Indiana Gov. Mike Pence's recent decision to dole out $42 million in performance-based pay raises to state employees is the latest milestone in a slow march toward using incentives to increase the productivity of government workforces. Employees who meet expectations will get 3 percent raises, those who exceed them will reap 4 percent increases and outstanding performers will see their salaries jump by 6 percent.
Although Pence's action is a step in the right direction, there is much more that should be done to transform state and local governments into meritocracies. While some of the Indiana employees who will receive raises are unionized, collective bargaining agreements often make it difficult to expend pay for performance to union employees. Instead of mandating that each worker is treated the same, collective bargaining agreements could specify annual increases for the bargaining unit as a whole but give managers flexibility to allocate individual raises based on merit.
State and local governments also should have the ability to raise salaries for workers in high-demand fields. When Google and Facebook moved in near an important state data center, North Carolina responded in 2014 by putting $7.5 million into a fund to retain not only state employees those companies might want to hire but also other workers with in-demand skills such as nurses. Such a program could also be used to attract teachers in subject areas where there is a shortage, such as math, science and special education.
As some states and a few local governments experience surpluses for the first time since the Great Recession, public officials would do well to learn from the example of Pence's predecessor, Mitch Daniels. When Indiana found itself with an unexpected $1.18 billion surplus in 2011, Daniels shared part of the bounty with the highest-performing state employees.
Of course, the success of performance pay depends on the competence of government managers. Public-employee unions take a lot of heat -- some of it justified -- for public-sector labor practices such as pension spiking and abuse of sick-time and overtime rules, but managers must also step up if state and local governments are to use incentives to improve productivity.
There is a strong temptation for managers to take the path of least resistance and treat all employees the same. But any short-term gain from that approach is fraught with long-term consequences. Productive workers leave; after a time, generous pension incentives make it hard for others to go, and the result is an older workforce that values job security over advancement -- not exactly a recipe for efficiency and productivity.
In the final analysis, transforming state and local governments into meritocracies requires changing the culture. It is almost by definition a slow and painful process, but one that could ultimately pay handsome rewards.