Pay-For-Performance: Coming to Your Agency?
Should federal employees’ pay depend on assessments of their performance?
Among the Trump administration’s many ideas for improving performance and accountability in the federal civil service are to more directly tie compensation to performance. Among the most likely vehicles to do so would be to move from a civil service pay system, in which employees slowly move across through the General Schedule (GS) through steps, to a more flexible pay band system, in which an employee’s compensation and the potential for advancement would depend on performance.
Decades of efforts to implement pay-for-performance in a variety of federal agencies have proceeded haltingly and, many say, have yielded in many cases mixed and/or unclear results.
An Initiative Underway
The president’s fiscal year 2019 budget proposal, release February 12, affirmed the administration’s support for tying federal civil service pay to performance. Accompanying the proposed budget was an Analytical Perspectives document released by the Office of Management and Budget which noted that:
This administration believes in pay for performance. The existing federal salary structure rewards longevity over performance. This is most evident in the tenure-based “step-increase” promotions that white-collar workers receive on a fixed, periodic schedule without regard to whether they are performing at an exceptional level or merely passable (they are granted 99.7 percent of the time). The budget proposes to slow the frequency of these step increases, while increasing performance-based pay for workers in mission-critical areas.
The budget took a step in that direction by proposing an across-the-board federal employee pay freeze for fiscal year 2019. If enacted, that step could arguably be interpreted as a move toward pay-for-performance, given a larger percentage of compensation increases during that period would be individual and performance base, rather than across the board. The proposed budget also includes a $1 billion workforce fund with the ability to dole out extra awards. It is designed to seed innovative management practices “to replace the across-the-board pay raise that provides Federal employees with increases irrespective of performance with targeted pay incentives to reward and retain high performers and those with the most essential skills,” according to a 2019 Budget Fact Sheet.
Ultimately, the nation’s budget will be determined by Congress and changes to many aspects of within-grade step increases would take Congressional legislation because they are fixed by federal law. Still, updates to federal regulations or interpretation of the law by individual agencies or by the Office of Personnel Management (OPM) could provide agencies with more flexibility to make changes related to pay-for-performance sooner. They could, for example raise the level of performance necessary to receive a within-grade step increase by an agency head adjusting what they deem an acceptable level of competence to allow such increases, noted one senior federal employee association executive.
Meanwhile, the U.S. Department of Defense (DOD), which in 2010 withdrew an earlier pay-for-performance effort, is in the middle of a large a workforce performance management reform program that features performance-related compensation elements.
A Long History and Strong Opinions
Some major pay-for-performance efforts, such as those implemented more than a decade ago by the DOD and the Department of Homeland Security (DHS), were discontinued, in the face of union opposition and allegations of favoritism and racial and gender discrimination. On the other hand, other pay-for-performance efforts, such as those of certain DOD units, including the National Geospatial-Intelligence Agency (NGA) and DOD’s Acquisition Demonstration Project (AcqDemo), are touted by many as longstanding, successful models worthy of emulation.
Many federal agency leaders and federal workforce consultants express support for pay-for-performance as a step that can better incentivize high-performance, if properly executed. “It is important that organizations make distinctions between high performers and everyone else, whether that’s through compensation or other means,” says Ronald Sanders, recently appointed by President Trump as chairman of the Federal Salary Council. Noting his comments reflect his own views and not necessarily those of the Trump administration or the Federal Salary Council, Sanders, a former senior federal agency HR executive and consultant and currently director of the School of Public Affairs at the University of South Florida, adds, “If you don’t make those distinctions, the high performers put less into their jobs or leave, figuring ‘why should I put more effort and thought into my work if it is not recognized.’ ”
Others also support pay-for-performance. “The Federal Managers Association (FMA) supports pay-for-performance if it can be properly implemented,” says Renee Johnson, FMA president. “We still need more information to see if it can be implemented at an individual agency level before determining if it is the right choice for widespread implementation.” Senior Executives Association President Bill Valdez also noted his organization supports pay-for-performance as part of larger federal workforce reforms.
Generally, employee unions have opposed pay-for-performance, often on the basis that it would be abused by federal managers. They state that has in some cases, pay-for-performance has led to patterns of compensation suggesting discrimination against minorities and other subgroups of the federal workforce; it imposes standards cannot clearly be implemented; and it can pit fellow employees against one another.
“It remains wrong to distribute the system’s hoped-for additional monies in a way that favors some demographic groups over others on the flimsy grounds of a manager’s subjective assessment of performance,” said Jacqueline Simon, policy director of the American Federation of Government Employees (AFGE) in May 2017 testimony before a House subcommittee hearing on federal employee compensation. “In the public sector, there is too much risk of political favoritism, and too much risk that unconscious bias will result in greater rewards for those with good connections or the preferred gender or skin color.”
Carrots and Sticks
Many pay-for-performance constructs are designed to allocate the current 15 GS grades into five or six pay bands. Instead of the current GS system, with step-by-step progression within a given grade and a defined salary at each step, employee compensation within pay bands varies more within each grade, with pay increases within such bands and advancement to the next grade dependent upon performance.
It is widely agreed that a prerequisite for a successful pay-for-performance program is a good performance management system, in which position expectations, as well as criteria and a process for measuring performance against such expectations, are clearly defined.
Indeed, the performance management component is often the heavy lift for instituting pay-for-performance, requiring a determination of the relative ratings of disparate employees, sometimes in different functions. The actual execution of pay-for-performance that follows is often a relatively straightforward matter, with disbursement of a fixed pool of funds in a manner closely tied to those ratings.
NGA’s pay-for-performance program, among the most widely praised, began in 1999 and includes all of its approximately 10,000 civilian employees.
Annual performance evaluations play a significant role in determining the amount of salary increase within a pay band an employee will receive. Separate from salary adjustment, top NGA employees can also be recognized with annual bonuses based primarily on their performance rating, in addition to awards throughout the year. An annual promotion process determines those employees who move to a higher band.
Rigor to ensure ratings and resulting compensation for performance is fair is built in at various levels. NGA supervisors make rating decisions after receiving approval by reviewing officials. However, panels, usually composed of supervisors and managers, determine performance-based salary increases and bonuses. To compute salary increases, the panel members rely on pre-established business rules, which are published for the workforce in advance, and a spreadsheet that uses a mathematical algorithm.
The current NGA performance management process features continued examination of design, execution and results of the merit-based system. This consists of an annual review of all the facets of the system and a semiannual comprehensive evaluation, including employee surveys, targeted interviews and focus groups. The distribution of ratings and financial rewards are analyzed for possible unintended impacts. The outliers and exceptions are scrutinized as well as the justification for larger bonus awards. The results are approved by the agency director in consultation with the subordinate organizational heads. A summary of the results are then made available to the workforce for transparency.
Implementing the program has not been easy at NGA and likely will not be easy at any agency, says Ellen Ardrey, NGA’s associate director for support. “Leadership and management must have the commitment to stay the course to give a new pay-for-performance, or any system, a chance to succeed,” Ardrey says. “That means a full-on commitment to two or three complete cycles, likely years, before final decisions.”
There have been considerable agency retreats from past pay-for-performance efforts. From 2006 to 2009, 225,000 civilian DOD workers participated in the National Security Personnel System (NSPS), which based salaries and annual salary adjustments upon supervisors’ assessments of employee performance. NSPS also granted managers flexibility on job classification, hiring, assignments, promotion, tenure and performance management. The program was discontinued after data on salaries, performance ratings and bonuses showed marked advantages to being white and male, and working in close geographic proximity to the Pentagon in Arlington, VA.
“It was not surprising that even in its brief three-year reign, NSPS damaged the federal government’s excellent record of internal equity on race and gender,” says AFGE’s Simon. A DHS pay-for-performance system was similarly curtailed in 2008 after adverse court rulings.
Many HR experts say that if pay-for-performance cannot be implemented successfully for managers, there is little hope for doing so for rank-and-file employees. An obvious model for pay-for-performance is the Senior Executive Service (SES), the corps of senior civil service executives one rung below political appointees. The SES relies upon bonus pools as a significant portion of such executives’ compensation, generally five to 20 percent of pay, and special awards of up to 35 percent of base pay, according to OPM data. Still, the SEA’s Valdez and others have said that the vision of the SES as a performance- and compensation-driven body has fallen short of legislative expectations. This is due in part to an insufficient level of pay and bonus pools for senior executives when compared to the private sector, and in part due to other factors, such as insufficient mobility of SES executives between agencies.
Many agencies’ HR leaders are bullish on pay-for-performance and continue to try to implement and expand its use.
Pay-for-performance at the U.S. Securities and Exchange Commission (SEC) has been deployed only to non-union-represented personnel, under a separate pay plan approved by OPM. It covers roughly 1,000 managers and staff, which comprise about 25 percent of SEC’s total workforce, says Lacey Dingman, SEC chief human capital officer.
Under the new program, instituted in 2014, those employees receive base pay compensation within a range dependent on their experience, background, and work they will perform and the market for the position, with salary increases awarded based upon performance ratings. In addition, they can receive performance-based awards of 1 percent to 1.5 percent of base salary, with offices and division each having their own pools to award individuals based upon merit. Further expansion of pay-for-performance has begun with the development of a new performance management system instituted two years ago, Dingman says.
Dingman says the pay-for-performance elements is one of a host of HR reforms that have contributed to improved SEC Federal Employee Viewpoint Survey ratings and ratings in the Partnership for Public Service’s Best Places to Work rankings since the low ratings the agency received in the years immediately following the 2008-09 financial crisis. She adds that pay-for-performance is particularly well-suited to the composition of the SEC’s workforce.
“I think we are different from many other agencies in that many of our employees are from the private sector and are used to pay-for-performance and receiving bonuses,” Dingman says. “Many new employees are disappointed that they don’t get more. So our work culture is more accustomed to pay-for-performance.”
Dingman says that the SEC would like to expand the pay-for-performance construct to bargaining unit personnel and has raised the topic with union representatives.
“What we have learned since 2014 is that you cannot underestimate the importance of a performance management system,” Dingman says. “If there is no buy-in and trust that management will be fair and true in their ratings, employees will be under-motivated and distrust the system.”
As for DOD’s latest performance management initiative, The Defense Performance Management and Appraisal Program (DPMAP) is an agency-wide performance management program that links individual performance to DOD values and organizational mission. Phased implementation of DPMAP began on April 1, 2016, and is scheduled to continue through the end of fiscal 2018. The DPMAP includes a three-level rating pattern (outstanding/fully successful/unsuccessful). Currently, more than 400,000 civilian employees are covered by the program, according to the DOD.
Unlike the previous DSPS program, DPMAP was developed in coordination and with the support of some federal unions, including the AFGE. According to a December 2017 DPMAP memorandum of agreement between the DOD Defense Logistics Agency subunit and AFGE implementing DPMAP for that agency, the agreement calls for incentive awards to be distributed “in a way that makes meaningful distinctions in levels of performance based on the employee’s rating of record.”
Challenges for Pay for Performance
As noted, a prerequisite for the success of pay-for-performance programs is a good performance management system, in which positions expectations, as well as criteria for measuring performance against such expectations, are clearly defined.
Some fear that pay for performance will be used as a cudgel to force down employee ratings and compensation for those on the wrong end of a curve, even if they are performing adequately. Indeed, Sanders notes that imposing a curve too rigidly can yield problematic results. “If 40 members of a small unit all do truly outstanding work, some should not be forced downwards to facilitate creation of a curve,” Sanders says.
There are solutions to such challenges, Sanders notes. The pool of employees that are reviewed can be expanded, at which point, he says, statistical norms tend to exert themselves and a performance curve can be developed.
A good pay-for-performance system also requires employees to have sufficient control over their employment activities, says Howard Risher, a federal pay consultant. “Pay-for-performance doesn’t make any sense at all if the employee can’t make decisions,” Risher says.
In addition, metrics can sometimes be difficult to generate and can work against a good pay-for-performance system. “It’s not easy to measure knowledge work or collaborative work,” adds Robbie Kunreuther, a federal personnel consultant. “When I was in federal government, I was a labor relations specialist. How would you measure success for that? The same is true for a project engineer working on a team.”
There is also the question of whether pay is the right carrot for federal employees. Many of those interviewed say that rank-and-file federal employees are likely to be less motivated by pay than private-sector equivalents or their federal managers and executives than by other factors.
Even if that is the case, however, Valdez, Sanders and others note that there may be other carrots that would incentivize federal employees, such as plum assignments, opportunities for further training and rotations, as well as various forms of public and/or direct recognition from agencies and their managers.
More significant moves to deploy pay-for-performance could require federal legislation. There is at least one piece of legislation introduced in the House (H.R. 3257) by U.S. Rep. Todd Rokita (R-Indiana) that would take steps to move the government in that direction by prohibiting an employee from receiving an increase in annual rate of pay if the employee did not receive at least a score of 4 or 5 out of 5 (or an equivalent rating with respect to a performance appraisal system that does provide for such a scoring system) on the employee’s latest performance review.
On the other hand, many agencies already have received considerable authority to implement pay-for-performance elements, including through agency specific legislation, such as the DOD through the 2010 Defense Acquisition Authorization Act.
Valdez says more scrutiny of what has and has not worked in the various demonstration projects would facilitate evaluation of when pay-for-performance makes sense and how to proceed. “We need rigorous evaluations of those demonstration projects and to see what has and has not worked,” Valdez says. “I have not seen that done yet.”
Worth the Effort?
More fundamentally, some question whether pay-for-performance is worth the considerable effort to design and maintain such a program. A 2010 National Academy of Public Administration report on one pay-for-performance expansion noted that among the arguments against such programs: “Most (performance-based compensation) plans share two attributes: They absorb vast amounts of management time and resources, and they make everybody unhappy.”
Pay-for-performance may not necessarily be appropriate for all members of the civil service, Sanders noted. “Pay-for-performance should not be implemented civil-service wide,” he says. “I am convinced that some jobs and grade levels are amendable to pay-for-performance and some are not.”
Highly competitive occupations are a key one where they make sense, Sanders says. “If we don’t find ways to recognize top performers, particularly in those hypercompetitive occupations like cybersecurity, we will lose them, so we must find a way.”
Opponents to pay-for-performance claim that there are already enough carrots and sticks at managers’ disposal through existing HR and compensation flexibilities approved by Congress.
Others say that while further implementation of pay-for-performance constructs would likely be valid if handled responsibly, rhetoric that has accompanied recent steps in that direction have included polemics on employee performance that have complicated any move in that direction.
“The whole discussion pay for performance has been poisoned by the associated discussion on firing federal employees and using pay-for-performance as a way to cull the herd, as it has been characterized in the House,” says Valdez. ”SEA does believe in pay-for-performance and removing poor performers, but we need to reframe the debate as one on the competencies that federal government needs to manage mission and recruit and maintain a 21st century workforce.”
David Tobenkin is a freelance reporter based in the greater Washington, D.C., area.
Reprinted with permission from NARFE magazine, National Active and Retired Federal Employees Association, April 2018