents a simple theoretical model based on insights developed for understanding the success of performance-related incentives in the private sector. This literature has underlined the need for a system of separation of interests within firms to make promises on incentives credible. The interests of those who benefit from the incentives (e.g. owners) must be relatively different from the interests of those who manage the incentive system (e.g. managers). Similarly, this paper argues that incentives in the public sector can only be implemented in those administrations in which there is a relative separation between those who benefit from the incentives (e.g. politicians) and those who manage the incentive system (e.g. senior civil servants). Where the interests of both groups totally overlap (e.g. the careers of senior officials and politicians are intertwined), incentives will be less credible and thus less likely. A quantitative analysis for 25 OECD countries confirms that incentives are significantly more used in those contexts with clearer separation of interests between politicians and senior civil servants. Narratives from Sweden, the UK, France and Germany illustrate the workings of the theory.