Update: The Washington Post reported on Oct. 26, 2009, that Congress had passed and President Obama would sign a bill to end pay-for-performance systems used by the Defense Department and intelligence agencies. The Wall Street Journal on April 11, 2009, noted strong union opposition to merit-based pay for federal employees.
Several trends have emerged from the federal government's experience with performance-based pay systems, according to Alternative Personnel Systems in the Federal Government — A Status Report on Demonstration Projects and Other Performance-Based Pay Systems, issued by the U.S. Office of Personnel Management (OPM). The report, which includes information based on agency data, evaluations and studies, concludes that the performance-based pay systems that now cover some 298,000 federal employees "work."
Among the key findings:
• Performance-based pay systems continue to be successful, as evidenced by many evaluations and a stronger link between pay and performance than under longevity-based pay systems.
• Success entails significant effort but pays off by achieving a results-oriented performance culture.
• Managers and supervisors manage performance more effectively under performance-based pay systems.
• The ability to recruit and retain a high-quality workforce increases with performance-based pay.
• Payroll costs are being controlled, but cost discipline must be maintained as these systems expand and mature.
"This report shows performance-based pay systems drive improvements in managing performance, recruiting and retaining quality employees, and achieving results-oriented performance cultures," said a statement from OPM Director Linda M. Springer.
The study includes profiles of demonstration projects operating under OPM authority as well as independent systems (including the Department of Defense's national personnel security system) and executive pay systems (including the senior executive service and senior foreign service) where employee pay is linked to performance.
Although each of these alternative pay systems is unique in some respects, all systems share common design features, according to the OPM's report. Among these:
• Open ranges of pay rates, rather than fixed steps, are used.
• Pay increases are usually contingent on an assessment of fully successful employee performance.
• Pay increases that move employees through their pay ranges are linked directly—and differentially—to performance assessments rather than the passage of time.
• Position classifications are streamlined.
• Pay ranges cover more broadly defined levels of work than the narrower grades under the federal government's general schedule (GS) classification and pay system.
Overall, these pay-for-performance systems emphasize and reward employees’ performance and contribution to mission, the report notes. Employees receive an annual pay increase commensurate with their level of performance—the higher the level of performance, the higher level of annual pay increase. Annual pay increases range from 0 percent for low performers to as much as 20 percent for top performers.
Annual pay increases range from 0 percent
for low performers to as much as
20 percent for top performers.
While the total amount of money distributed as salary increases is comparable to what would have been distributed under the GS pay system, "the important difference lies in the basis used to make pay determinations and the value that basis represents," the report states.
Changing the Culture
Significantly changing workplace culture takes time. OPM studies of pay-for-performance systems show that "it takes at least five years for the majority of employees to be supportive of the change—but the support inevitably emerges."
Implementing pay for performance "requires commitment, communication, training and follow through," the report notes. Most of the demonstration projects reached the 50 percent benchmark of employee support within five years. And measures of support for the demonstration projects are as high as 80 percent.
Even where the explicit support is more temperate, the largest proportion of employees is undecided rather than opposed, the OPM found. In those settings where employees are still uncertain, statistics suggest that agencies need to monitor and focus more closely on their implementation efforts.
Pay for Performance at the IRS
At the Internal Revenue Service, a pay-for-performance system has been in place for senior and second-level managers since March 2001. The first two evaluation cycles produced pay and ratings distributions suggesting that the system had raised the bar for executives and managers and linked pay with individual and organizational performance successfully. In September 2005, all other managers (front-line) were brought into the system, which was then redesigned in March 2006.
The IRS used a phased approach to implementing new performance measures, starting at the top. To change employee perceptions and the broader IRS culture effectively, leaders and managers had to “walk the talk” with new individual goals and measures linked to performance-based pay. Executives and managers are evaluated on what they accomplish and how they meet their responsibilities.
The positive correlation of performance ratings to pay increases is strong. The IRS’s servicewide performance increases are differentiated by performance rating, and all covered employees with the same performance rating received the same percentage increase. The January 2007 pay increases by performance rating were:
The average increase was 3.2 percent.
Annually, the formula for increases in performance-based pay factors in the performance ratings distribution and the pay pool funds. The IRS then adjusts the percentages for servicewide performance-based increases to stay budget neutral.
-- From Alternative Personnel Systems in the Federal Government — A Status Report on Demonstration Projects and Other Performance-Based Pay Systems
Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.
Changes in Sight for Federal Employees, Washington Post, October 2009
Congress Moves to Squash Federal Merit Pay, Wall Street Journal, April 11, 2009