Options for Civil Service Pay Reform in Indonesia. Zahid Hasnain, Senior Public Sector Specialist, World Bank

Transcription

1 Options for Civil Service Pay Reform in Indonesia Zahid Hasnain, Senior Public Sector Specialist, World Bank 1

2 Outline of the Presentation 1. What should be the objectives of civil service pay policy? 2. How does Indonesia s system measure up against these objectives? 3. What are some possible reform options? 2

3 In general, there are 4 main objectives of civil service pay policy 1. Pay should be sufficient to attract and retain high quality staff competitive with the labor market for all the key positions. 2. Pay should be perceived to be fair and transparent compensation should be matched to the demands of the job and staff should be able to easily see this. 3. Pay should induce performance and accountability of staff to serve the public. 4. Pay should be at a level so that the overall wage bill is fiscally sustainable and does not crowd out other expenditures. Difficult to achieve all of these objectives as they may be mutually inconsistent 3

4 1. Assessment of Indonesia s pay system (central K/Ls only) 4

5 Main components of pay in Indonesia s civil service 1. Basic pay: Pay scale based on rank (golongan) and years of service, as defined in PP 7/1977 and subsequent amendments. 2. Common allowances: Structural, functional, or general allowances as specified in PP 7/1977. Allowances for dependants. Rice allowance. Hardship allowances for postings in remote areas, such as Papua. 3. BR performance allowance: Defined by Presidential Regulation (e.g. PerPres 75/2010 for MenPan) 7 different pay scales across the 12 K/Ls. 4. Benefits: housing, car, medical etc. 5. Honoraria (meeting allowances, speaker fees): Defined in ministerial decrees negotiated between K/L and MoF. 6. Other: e.g. travel per diems. Have de facto become salary supplements 5

6 Objective 1: Is pay sufficient? Monetary compensation in non-br agencies (excluding honoraria and in-kind benefits) 6

7 Honoraria and travel expenses are significant additional components of compensation Honoraria not classified under personnel expenditures in the budget; issue of fiscal control. 7

8 Labor force survey (Sakernas) data: public sector managers and professionals are on average paid less and junior staff paid more than in the private sector 8

9 Picture for BR agencies however, is very different 9

10 In sum, pay is getting more competitive with BR, particularly for senior staff and managers Old pay structure was not competitive for technical and more senior positions. Anecdotal evidence that BR pay has made the civil service a much more attractive career option for new entrants: Increases in the quality of new applicants in the BR agencies. Considerable increases in pay over a civil servant s career, in line with the private sector. Pay surveys, which have been undertaken by some K/Ls, can provide more detailed information and should be undertaken on a regular basis. 10

11 Objective 2: Is pay fair and transparent? There is a general principle of equal pay for equal work and numerous studies have found that violating this principle can significantly impact staff motivation and productivity. In Indonesia, pay varies: Between staff in the same rank between BR and non-br agencies; Between staff in the same rank between different BR agencies (7 different pay scales among the current 12 BR agencies). Between staff in the same rank within an agency, particularly in a BR agency 11

12 Differences between BR and non-br agencies for staff in same rank 12

13 Differences within a BR agency for staff in same rank 13

14 Key question: Are these pay differences linked to demands of the job or to attract scarce skills in high demand in the private sector? BR pay scale is based on a job evaluation exercise: therefore not surprising that staff in same rank in a K/L in the old pay scale will be placed in different levels in the BR pay scale. However, unclear what methodology is used to assign monetary values to the BR pay scale i.e. lack of transparency: A general perception that this is done in an ad hoc manner. As a result, the pay differences may lack credibility and may be perceived as unfair. 14

15 Objective 3: What are the links to performance and accountability? In non-br agencies the pay system may not encourage performance and accountability: Some of the pay elements, such as honoraria, may encourage unproductive behavior. Highly compressed pay implies that monetary pay increases through career progression are relatively small; however inkind benefits may be large. In BR agencies pay has been significantly decompressed. 15

16 BR has greatly reduced pay compression 16

17 However, in BR agencies no clear link yet between performance and pay The BR Grand Design and Road Map provides a detailed process for the requirements for each K/L to get the BR performance allowance. However, these are entry criteria based on what reforms the agency has done and what reforms the agency is committing to do. There is currently no clear mechanism to sanction agencies that do not perform, which reduced the credibility of BR pay. Key is to develop a robust Monitoring and Evaluation Framework this has recently been developed. 17

18 Objective 4: Fiscal sustainability. National spending on personnel rose from 23% of total national spending in 2005 to 28% in 2011, and from 4.4% of GDP to 5.1% over the same period. These figures exclude honorarium etc, which reduced fiscal controls. 400,000 IDR billion Percent (%) , , , , * 2011** Nominal Constant 2009 prices (LHS) % GDP (RHS) % Total national spending (RHS) 0 18

19 Indonesia s wage bill is now comparable to other countries as % total spending At 28% of total national spending in 2011, Indonesia now spends roughly the same as its neighbors in the Asia-Pacific & slightly less than Middle-income countries. 40 % of general government expenditures

20 but high as a % of total revenue, raising questions about sustainability At 31% of total national domestic revenues in 2011, Indonesia now allocates more of its revenue to the wage bill than almost all other countries This could be a signal that the wage bill is becoming unsustainable. 40 % of general government revenues

21 To summarize: BR has addressed objective 1 1. Increased pay and reduced pay compression through allowances and BR pay. 2. Increasing pay flexibility may enable civil service pay to more easily adjust to changes in the labor market: Global trend has been to move away from uniform pay spine to respond to increasing variation in the labor market. Indonesia has de facto introduced agency-specific pay with a loose logic that high priority agencies get highest pay. Greater delegation of pay decisions to K/Ls. 21

22 but at the cost of the other 3 objectives 1. Fiscal impact will be considerable from full rollout to all the K/Ls and eventually to local governments. 2. Questions about fairness and transparency: What is the methodology used in BR pay? The old and new pay scales co-existing create problems because in the old system pay is based on rank and in the new on job classification. Increasing inequity between workers and retirees. 3. No clear link with performance and accountability. The above implies that political sustainability then becomes questionable; underlines the need for an overall strategy towards pay reform 22

23 Performance-related pay is now on the agenda: What is the international experience? Many OECD countries, and some MICs (e.g. Thailand, Brazil) have introduced PRP for core civil servants and service delivery staff. Opinion is highly divided on whether or not performance pay works. World Bank recently completed a review of the literature on performance related pay: Over 100 studies reviewed Studies covered many countries and contexts 23

24 Main findings of the WB review Overall, a majority of studies reviewed present supportive evidence of some effect of performance pay on staff recruitment, effort, and outcomes. A majority of high quality studies (statistical and experimental) show a positive effect of PRP while a majority of lower quality studies show a negative effect or no effect. However, evidence is more mixed for studies that are more relevant to the public sector that focus on complex tasks that are not as easily measureable. Again, majority of higher quality studies focusing on complex tasks found positive outcomes of PRP. 24

25 Findings by study quality (5 = highest) 25

26 However, plenty of caveats Design of the PRP is key badly designed incentive schemes can result in gaming the system whereby people work only towards the indicators that are measured and neglect other important tasks. Lots of design elements to consider what aspect of performance is to be measured, how is it to be measured, what will be the size of the performance bonus. How will the performance appraisal be done quantitative indicators (e.g. tax collections, student test scores) or manager evaluations? What will be the management arrangements? How does politics effect PRP? 26

27 2. Pay Reform Options 27

28 How have OECD countries tried to meet the 4 objectives of pay policy? Realization that a uniform pay spine across the civil service was not meeting the objectives. Starting in late 1980s, several OECD countries moved to pay flexibility in the civil service to be more like the private sector: Differentiation: The same job can pay differently across agencies and geographical locations Individualization: Two individuals in the same agency in the same job get paid differently based on performance Delegation: Decisions on pay are transferred from central civil service agency to line ministry/agency which presumably has better information about staff 28

29 A framework for approach to pay reform: Which route should Indonesia follow? Indonesia 2011 Increasing differentiation across K/Ls Some individualization Some delegation to K/Ls But no coherent overall framework (2) Indonesia s future Reformed Structure (1) OECD 1980s Uniform pay spine across the civil service OECD 2011 High differentiation High individualization High delegation 29

30 A possible future pay structure for Indonesia Option 1: BR Pay Scale for basic pay, varying by K/L grouping Option 2: Common allowances Family Rice Performancerelated pay Uniform BR Pay Scale Pay for Scarce Skills Old basic pay scale abolished; BR job evaluation based pay scale becomes the model for the new basic pay scale Key question is how much should it vary across K/Ls? Some options. Old position allowances merged into basic pay; honoraria abolished. Some common allowances maintained. Performance-related Pay: Conditional on the development of new performance appraisal tools. Delegated to the K/L % 1-5% 20% 30

31 How would this meet the objectives? Having a basic pay scale based on job evaluations and benchmarked to the labor market (like the BR scale) will address objectives 1,2 and 3 Allowing some differentiation across K/Ls addresses 1 and 4 Eliminating honararia and some of the other allowances addresses 2,3, and 4 Performance-related pay that is linked to a credible assessment system addresses 2 and 3 31

32 Next steps What is the government s vision on civil service pay? What will be the institutional arrangements? Unclear who has the mandate for overall reforms: de jure vs. de facto At a minimum, a joint task-force/committee with MoF and MenPAN is needed to model the different fiscal implications of alternative pay reform Impact on pensions; fiscal projections of alternative models. Control mechanisms. 32

33 How the World Bank can help WB is conducting a cross-national study on pay flexibility in the civil service: Indonesia, Thailand, Korea, and Japan (East Asia) Brazil and Chile (LA) Russia and possibly 2 other cases (Europe) Also undertaking major survey of civil servants in Indonesia to assess impact of BR on staff perceptions. The findings of these studies can be used to provide further policy recommendations (April 2012). 33

34 Thank You 34