Improve Incentives for State Employees to Develop Cost-Saving Ideas

The state should improve incentives for agencies to implement productivity plans and for their employees to develop cost-saving ideas.


Background
Texas maintains two programs that reward employees for innovative ideas that save the state money the Productivity Bonus Program (PBP) and the State Employee Incentive Program (SEIP). Both are funded by savings derived from cost reductions and are administered by the Texas Incentive and Productivity Commission (TIPC).

The PBP achieved savings of almost $40 million for fiscal 1992 due to a Texas Performance Review (TPR) recommendation that was adopted by the 72nd Legislature. 1 Statewide participation in the PBP was mandatory for 1992 with few exceptions; the SEIP was not mandatory. Therefore, certified savings from the SEIP program have been much less $25,643, $179,288 and $362,301 in fiscal 1990, 1991 and 1992, respectively. 2 So far in fiscal 1993, $189,060 in savings have been certified, with $70,263 pending.

Through 1992, the SEIP program paid 75 employees $47,156 or an average of $749 per employee. 3 During fiscal 1990, the PBP operated without funding and on a pilot-program basis. The first PBP award was made in August 1991 to 57 employees at the State Treasury, who each received $59. 4 For fiscal 1992, TIPC approved savings of more than $39 million resulting from 93 successful productivity plans. 5

The main difference in the two programs is that PBP is a planned effor t by a group to reduce costs. The group shares an award of the certified savings not to exceed $1,000 per employee. SEIP is a suggestion program that rewards individuals or groups of employees with a 10 percent share of the savings or revenues generated by new ideas that are implemented by agencies. The award has a maximum of $5,000 per suggestion.

The most commonly cited problem with the incentive programs is the lack of middle- and upper-management attention and participation in the programs. Since these employees have access to valuable information and ideas concerning savings, this limits the programs.

Another problem is the low incentive amount provided by the awards. Washington State s equivalent of the productivity bonus program originally offered cash bonuses for group productivity improvements equal to 25 percent of the savings with no upper limit. 6 During fiscal 1991, a group of employees from Washington s health and human services agency developed a suggestion that saved more than $6.3 million. Each full-time employee s share of the bonus was more than $30,000. As a result, the award limit was capped at $10,000. 7


Recommendations
A. The Legislature should allow all employees including those in management except elected officials and agency heads to participate in the employee bonus program.

Increased participation by those with more knowledge, experience and access to information in their respective areas should lead to increased savings.

B. The Legislature should change the funding mechani sm for paying awards and bonuses in the State Employee Incentive Program (SEIP) and Productivity Bonus Program (PBP) programs to a sliding percentage scale of 10 percent up to the first $100,000 of general revenue saved and 1 percent for all savings therea fter.

This plan would not have a cap, which would create an incentive for employees to look for big dollar savings. On the other hand, the 1 percent limit would keep incentive payments reasonable. For instance, a $1 million savings would generate an ince ntive payment of $19,000 (1.9 percent). Upper range awards should be capped at an appropriate level.

C. The Legislature should amend state law to reduce an agency s transfer of funds to Texas Incentive and Productivity Commission (TIPC) to 1 percent of the certified savings.

Agencies participating in the PBP and SEIP programs would transfer 1 percent of realized savings to the Productivity Bonus Fund. One-half of these transferred funds in excess of TIPC appropriation should be retained by TIPC to enhanc e the programs. Based on the fiscal 1992 certified savings, TIPC would have received almost $400,000 (1 percent of $39 million). The agency appropriation for 1992 was about $220,000. The difference of $180,000 would be evenly divided between TIPC and the G eneral Revenue Fund with each receiving $90,000. This additional funding could be used by TIPC to improve program activities.

D. State agencies should retain all certified savings other than the TIPC fund transfer and employee bonus payments.

Many agenc ies do not participate in the bonus programs because under the current procedures they lose more in fund transfers than they gain in savings. Forty percent of the SEIP and 19 percent of the PBP certified savings are returned to the originating agency. Sinc e the larger value of savings occurs in the PBP bonus program, agencies have been reluctant to participate. Of the almost $40 million in certified savings, only $7.6 million was retained by the agencies. This is inconsistent with the more flexible budget p olicies adopted by the state in 1991. Allowing agencies to keep more of the savings should increase participation. The savings returned to the agencies should be placed in a special account and used only for productivity improving investments, such as empl oyee training, equipment purchases or workplace enhancements.

E. Each agency s Legislative Appropriations Requests should include a performance measure for the number of employee suggestions made and the percentage of suggestions adopted.

A benchmark sh ould be established for the number of suggestions that should come from an agency (for example, 10 suggestions per 100 employees). The number of suggestions would then become one measure of the agency s overall performance. This requirement should ensure that a sufficient number of employee suggestions are submitted for review. It would still be up to agency management to review these suggestions for possible implementation.

By measuring the acceptance rate of suggestions, comparisons both among agencies and with private-sector benchmarks can help evaluate agencies responsiveness to new ideas. This measure also would be an incentive for agencies to give proper attention to suggestions.

F. The Office of State-Federal Relations should encourage the federal government to allow a portion of federal funds saved through cost-saving ideas to be used to provide incentive awards.


Implications
As they are structured now, the incentive award programs are not effective. The problem is how to structure the incentive s properly. Reducing the transfer of funds from an agency to TIPC should encourage greater participation by state agencies. Removing the cap and allowing the possibility of larger awards should provide an impetus for employees to search for savings and to look beyond the smaller savings options. Including management-level employees should also improve the programs outcomes.


Fiscal Impact
Insufficient data exist to determine cost savings. However, this suggestion should remove some of the current barriers to the success of the incentive programs and encourage more savings over time.



Endnotes
1 Texas Incentive and Productivity Commission, Summary of Productivity Plans, Fiscal Year 1992 (Austin, Texas, September 23, 1992).
2 Texas Incentive and Productivity Commission, State Employee Incentive Program Handbook, Austin, Texas.
3 Ibid.
4 Ibid.
5 Ibid.
6 State of Washington, Productivity Board, Incentive Pay Program, Olympia, Washington (Pamphlet).
7 Interview with Barbara Peck, Incentive Pay Program, State of Washington, December 7, 1992.