Trump Proposes Tying Federal Workers' Pay to Performance

Budget would freeze federal workers' salaries for 2019 and introduce performance-plan incentives

Stephen Miller, CEBS By Stephen Miller, CEBS February 14, 2018
Trump Proposes Tying Federal Workers Pay to Performance

Using merit-based salary increases determined by performance reviews and variable-pay incentive bonuses to reward workers for meeting or surpassing annual goals has become common in the private sector. For federal workers, however, their pay is largely set by education and job position, with automatic increases over time based on tenure.

The White House 2019 budget plan released on Feb. 12, 2018, is the latest attempt to tie federal workers' pay to performance evaluations. The plan also calls for revising policies that make it difficult to discipline and fire federal employees. Federal worker unions are pledging to fight these reforms.

Update: The Trump administration's management agenda released in March 2018 provided more on the proposed performance pay plan for federal employees. As Government Executive reported:

The agenda frames the issue by noting that "it is important to appropriately compensate personnel based on mission needs and labor market dynamics," something the existing compensation system fails to do. The document then repeats the fiscal 2019 budget proposal to forgo an across-the-board pay increase while realigning "incentives by enhancing performance-based pay and slowing the frequency of tenure-based step increases."

How Federal Workers' Pay Might Change

The 2019 budget proposal would reduce automatic pay raises and use that savings to fund a performance-bonus pool. Under the current system, federal employees' pay is reviewed every one to three years. Employees whose performance is "fully successful"—as 99.7 percent are—get a within-grade step increase in addition to annual cost-of-living increases.

Trump's plan would stretch out the amount of time to go from step 1 to step 10 from 18 years to 27 years, reducing salary budgets by $10 billion over the next decade, officials said. That money would then go to high-performing employees either as merit raises or one-time bonuses.
(USA Today

Unions Protest Pay-for-Performance Plan

Federal labor organizations are vowing to fight the Trump administration's pay-for-performance plan. J. David Cox Sr., president of the American Federation of Government Employees, the largest federal union, called the proposal a "nail in the coffin of the apolitical, professional civil service." An earlier effort to move toward pay-for-performance under President George W. Bush came under harsh criticism for unfairness from labor organizations and Democrats, and it was abolished early in the Obama administration.

"Congress repealed authority for that system after just three years because it resulted in tremendous pay discrimination against women and racial minorities," Cox said. "These subjective pay systems open the door to corruption, favoritism and discrimination."
(Washington Post)

Targeted Pay Incentives and Revived Benefits Cuts

The administration will seek a pay freeze for all civilian federal employees in 2019, as the first step in moving the civil service to a pay for performance system, pairing the freeze with a $1 billion interagency fund to reward high performers. "This [fund] will 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," officials wrote in a fact sheet accompanying the budget.

In addition, Trump's fiscal 2019 budget reintroduces a number of cuts to federal employees' benefits and retirement programs that were proposed last year but went unimplemented by Congress. The budget, for instance, would:

  • Require federal workers to contribute 1 percent more toward the Federal Employees Retirement System (FERS) defined benefit annuity each year for six years.
  • Eliminate the FERS supplement for retirees under the age of 62.
  • Reduce cost of living adjustments (COLAs) for employees and existing retirees in the Civil Service Retirement System by 0.5 percent, and eliminate COLAs for FERS employees and retirees.
  • Base the formula that determines future federal retirees' defined benefit annuities on the highest five years of salary, instead of the current "high three."
  • Alter the defined contribution Thrift Savings Plan's G Fund, which is made up of government securities and currently has a statutorily mandated annual interest rate of 2.25 percent, by basing the yield on the three-month U.S. Treasury bill, currently 1.03 percent per year.

(Government Executive)

Private Sector Raises Are Turning into Bonuses

A growing preference among private-sector employers for one-time awards instead of annual salary increases that build over time has been transforming the employment landscape for two decades.

According to a report by consultancy Aon Hewitt, variable-pay spending for salaried employees in 1991 accounted for an average of 3.1 percent of total compensation budgets while salary increases amounted to 5 percent. In 2017, variable pay consumed 12.7 percent to those budgets while raises amounted to just 2.9 percent.

"Pressure to increase productivity and minimize costs," the report concluded, had pushed employers "to forgo raises and rely more on short-term awards as the primary means of rewarding for performance."
(New York Times)

[SHRM members-only toolkit: Designing and Managing Incentive Compensation Programs] 

Variable Rewards Require Clear Metrics 

Variable rewards should be tied to meeting performance goals, with a direct connection between the goal and the payout, compensation specialists say. In addition, payouts should be substantial enough to motivate performance. A $5,000 lump sum to a secretary earning $30,000 is substantial. To a well-paid CEO, it's not.

Performance criteria in a successful program should include a combination of quantitative and qualitative measures that are simple to understand, supported by valid competitive data and monitored through strong controls.
(SHRM Online)


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