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Performance-Based
Pay for Federal Executives: An Update
by
John M. Kamensky
Eighteen months ago, this column focused on the start-up of a new performance-based pay system for federal executives. Now it is in place. Does it work? What lessons does its implementation have for expanding performance pay to the rest of government employees? A July panel sponsored by the Washington DC-based Council for Excellence in Government explored these questions.
First, some background. The new performance-based pay system stems from statutory changes in 2003 that raised the ceiling on how much federal executives could be paid. Congress stipulated that agencies could raise the bonuses and salaries for their executives only if they could demonstrate that their bonus and pay decisions made “meaningful distinctions in performance” among their executives. In response to this provision, the U.S. Office of Personnel Management (OPM) created a certification system where agencies had to meet defined standards before they could pay their executives beyond the old ceiling of $145,600. The new law allows agencies to raise salaries up to $165,200 in 2006, with a total cap on pay-plus-bonuses of $212,100 (the vice president’s salary). While this system only covers the top 6,800 of the 1.9 million civil servants, it may serve as a pilot for the expansion of similar pay systems for the rest of the civil service. In fact, Congress authorized performance-based pay systems for Defense and Homeland Security that, together, comprise nearly half of the civil service, and the Administration is pushing to expand this to the rest of the government.
The 1978 law creating the Senior Executive Service (SES) originally envisioned performance-based pay for executives. However, in practice, executives were almost always given top ratings, and typically bonuses were either split equally, or rotated from year-to-year among them. In the past, SESers were evaluated based on how hard they worked, their loyalty, and their outputs. Long hours, under high pressure, equaled good performance. And since, by definition, senior executives were at the top of their profession and all worked hard, it was seen as “only fair” to treat them equally.
The Council’s panel examined how things have changed, especially in the past few years. Panelists included:
All three saw the changes as encouraging, but found the changes require executives to reframe how they approach their work. Their discussion focused on several observations and lessons learned:
Hard work not enough anymore. Tobias observed that the Bush Administration has attempted to “change the game” for SES performance. The goal is to link SES pay to the performance outcomes of their agency and programs. If successful, he says, this means “hard work is no longer the currency of the realm – achievement is.” He also notes that to be successful agencies will have to change the way they operate as will as change the relationship between the evaluators and the evaluatees. Evaluators now have to be more explicit in their expectations, and less implicit. And the emphasis is more explicit on program outcomes. The emphasis is now more heavily weighted on agency and program performance, not personal performance. Perez echoed his insights. She said, “The conversation has changed . . . since 1993” when the Government Performance and Results Act was passed. “It is more about delivering services, operating via networks, and achieving outcomes.” She says, “It’s been difficult,” but she’s seen consistent improvement in these areas across the government in the four years she has been in her role at OPM.
Political appointees are becoming engaged. Tobias also noted that “achieving outcomes must be important to political appointees” before the new pay system will work. Political appointees have to care more about implementation, not just policy development – their traditional area of emphasis. Perez noted that, while OPM does not require that they be in the same system, she believes both political and career executives are increasingly being held accountable for their use of the performance management process. “Agencies are integrating politicals into their performance evaluation system,” she said, and they are being rated and assessed based on the same standards as the career executives. McMullen said that this was, in fact, happening at the Department of Labor. More broadly though, the Senior Executives Association, a professional association representing SES members, has recently surveyed its members on their agencies’ implementation of the new system. Results of the survey should be available by early August at www.seniorexecs.org. It may give a broader context of the implementation of the new pay system, from the perspective of those affected.
Prerequisites for success. McMullen said the Department of Labor was one of the first to tie its SESers’ performance to the departmental strategic plan. He said that having a good, outcome-oriented strategic plan is a prerequisite to creating a meaningful performance-based pay system. He also said that an agency’s human capital plan has to be tied to the departmental strategic plan to be effective. In addition, political executives and human capital staff need to be involved in:
However, he said that the department’s SESers initially resisted this approach because they didn’t feel they could influence or control the outcomes of the department --that there were too many intervening factors -- and that they were unwilling to commit to that kind of risk. In his experience, the most difficult thing in moving to a performance-based pay system was the creation of a bridge from a system that is designed to measure year-to-year performance to one that could measure the achievement of long-term outcomes. He said that the longer-term outcomes have to be redefined into a set of outputs and activities that build to the longer-term outcome, such as through the use of logic models. Also, the system has to be flexible enough to reflect unexpected changes in the operating environment, such as an economic downturn, or a hurricane.
Real benefit: increased communication. In conclusion, Perez said that a visible link between performance and pay “is key to the overall effort.” However, the amount of pay at-risk is not generally seen as a driver of executive performance in the public sector, largely because it is smaller than in the private sector. For example, in 2005, SES performance-based pay increases averaged about 3.8 percent. The significance of the link, some observers say, is driven more by professional pride in a job well-done.
Perez said the real benefit of the new SES performance pay system is that it serves as a foundation for creating and sustaining an ongoing conversation and feedback between executives about the outcomes they are trying to work together to achieve. This reflects similar observations made by Dr. Shelley Metzenbaum in a recent report for the IBM Center for The Business of Government, Performance Accountability, where she noted that “feedback and interactive inquiry [are] powerful motivators and performance drivers on their own.” Yet, as Perez notes, the sharpened focus on performance and outcomes didn’t happen at the federal level until the tie was made to pay in the past few years.