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This first appeared as a PATimes column in February 2005.
Making
Meaningful Distinctions: A New Performance-Based
Pay System for Federal Executives
by
John M. Kamensky
The federal government has tried and failed to create a performance-based pay system for its workforce several times in the past two decades. But hope springs eternal for those attempting to create a managing-for-results culture in the public sector. In fact, the December 2004 PATimes led with the headline “Federal Government Moves Towards Performance Pay.” That story summarized a recent report by pay expert Howard Risher, who concludes that the federal government is moving slowly toward a performance-based salary philosophy.
Will it work this time? Several Government Accountability Office (GAO) reports in 1993 and 1994 point to some best practices, but the real bellwether may be its implementation among career senior executives.
The career Senior Executive Service (SES) is comprised of the top 6,300 of the 1.8 million federal civil servants. Until a few months ago, they operated under a 6-level pay system with a salary cap of $145,600. Because of annual cost of living increases, and special pay for those living in high cost localities, about two-thirds of these SES were being paid at that cap. In addition, their agencies tended to rate them the same – at the top -- in their annual performance appraisals. For example, GAO found that the Department of Health and Human Services in 2002 rated 86 percent of its executives in its top rating category (even though only one third received a bonus).
Career executives have complained about their pay; they had received raises in only 5 of the past 10 years. Political leaders, such as Kay Cole James, the former head of the Office of Personnel Management (OPM), have complained that career executives’ ratings were unrealistically inflated. Past research showed that only about 15 – 20 percent of performers are actually “stars.”
In 2003, Congress attempted to fix both complaints at OPM’s behest. It raised the cap on pay as well as bonuses. However, it made the pay raise contingent on agencies making “meaningful distinctions in performance” among their executives. To do this, OPM created a certification process for agency SES performance management systems. Finally, to reinforce that this new approach would be performance-based, Congress eliminated the 6-level pay system by moving to a single pay band and eliminated annual cost-of-living and locality pay adjustments, which has the effect of putting a larger portion of executives’ pay at risk. In fact, a Government Executive survey of executives found that 60 percent thought these changes would “provide an incentive to senior executives to work harder.”
Washington Post writer Steve Barr observed that these changes make “the most far-reaching changes in the SES since it was formed almost 25 years ago.” Why? Because now, any pay adjustments must be based on an individual’s performance and/or contribution to the agency’s performance. The increased share of pay at risk, however, may be worthwhile. The Federal Times estimates that the pay cap will rise from the 2004 cap of $145,600 for all executives to $162,100 for those under the new system in 2005, and the total cap on pay plus any bonuses will rise to $208,100 (the vice president’s salary).
SIDE BAR: OPM Certification Criteria for Agency SES Performance Management Systems
To be eligible for the higher pay ceilings, agencies must certify that their SES performance management systems meet the following criteria:
§ Performance expectations are aligned with agency performance plans
§ Expectations are based on executive input
§ Expectations are measurable and focus on tangible outputs, outcomes, or mileposts
§ Expectations are balanced among results, customer feedback, employee feedback, quality, timeliness, and cost effectiveness
§ Assessments must be made in context of agency performance
§ Pay and awards must make meaningful distinctions among executives
§ Agency heads or their designees are responsible for overseeing implementation
OPM’s Certification Process
OPM and the Office of Management and Budget (OMB) must both approve an agency’s SES performance management system before an agency can raise its pay caps. Since this could be an immediate pay boost of more than $16,000 for many executives, there is a strong incentive for agency personnel managers to act quickly to put in place a certified system, or face the wrath of their executives. OPM created a set of certification criteria (see sidebar) and a checklist of specific actions. However, since few agencies have the necessary track record to demonstrate that they meet these criteria, OPM has allowed a one-year provisional certification.
As of the end of 2004 OPM had certified the SES performance management systems for 32 agencies. These systems cover about 5,100 of the 6,300 SESers. Only two agencies – the Pension Benefits Guaranty Corporation and the General Services Administration -- have received full certification, which is good for a two-year period; the remainder had to re-apply for certification. Major agencies missing included Defense, Homeland Security, and Education.
Selected Agency Experience to Date
Three agencies that developed plans approved by OPM last year have taken a number of common approaches, but each offer an interesting twist in how each took a different approach in designing their new systems. The Departments of Health and Human Services (HHS), Interior, and Treasury were provisionally certified and rated a combined total of about 1,100 SES under the new approach for the first time this past fall.
Each agency involved their SES in designing their approaches. Treasury’s Darwin McCallian, who helped design that department’s system, said “to create Treasury-wide ownership of the new system and foster accountability, it was imperative to have a system developed by executives for executives” and that they were “receptive to helping us get certified. . . they wanted this to work.” In each of the departments, there was often a big transition involved. In Interior, for example, the department moved from a pass/fail rating system to a 5-level rating scale. In HHS, which had been pursuing a departmentwide approach for several years, the transition was much easier.
However for all three departments, the biggest change was the requirement to factor in the performance of the organizations managed by the executives. Integrating organizational performance into executives’ performance was more difficult than imagined. HHS’s principal deputy assistant secretary for administration and management, Evelyn White, remarked about these first-time organizational assessments: “We didn’t know what it meant until we started to go through it.” Departments were under a tremendous time pressure to complete their pay and bonus decisions by the end of the year. However, they could not begin the ranking process for executives until the organizational assessments were completed, and these could not be done until November 15, when agencies’ annual reports were completed. In Interior, the bureau-level organizational assessments were not completed until December 1st, then there were several review panels that had to complete their decisions before January, when the new pay year began. Because of the senior levels involved, many of the decisionmakers were also in the midst of their departmental budget decisionmaking process that had the same deadline.
Conclusions
The lessons of these early adopters, however, show the new pay approach is having an immediate effect. For example, to be successful in their own performance, executives are beginning to cascade their performance expectations down to their staff through their performance management process. However, studies show it takes years to “get it right.” GAO found that it is critical that the new systems are valid, reliable, and transparent in how they operate, with reasonable safeguards to avoid abuse. However, if this effort to link pay and performance works with the SES, then it may serve as a model to be spread across the entire federal workforce, starting with agencies where Congress has already authorized such changes, such as Homeland Security and Defense.