Merit pay

Idea of performance based pay
Merit pay, merit increase or pay for performance, is performance related pay, most frequently in the context of educational reform or government civil service reform (government jobs). It provides bonuses for workers who perform their jobs effectively, according to easily measurable criteria. In the United States, policy makers are divided on whether merit pay should be offered to public school teachers, and other public employees, as is commonly the case in the United Kingdom.

Most analyses of merit pay, including the Nashville Study, consider whether or not the existing teachers in a school perform better after being offered pay for performance. Scores might go up if teachers work harder or "work better." This situation, often called "increased effort," implies that teachers were not working as hard as they might before the performance pay was offered, and the lack of achievement results implies that the performance pay does not lead to increased effort. On the other hand, an additional feature of performance pay might be improved "selection" of who enters and who stays in teaching. For example, a different group of teachers might be induced to enter the teacher profession if pay was aligned more with performance. And, the best teachers, the ones who get the added performance pay, may on average be induced to stay in the classroom longer. These larger impacts through changes in selection would not show up on the evaluations previously conducted but can show up on overall comparisons of countries that do and do not employ performance pay systems. Ludger Woessmann finds evidence that performance pay does improve performance when viewed across countries. Additionally, the analysis of the impact of dismissing ineffective teachers by Eric Hanushek can be interpreted as a special form of performance pay where pay is reduced to zero (or a very low amount) for teachers who do not perform well.

Loss aversion was first proposed by Daniel Kahneman and Amos Tversky in 1979. They proposed the notion that individuals assign value to gains and losses rather than to final assets. In other words, individuals have a tendency to prefer avoiding losses rather than accruing gains. This notion of people hating to lose, more than they like gaining something, even if the potential amount that could be lost is the same as the amount to be gained, has been tested in many arenas. An experiment conducted by Kahneman et al. 1990 Journal of Political Economy describes testing loss aversion through the concepts of the Endowment effect and the Coase Theorem. The endowment effect reveals the notion that people place a higher value on objects they own relative to objects they do not. The Coase theorem focuses on transaction costs and the importance of who owns a particular commodity. They found that randomly assigned owners of a mug required significantly more money to part with their possession (around $7) than randomly assigned buyers were willing to pay to acquire it (around $3). Kahneman attributed this result to loss aversion: owners were affected more by the loss of the mug compared to the effect of a buyer purchasing the mug as a gain. Another experiment conducted by Terrance Odean at Berkeley College examined the account of 10,000 investors at a large discount brokerage house. The tendency of investors revealed they held on to losing investments too long and sold winning investments too soon. Their behavior did not appear to be motivated by rational re balancing of portfolios or to avoid higher trading costs. According to Odean, these investors held on to these losing stocks in order to prolong the feeling of loss from selling them, even though there was no evidence that by holding onto them, they would rise in value. "Winning investments that investors chose to sell continued in subsequent months to outperform the losing stocks investors kept."

Some political figures support the merit pay system as an effective policy for enhancing educational quality.

Jeb Bush, governor of Florida during that time, enacted a 5 percent bonus for the top 25 percent of teachers in the state of Florida. A large factor in selection of the top 25 percent of teachers was student score improvement. A similar program was implemented in Houston at the same time, only lacking a limit on the percentage of teachers who could receive the bonus. Teachers in both states rebelled, stating that a year of instruction can't be measured in a single test, on a single day. These systems showed other imperfections as well. For example, a county in Florida ran out of money before all the teachers received bonuses. Accusations of discrimination also existed, a result of difference in pay between predominately black and predominately white schools. President Barack Obama supports merit pay for teachers but believes teachers' pay should be increased based on performance tests, not arbitrary tests. He wishes to work with the National Education Association (NEA) to find a new system to get rid of performance pay. The National Education Association (NEA) adamantly opposes some forms of merit pay. In June 2003, NEA President Reg Weaver said:

Teachers understand that politically motivated panaceas such as merit pay and eliminating tenure do nothing to improve teacher quality. Our members are open to alternatives, but we will always oppose quick fixes designed to weaken the voice of teachers and effectiveness of education employees in all jobs. In September 2011, Obama took steps to reform certain unpopular and ineffective provisions of No Child Left Behind: "Congress hasn't been able to do it, so I will. The most notable change to the law related to the 2014 deadline for all schools to bring their entire student body to "proficient" levels in reading and math. The Obama administration offered a pass on the deadline and the opportunity to design their own accountability systems to some schools. The provisions that required failing schools to offer after school tutoring and no cost bus transportation to better schools were also waived. To qualify for the waivers, however, states must demonstrate an adoption of "college and career ready" academic standards and deliver a sketch of how they plan to transform their lowest performing schools. States that apply for these waivers this fall can be reviewed by the Education Department early next year. According to Eugene Wilhoit, executive director of the Council of Chief State School Officers, likely candidates for early application include Georgia, Kentucky, Wisconsin, and Colorado. Wilhoit believes that other states will also apply for the waiver after watching the process unfold for the states that apply early. Still, other states are not likely to apply at all since they are unwilling to disrupt current accountability systems if No Child Left Behind could soon be overhauled by Congress.

In late 2013, the Brookings Institution, a liberal think tank, published research by analysts Choi and Whitford, who cautioned that—despite a shift of resources to merit based pay for federal workers, intended to "better align pay and performance"—such efforts often fail, and such incentives "may not work" for "public organizations." However, rather than focus on the results of merit based pay in "individual and organizational performance," Choi and Whitford focused, instead, on its effects on "job satisfaction," saying that is "often a good predictor of performance." They studied federal government "findings" that indicated that subjecting federal employees to merit based pay produces workers who are "consistently less happy" with their pay, their job and their organization, than those federal employees paid in "traditional compensation systems." Their report expresses concern that this could affect long term outcomes.

The idea of merit pay receive a major discrediting blow from the Veterans Health Administration controversy of 2014, which revealed nationwide altering of records by Veterans Health Administration executives, including falsifying patient waiting lists and wait times, and keeping "secret" wait lists to ensure receiving merit pay bonuses. Over 1,000 veterans were reported to have been affected, as of June 2014, with dozens having apparently died waiting for care. The scandal became a leading U. S. domestic news story in 2014, resulting in investigations by the VA Inspector General, Congress, and others. The issue first became a major national topic when a doctor at the VA hospital in Phoenix reported that perhaps over 40 patients had died due to false and secret waiting lists that delayed or prevented their care. Subsequent reports found similar allegations at many other VA medical facilities around the nation. Patient wait times were a metric used to determine executive bonuses, and it is alleged that the delays in care were concealed by wait list abuses in order to ensure that staff received bonuses. Subsequent allegations and audits revealed the waiting list issue in Phoenix was not unique, but part of a wider, systemic problem in the VA nationwide, with secret waiting lists and related issues being uncovered at numerous other VA medical facilities, including in Chicago, Kansas City, Wichita, El Paso, and elsewhere. On May 30, 2014, President Obama accepted the resignation of Secretary of Veterans Affairs, Gen. Eric Shenseki, noting that:

A few minutes ago, Secretary Shinseki and Rob Nabors, who I've temporarily assigned to work with the VA, presented me with the department's initial review of VA facilities nationwide. And what they've found is that the misconduct has not been limited to a few VA facilities, but many across the country. That's totally unacceptable. Secretary Shinseki has now begun the process of firing many of the people responsible, including senior leaders at the Phoenix VA. He's canceled any possible performance bonuses this year for VHA senior executives.