GOVERNANCE NOTES MAY 2019 No.16 WAGE BILL AND PAY REFORM: A FIRST GLANCE AND A LOOK FORWARD Prepared by Wouter van Acker and Zahid Hasnain, Governance Global Practice Reforming wage bills can significantly impact a country’s fiscal WHAT IS THE BANK’S BASIC POLICY MENU? outlook, public sector performance, the health of its labor Although interventions differ between countries based on market, and private sector development. The public sector administrative traditions, political context, level of development, represents an average 15 percent of total employment, and and other factors, common threads are found among the policy it accounts for a large chunk of formal sector employment options recommended by the World Bank. The most important in Sub-Saharan Africa, East and Central Asia, South Asia, ones are differentiated between technical and short - and medium East Asia and the Pacific, and Middle East and North Africa - term options for wage bill reform. Regions of the World Bank.1 The Bank began focusing on this topic several decades ago, and many of the issues then TECHNICAL OPTIONS remain relevant today. This Governance Note offers answers to To get a grip on the government’s personnel expenses, the principal questions: What is the main motivation for the Bank’s Bank often looks at payroll management first. Although not involvement? What does its basic package of policy solutions immediately leading to reductions in the wage bill, these steps look like? What are the main policy trade-offs? How does the form the fundamental basis for further action: political economy of pay reform come into play? And what can • Centralize and modernize payroll management be learned by World Bank staff from experience for future wage bill and pay reform projects? • Link the wage bill to the overall budget WHAT IS THE WORLD BANK’S MAIN MOTIVATION? A central agency or bureau in charge of the personnel register The Bank’s goals in wage bill reform are transparency, horizontal is needed to develop clarity and structure. Digitization of equity, and predictability of the wage bill. Most of all, it aims to payroll management simplifies the process of analyzing and improve a country’s fiscal sustainability. The policy options that adapting the workforce and calculating overall costs. Once underpin these motivations will be discussed in more detail after payroll management is centralized and modernized, it becomes examining the purpose of these goals. much easier to link the wage bill to the overall budget. Often Transparency is the basis for horizontal equity and government budgets are finalized without knowing exactly the predictability. Creating a simpler pay structure, reducing the cost of the wage bill (World Bank 2009). number of allowances on top of public servants’ base pay, and improving payroll management all lead to more transparency. SHORT-TERM OPTIONS Greater transparency then leads to the opportunity to achieve Fiscal crises might require a government to implement short-term more horizontal equity — where public servants get the same pay wage bill policies. Some of them include: for the same work, regardless of their respective organization. • Freezing wages across the board or linking wage increases to Better options also become available to monitor and improve inflation only public sector performance, and the wage bill for the next fiscal year becomes easier to predict. As a result, the government • Allowing only current positions to be refilled or creating is better able to adjust the wage bill to better fit budgetary attrition by only replacing, for example, three out of every five limits, detect waste and shortages, and improve its overall people leaving the public sector performance. • Encouraging older employees to retire early, although this The Bank’s most important motivation is the positive option might include extra costs in the form of pension impact of wage bill reform on a country’s fiscal situation. Fiscal payments sustainability is a key priority for developing countries. The total wage bill (salaries plus allowances) can add up to between 20 Often, when hiring freezes or attrition are introduced, the percent and 30 percent of government spending (IMF 2016). This education and health services sector are excluded. simple fact shows that efficiency measures could significantly impact the total budget. Similarly, money saved on the wage bill MEDIUM-TERM OPTIONS can be spent on other, critical nonwage priorities. Medium term policy changes tend to be more sustainable and 1 World Wide Bureaucracy Indicators: https://databank.worldbank.org/data/source/worldwide- bureaucracy-indicators-(wwbi)#. 1 GOVERNANCE NOTES MAY 2019 No.16 have greater impact on the wage bill (Forni and Novta 2016). Four (Forni and Novta 2016; Bregn 2008). This facet tends to be options often offered to the Bank’s clients are summarized here. underrepresented in many World Bank documents. Closely related is the importance of the political economy of pay reform — a key Registering all employees. Finding out exactly who works where bottleneck issue that often determines what types of reforms and for whom can be a massive challenge. This is, however, the are feasible. Changes in people’s pay are inherently political. start. One immediate benefit is that finding so-called “ghost Campaign promises, looming strikes, union actions, or upcoming workers” and redundant positions becomes a lot easier. Malawi, elections can be decisive (Barma and Orac 2014; Eckardt and for example, got rid of 17,669 ghost workers (World Bank 2018a). Mills 2014). In Chad, cuts in allowances were reversed after fierce pressure from striking public servants (World Bank 2018b). Creating a single-pay structure. After cataloging all employees, When the public sector employs a great number of people a wage grid with equal positions linked to equal wages could (sometimes up to 35 percent of the working age population), inform the levels of equity and transparency. Much like large, across-the-board wage cuts or firings could lead to social modernizing payroll management, this approach is intended unrest — an issue addressed in the pay bill strategy for Swaziland to enhance the government’s options and ability to control the (World Bank 2010). Countries like Egypt and Tunisia are two wage bill. However, single-pay structures must take into account other examples where public sector jobs had, previous to the Arab different career paths in different parts of the public sector. Spring, been used consistently to ease social tensions. Similarly, a balance needs to be found between horizontal equity Previous evaluations find a tendency to take too much of a between similar positions in different organizations and the need technocratic, one-size-fits-all approach to wage reform (World for wage flexibility to award outstanding employees or attract Bank 1999, 2008a). What exactly constitutes too large a wage personnel to hard-to-fill positions. An interesting example is found bill is partly nationally, culturally, and historically determined. In in Ghana (Cavalcanti2009). certain countries the government is generally expected to deliver more services than in others. Simply comparing percentages Decreasing allowances and increasing the wage percentage over different countries might not be enough to reach a solid taken up by base pay. Allowances form a large part of the lack conclusion. of transparency and insight in the exact size of an upcoming wage bill (Reid and Orac 2007). A significant number of discretionary Unintended consequences and trade-offs of short-term non-pay benefits are often unaccounted and mostly handed out solutions. The unintended consequences of policy advice can in a decentralized nontransparent manner. Decreasing the number be seen in Cameroon. Strict wage limits were quickly followed of allowances and increasing the percentage of base pay in the by a recovery of wage losses through the proliferation of wage will increase transparency and the government’s ability to discretionary non-pay allowances. The wage freeze led to a far control the wage bill. less transparent system rather than a smaller wage bill (World Bank 2018c). Downsizing is equally problematic. An evaluation Comparing public and private sector wages. Properly and by the Independent Evaluation Group concludes, “Downsizing regularly comparing public sector wages with their equivalents in and capacity building initiatives failed to produce permanent the private sector can enable the public sector to set its wages reductions in civil service size and to overcome capacity more efficiently and competitively (Gindling et al. 2019). constraints in economic management and service delivery” (World It can be difficult to figure out which of these options are most Bank 1999, ii). At the same time, encouraging employees to retire relevant, effective, and achievable. The World Bank Bureaucracy early could lead to a hike in pension payments, might not lead to Lab is working in many countries (e.g., Bosnia-Herzegovina, Brazil, quick wins, and are more likely to produce quick losses. Honduras) to discover which policies are best applicable and most pertinent for each client country. The Lab works mainly through Notable trade-offs and consequences in the medium term. the analysis of microlevel personnel and payroll data shared by Decompressing wage structures, or creating a single-wage grid, government.2 can lead to short term wage hikes. When changes are made, no one wants to make less money. As a result, up is the only WHAT ARE THE MAIN TRADE-OFFS? movement wages will make. Although the long-term effects of Many policy decisions come with possible trade-offs and often a simplified and decompressed pay structure might be positive unexpected outcomes. Four of the most notable ones are and significant, the wage bill might go up in the short term. In described here. A few general issues are considered first. Ghana, the government expected at least a 50 percent increase Public servants do not just represent a cost, they are crucial in its base pay wage bill if its single-pay spine was introduced for service delivery. Finding a balance between cost savings (Cavalcanti 2009). and inherent impacts on service delivery is key. In developing countries, improving public services can often mean increasing Winner and losers when decompressing and reorganizing wage staff. structures or moving allowances into base pay. Political economy Research and experience show that support among teaches us that changes to nonwage compensation is a strong stakeholders and the political elite, plus clear communication and effective mobilizer, as seen in the case of Chad (World Bank and expectations from management, are crucial in pay reform 2018c). Opposition parties, unions, and affected members of the 2 World Bank Bureaucracy Lab: http://www.worldbank.org/en/research/dime/brief/Bureaucracy-Lab. 2 GOVERNANCE NOTES MAY 2019 No.16 public service can be formidable opponents to pay reform and inform the design of pay and employment policies and monitor delay or block the process (Kiragu and Mukandala 2003). In Latvia policy implementation. Since it is rather technocratic, chances of (World Bank 2005), reforming the pay system in the public sector full implementation are reasonable. The data generated by these became a highly politically charged issue that encountered strong systems provide objective facts, such as quantifying pay inequity resistance from high level civil servants, leading to little progress. across public sector workers, that can help relax the political economy constraints to reform. More generally, the Bank’s Difficulties in comparing wages. Comparing public with private engagement in wage bill and pay reform should be grounded in sector wages is only a seemingly evident step in pay reform solid empirical analysis given the importance of local context and and is infamously difficult. These sectors don’t have one-on-one the lack of silver bullets to solve complex problems. An example comparable functions. Monetary allowances in the public sector of the empirical data necessary for such analysis is given by might not be included in pay information, making comparisons the Worldwide Bureaucracy Indicators.3 These cross-national flawed. People might decide to work for the public sector for benchmarks need to be supplemented by analysis of micro-data nonmonetary reasons such as status, networking, public service (e.g., number, location, and cost of all civil servants), to identify motivation, and job security (Gindling et al. 2019). where the problems are located and provide client governments with suitable policy solutions to address them. Payroll management issues. Finally, even the more technocratic Finally, cognizance is needed around unintended issue of payroll management often brings considerable budgetary consequences. Short-term reforms, like wage freezes and hiring and information technology issues along with it. Tech projects are contractual employees, can create long-term distortions. At a notoriously difficult to manage and can lead to significant delays minimum, there needs to be fiscal modeling of different reform if not handled properly. Examples include making improvements options and self-awareness of possible perverse effects given to payroll management in Tajikistan and Tanzania (World Bank local political economy realities. Although short-term reforms are 2006, 2008b). Budgetary constraints became the main obstacle sometimes necessary, they are never sufficient. Research and in Madagascar when the Ministry of Civil Service was unable to experience show them to be unsustainable. More often than not, secure financing to update the civil servants’ roster (World Bank they don’t lead to structural reforms. 2017). CONCLUSION A LOOK AHEAD: LESSONS LEARNED Wage bill and hiring policies can have an enormous impact on Three key lessons learned are identified and summarized: a country’s fiscal situation. Reforming them could have a large make interventions context specific and underpinned by return on investment. If done properly, reforms could strengthen diagnostic work on civil services and political contexts; make both the public sector, the private sector labor market, and payroll management both the basis and the minimum for the fiscal sustainability of the government. After considering more comprehensive reforms; and be cognizant of unintended general yet foremost factors, opportunities can be found at a consequences. technical level, and policy options are possible for both the short Policy interventions on pay and wage bill reform should be and medium term. However, if done incorrectly, attempts at context specific. Different countries have different public services, reform can have a hugely detrimental effect on service delivery administrative cultures, and expectations of public service and a country’s development. This Governance Note provides delivery. Thorough knowledge of these issues is a prerequisite an introduction and overview and aims to generate interest in for effective policy interventions. An example is the difference requests for more information. between administrations with a francophone or anglophone For the convenience of World Bank staff who want to explore tradition, which possess different public sector features, including issues further, a list of relevant literature and World Bank cases pay structures and reforms (Kiragu and Mukandala 2003). by Region is available upon request. To obtain it as well as more Reforms are best underpinned by diagnostic work on civil services cases, reports, working papers, or answers to essential questions, (e.g., tradition, culture) and more diagnostics on specific political contact wvanacker@worldbank.org. contexts (World Bank 2008a). Whereas short-term policies have policy risks such as low sustainability and diminished public service delivery, the risks of medium-term policies are more political in nature. The political economy surrounding wages and benefits is complicated and politically dangerous (e.g., World Bank 2005, 2018b). Political economic or stakeholder analyses are rarely carried out by World Bank teams before implementing or advising policies, even though, for example, the simple observation on whether unions are expected to strongly oppose the reforms can greatly inform policy options. Payroll management is both the basis and the minimum for more comprehensive reforms. Apart from improving fiscal controls, a centralized payroll system provides the vital data to 3 The Worldwide Bureaucracy Indicators can be accessed at https://datacatalog.worldbank.org/ dataset/worldwide-bureaucracy-indicators. 3 GOVERNANCE NOTES MAY 2019 No.16 REFERENCES Barma, N. H., and J. Orac. 2014. “Tailoring Civil Service Pay Analysis and Advice to Context: Challenges, Approaches, and the Case of Lao PDR.” Policy Research Working Paper 6744, World Bank, Washington, DC. Bregn, K. 2008. “Management of the New Pay Systems in the Public Sector — Some Implications of Insights Gained from Experiments.” International Review of Administrative Sciences 74 (1): 79–93. Cavalcanti, C. 2009. “Estimating the Fiscal Costs of Implementing Ghana’s Single Pay Spine Reform.” Policy Research Working Paper 5150, World Bank, Washington DC. Eckardt, S., and Z. Mills. 2014. “What Goes Up Must Come Down — Cyclicality in Public Wage Bill Spending.” Policy Research Working Paper 6760, World Bank, Washington, DC. Forni, L., and N. Novta. 2016. “Public Employment and Compensation Reform: The Role of Social Dialogue and Structural Measures.” Journal of Tax and Public Finance 23 (5): 960–979. Gindling, T.H., Z. Hasnain, D. Newhouse, and R. Shi. 2019. “Are Public Sector Workers in Developing Countries Overpaid?” Policy Research Working Paper 8754, World Bank, Washington, DC. IMF (International Monetary Fund). 2016. “Managing Government Compensation and Employment - Institutions, Policies, and Reform Challenges.” Policy Paper, June 8, IMF, Washington, DC. Kiragu, K., and R. Mukandala. 2003. Public Service Pay Reform — Tactics, Sequencing, and Politics in Developing Countries: Lessons from Sub-Saharan Africa. Available online through the World Bank, Washington, DC, at: http://www1.worldbank.org/publicsector/civilservice/ Mayseminar/PayReformStudy.pdf. 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Mongolia: Towards a High Performing Civil Service. Washington, DC: World Bank. ———. 2010. Achieving Fiscal Sustainability in Swaziland: Reestablishing Control over the Wage Bill. Washington, DC: World Bank. ———. 2017. “Madagascar — Resilience Policy Operation.” Implementation Completion and Results Report ICR4216, World Bank, Washington, DC. ———. 2018a. “Malawi — Financial Reporting and Oversight Improvement Project.” Implementation Completion and Results Report ICR4541, World Bank, Washington, DC. ———. 2018b. “Chad — Emergency Fiscal Stabilization Development Policy Operation.” Implementation Completion and Results Report ICR4462, World Bank, Washington, DC. ———. 2018c. Cameroon — Public Expenditure Review: Aligning Public Expenditures with the Goals of Vision 2035. Washington, DC: World Bank Group. GOVERNANCE GLOBAL PRACTICE Guiding Results through Public Institutions Governance Notes captures knowledge derived from World Bank engagements and technical and financial assistance requests. The views expressed are those of the authors and do not necessarily reflect the views of the World Bank. For more information, contact: govgplearns@worldbank.org. 4