Scott MacStravic
As current and potential additional revenues increase--from pay-for-performance (P4P) arrangements with employers, insurers and governments--the advantages of internal use of P4P systems for compensating employees grows accordingly. To this is added the potential benefits of internal P4P measurement and compensation as elements of both employee health management (EHM) and integrated, value-based benefits management as separate, though related initiatives aimed at improving workforce performance.
While the advantages are great, there can be no question that there are also internal barriers and costs, both financial and managerial, for internal P4P. These include, but are not limited to:
- Increasing operating costs by the costs of the P4P measurement and management system, itself
- Increasing employee compensation and thereby overall operating costs
- Increasing turnover among employees, and thereby operating costs, though the net effects may be positive
- Personal costs to supervisors and managers
Costs of P4P Measurement and Management
Workforce productivity and other dimensions of performance are not easy to measure in healthcare organizations (HCOs). Even in industries and jobs where individual output is easily measured, the P4P system adds to operating costs compared to existing hourly wage or salary methods. And for jobs where output and performance have not been measured, the challenge of measuring performance, on a team or individual basis, will add significant costs. Fortunately, there are many well-tested and validated methods for employee self-reporting of productivity, and performance on at least a team basis should be facilitated by overall efforts to measure and improve performance already underway.
Numerous software systems are available for performance measurement and management, as workforce performance management has become a major focus in most industries. Any Google search will yield hundreds of references on the subjects, and links to vendors such as SAP.com and Softscape.com. And costs of measuring and managing P4P systems are generally far lower than the benefits they deliver in terms of added performance and workforce value.
Added Compensation Costs
By intent, P4P systems should increase workforce compensation in two ways. First, because they tend to improve workforce performance, they will increase overall compensation as a result. When a windshield repair firm switched to P4P from hourly wages, it achieved a 44% increase in productivity in the first year of the new system. But overall workforce compensation increased only 10%, yielding a 34% “profit” that easily covered the added costs of both compensation and the measurement/management system. [E. Lazar “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]
The second cause of added compensation is the tendency of internal P4P systems to improve the “performance balance” of the workforce. Such systems tend to promote retention of high-performing employees, while prompting the departure of low-performing (and therefore lower-paid) employees. In the windshield repair firm, turnover among high-performers decreased by 21%, for example, while it increased by over 10% among low performers. This would indicate that on average, the firm will end up with more high performers, and fewer low performers, over time. This will increase average compensation per worker, but with even higher performance and value per worker, hence higher ROW.
Turnover Costs
During the time that more low performing employees are leaving, there will be higher turnover costs. On the other hand, with clear identification of which are the high performers, organizations should be able to identify which personal characteristics best predict high performance, and improve their recruitment of high performers, further improving the mix of high vs. low performers, and thereby the overall performance of the workforce and the organization.
Personal Costs to Supervisors and Managers
There are likely to be some personal costs with P4P systems as well as financial costs that are offset by savings and revenue enhancement from improved worker performance. For one thing, employees will learn how valuable they are to the organization, and may press for even more compensation, beyond what the P4P scheme allows. When the windshield repair firm employees learned that their productivity increased by 44%, while their compensation increased by only 10% on average, and 28% at most, they might have pressed their supervisors for a higher “share” of the gains.
For another, when the true value of employees is known, their input and feedback increases in value to the organization. When their feedback indicates low satisfaction with or ratings of their supervisor, and of other managers, for that matter, the organization may listen more and respond in ways that do not help the supervisor and manager as they see it. More supervisors and managers may join the ranks of “turnover” employees as a result.
And, of course, once there is an objective performance measurement system, supervisors and managers will lose influence in overall performance rating, promotion and raise decisions, as the P4P ratings mix with, or perhaps supplant those of supervisors and managers. They may even find it more difficult to be credited with what they think is their fair share of credit for their employees’ performance, particularly if employee ratings of their performance are low.
There is no way to argue in the abstract that P4P systems will produce a permanent and positive impact on healthcare organizations. It all depends on what kinds of systems are put in place, and how both managers and employees respond thereto. But given the known positive impacts of P4P, and the necessity for HCOs to reduce their costs wherever possible, while improving their quality and safety, to say nothing of customer satisfaction and revenue performance, it seems likely that internal P4P systems will be tried, and we will find through experience whether the overall benefits are worth the overall costs.
