Central goals, decentralised implementation; about the do's and don'ts of performance contracts for public organisations

Gradually, the use of performance contracts for public organisations, as well as performance pay within these organisations, has become more prominent, but is still far less common than in the private sector.

In this study, we analyse the possibilities for increasing the use and usefulness of performance contracts and performance pay in various (semi-)public sectors. We start by surveying the principal-agent literature, which proves to be a useful workhorse for the analysis of performance incentives. Given the insights of this literature, we develop a framework that characterises current incentives for public organisations, and the tradeoffs related to the use of explicit incentives. We apply this framework to six cases: the social benefit administration, the police force, the education sector, universities, physicians and the major research institute in the Netherlands (TNO). We find incentives to be weak as a result of two major reasons. First, the Dutch government often lacks information on performance indicators. Consequently, the outcomes cannot be interpreted as ‘good’ or ‘bad’. Second, the Dutch government itself has no strong incentives to act as a perseverant principal who commits himself to performance norms S as it decreases the flexibility of the government considerably. We conclude with some options for policy to alleviate the first reason for weak incentives, like benchmarking and (subjective) evaluation by external experts. The second reason for weak incentives should become less relevant when the modernisation of the budget rules is succesful.

This publication is in Dutch.