Pay-for-performance (PFP) refers to funding arrangements where a commissioning organization financially rewards service delivery organizations (or private investors in the case of a social impact bond) for achieving agreed upon outcome targets. PFP is sometimes referred to as Pay-for-Success (PFS) in the US and Payment-by-Results (PBR) in the UK.
Consider an illustrative example: a federal department enters into a contribution agreement with a not-for-profit organization for the delivery a suite of support services to clients facing multiple barriers to employment. Under this agreement, a certain amount of base funding is provided to cover eligible costs such as wages for the recipient organization’s staff. In addition, federal officials and the recipient organization negotiate a payment schedule whereby the Department provides additional payments for each client who reaches a milestone along a continuum of outcome metrics: developing a learning plan, completing job readiness training, obtaining a three-month trial position, and achieving 12 months of stable employment
Within these broad parameters, there are many varieties of PFP models. In international case studies, performance payments for PFP projects can vary from as much as 88% to as little as 2-3% of project costs, and evaluation strategies range from self-reporting from recipient organizations to independent evaluations using quasi-experimental methods. As well, PFP can involve direct funding of service delivery organizations (SDOs) by governments as well as arrangements involving private investors, such as social impact bonds (SIBs).
- Empower SDOs to innovate to best deliver results, including through the delivery of preventative or holistic services.
- Generate metrics, case studies, and capacity to help government and practitioners focus their time and funding on intervention models proven to achieve measurable outcomes.
- Will not result in better outcomes (and may even provoke negative consequences) if proper conditions are not in place or if poor design choices are made
- Will not replace traditional forms of government funding
- Increase the impact of spending through the measurement of outcomes
- Shift focus away from the reporting of inputs, activities and outputs to ensure oversight, in favour of the measurement of outcomes
- Transition from the delivery of siloed, disjointed services towards holistic, integrated and user-centric social programs
- Shared risk with implementation partners and investors with appropriate accountability
- A well-defined target population, which ensures that a baseline can be established to measure results achieved.
- Meaningful metrics for measuring social outcomes. The choice of metrics must be based on factors including evidence of links with positive social impacts and the availability of data.
- Technical capacity. There is a range of internal and external support infrastructure – from centres of excellence to training institutions – that can improve government and stakeholders’ capacity to participate in PFP projects.
- Strategic behaviour. If poorly designed (e.g., wrong choice of metrics), PFP arrangements can induce SDOs to modify their behaviour so as to achieve gains in performance measures without improving actual performance.
- Expect high initial transaction costs. Complex and lengthy negotiations on PFP project designs, as well as investments in building technical capacity, can create higher than usual upfront costs compared to more traditional new program design/initiation.
- Challenges for community organizations. Like government, established SDOs may need to adapt their ways of working under PFP, which can be costly and time-consuming. When performance payments represent a high share of overall costs, PFP projects can also force SDOs to risk-manage the delivery of services, leading to financial instability.
- There are ways to significantly mitigate the risks identified above. These include: providing technical assistance to SDOs; co-creating performance targets with partners; ensuring performance payments are neither too big nor too small; and linking performance payments to identifiable “milestones”.
Government of Canada
- Canada was instrumental in the design and development of Advance Market Commitment for Agriculture (AgResults), a high-profile multilateral initiative. It aims to leverage private sector research and development on food security challenges through a portfolio of pilot projects testing different types of pay-on-results approaches. The initial set will focus on maize production in Sub-Saharan Africa, including:
- Incentivizing the adoption of on-farm storage technology for smallholder farmers;
- Encouraging innovative distribution of a breakthrough technology to reduce aflatoxin contamination; and
- Building a market for new vitamin A-enhanced varieties of maize.
- Employment and Social Development Canada (ESDC)'s Career Focus program launched three pay-for-performance pilots, which were completed in 2013-14.
- ESDC is funding a project with Workplace Education Manitoba, in partnership with the Governments of Manitoba and Nova Scotia, to test whether performance-based funding models for essential skills training will make delivery of pre-employment support and training services more effective.
- ESDC’s is currently implementing a pilot testing elements of a SIB model. This pilot is testing two models for securing outside funds to support essential skills training, one focusing on employers and another on private investors.
Best in Class
- The US-based Non-profit Finance Fund’s Pay for Success Learning Hub has been highly active in publishing and disseminating practitioner- and policymaker-oriented research on the use of PFP, with a particular focus on SIBs.
- The Harvard Kennedy School’s Government Performance Lab conducts research and provides technical assistance to state and local governments in order for them to improve the results achieve for their citizens.
- The UK government’s Cabinet Office has created a Centre for Social Impact Bonds to promote a better understanding of SIBs across government; to provide expert advice to SIB developers; to monitor SIB delivery and evaluation; facilitate connections between actors within the SIB market; and gather and share relevant data.
- Big Society Capital (BSC) is a social investment fund that will be capitalized with about £600 million, two-thirds of it harvested from citizens’ dormant bank accounts and the rest injected by the four biggest British banks. BSC invests in projects that connect socially motivated investors with community organizations.
- Vancity is a Vancouver credit union that uses members’ deposits for lending and investing in the local economy, in businesses and organizations that have positive economic, social or environmental impacts and a strong growth potential. Vancity also provides local businesses and organizations with expert advice and specialized financing solutions.
- The MaRS Centre for Impact Investing, and Deloitte have significant experience researching SIBs and providing intermediary services for structuring SIB deals.
- Better Outcomes for Public Services (Jennifer Gold and Matthew Mendelsohn, Mowat Centre, July 2014)
- Applying performance funding to Essential Skills: State of knowledge review (Boris Palameta, Karen Myers, Natalie Conte, Social Research and Demonstration Corporation, 2013)
- Making public service markets work: Professionalising government’s approach to commissioning and market stewardship (Institute of government, 2013)
- The Payoff of Pay-for-Success (V. Kasturi Rangan and Lisa A. Chase, Stanford Social Innovation Review, Fall 2015)
- The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide (Brookings, July 2015)
- Phase 2 report from the Payment by Results Social Impact Bond Pilot at HMP Peterborough (Ministry of Justice Analytical Series, 2014)
- Housing First Social Impact Bond Feasibility Study (MaRS Centre for Impact Investing, Social Finance, Fall 2014)