FMA SUBMITS TESTIMONY ON IMPROVING PAY-FOR-PERFORMANCE SYSTEMS

Testimony for the Record

Before the United States Senate
Senate Committee on Homeland Security and Governmental Affairs
Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia

July 22, 2008

Improving Performance: A Review of Pay-for-Performance Systems in the Federal Government

Mixed Views Continue to Plague Pay-for-Performance Systems

Statement Submitted for the Record by
The Federal Managers Association

Chairman Akaka, Ranking Member Voinovich and Members of the Senate Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia:

On behalf of the 200,000 managers, supervisors, and executives in the federal government whose interests are represented by the Federal Managers Association (FMA), I would like to thank you for allowing us to express our views regarding pay-for-performance systems across the federal government.

Established in 1913, FMA is the largest and oldest Association of managers and supervisors in the federal government. FMA originally organized within the Department of Defense (DOD) to represent the interests of its civil service managers and supervisors, and has since branched out to include some 35 different federal departments and agencies. We are a non-profit, professional, advocacy organization dedicated to promoting excellence in public service.

The face of America’s workforce is changing. Once attractive for employing the most talented members of the workforce, by today’s standards, the federal civil service system is unreflective of the expectations of new job seekers. As those who are responsible for the implementation of new personnel programs, it is our stance that changes need to take place. The overhaul of the Department of Defense personnel system has opened the door to encourage the rest of the federal government to embrace a culture of modernization.

The current General Schedule (GS) pay system and performance review methods are antiquated. However, certain fundamental principles of merit remain crucial to preserving the integrity and accountability of a new employment system. We have seen through demonstration projects and pilot programs in various agencies around the country over the past few decades that implementing human resource management structures can help improve the productivity and mission of agencies.

We believe that the hardest working employees should be rewarded with the highest rate of pay; those employees who fall below the curve on their overall performance should not be rewarded at the same rate. The link between performance and pay provides employees with the confidence that their efforts will be appropriately recognized. Where is the incentive in doing a better job than your colleague when little is done to differentiate additional efforts?

Any new personnel system must adhere to certain basic principles if the system is to succeed. The integrity of pay-for-performance will be severely hindered if all high performers are not rewarded accordingly. We believe that any personnel system should continue to allocate at least the annual average pay raise that is authorized and appropriated by Congress for General Schedule (GS) employees to those employees under the new system who are “fully successful” (or the equivalent rating), in addition to other merit-based rewards based on “outstanding” performance (or equivalent rating).

Recently, a large percentage of FMA’s members within the Department of Defense were transitioned into the National Security Personnel System (NSPS). Additionally, FMA members at the Internal Revenue Service are also under the IRS’ pay-for-performance system. We would like to focus our written comments on these two systems.

THE NATIONAL SECURITY PERSONNEL SYSTEM

We at FMA have been closely monitoring the implementation of NSPS, and have been receiving significant feedback from our members as they transition. If one thing is for certain, it is that there is no one view of the system. If you were to ask ten employees their perspectives on the system, you would undoubtedly receive ten different answers. However, several themes have emerged throughout this process. Overwhelmingly, FMA managers and supervisors at DOD believe a switch to pay-for-performance is necessary to not only compete with the private sector for talent, but also to encourage and reward high performance. A performance-driven culture can influence behavior and foster increased production. The time for rewarding employees simply for longevity has passed. Many of the hard-working federal managers entering NSPS want to be rewarded for the job they do and they are excited to finally have this opportunity.

However, as with any overhaul, the devil is in the details. Overwhelmingly, the largest complaint we have received from our members is a lack of training on the new system. Not only will managers have to learn how to evaluate their employees, they also have to be taught how to assess their own performance. Additionally, managers have reported that the implementation of NSPS at their facilities has seemed rushed, adding to the problem of inadequate and incomplete training. As a result, many managers do not feel comfortable or confident in their assessment of their employees, which potentially could have a negative impact on an employee’s pay. Some workers have complained that the new rules are not fostering better communication between supervisors and employees as the system’s proponents had hoped. Those who have completed their first and second rating cycles have told us they feel better prepared for the next round, but simply due to trial and error, not additional or adequate training.

The cumbersome process is also causing frustration among employees. It is not uncommon for the rating cycles to take upwards of six months and fifty percent of a manager’s time. This is in addition to increased regular workloads as baby boomers flee the government for retirement. We have heard there are simply not enough hours in the day to accomplish one’s day-to-day job duties as well as the performance evaluations. A streamlined process with a shorter rating period would greatly assist employees.

Along the same lines, there is a lack of concrete business rules that allow for a transparent and fair deployment of pay-for-performance. The process, as explained to our membership, creates a difficult environment for the rating officials in that a rating will not be revealed to the employee until after it passes through a review cycle. For a system designed to create better communication between the manager and employee, this inability to reveal the final rating at the close of the rating period does not promote the trust and openness necessary to ensure transparency in the system. The process should be modified to allow the rating official’s ranking to be revealed to the employee and any adjustments made post-rating should be explained and justified by the panels making the adjustments.

Another cause for concern is how the pay pools will be distributed. Last year, Congress determined that all DOD employees rated above “unsuccessful” must receive no less than sixty percent of the GS raise appropriated by Congress, with the remaining forty percent going into the pay pools, and one hundred percent of the locality pay adjustment. It is our belief that any employee rated a 3 (valued performer) or above should, at a minimum, receive the congressionally approved pay raise. Issues of fairness and low morale would certainly surface if a valued performer were to receive less than the GS raise.

Several of our members have expressed their concerns with the above formula. With sixty percent guaranteed, they fear any other pay increase they receive (assuming they meet or exceed performance standards) will come in the form of a bonus which does not count towards basic pay for retirement purposes. This not only affects an employee’s high three, but can also impact one’s Thrift Savings Plan contributions. One manager even commented, “My retirement pay will be the same four years from now as it would be today.” There is also no guarantee the pay pools will have the funds to distribute more than the 60 percent requirement. In such a situation, higher performing employees are better off under the old GS system.

The so-called bell curve distribution of raises is also of grave concern. Managers and supervisors have reported extreme pressure from higher-ups to maintain a specified distribution of funds or performance ratings within each pay pool. Managers were also told that there would not be enough money in the pool if all employees were rated 4s or 5s. Higher ratings mean less money per share in the pool, while lower ratings mean bigger shares for the performing employees. There is severe danger of ratings being deflated or inflated to accommodate a small section of the population. Forced distribution does nothing but contradict a pay-for-performance system.

THE INTERAL REVENUE SERVICE PERFORMANCE SYSTEM

Currently, IRS leadership has decided that the 8,800 managers within the Internal Revenue Service receive at least the same base pay and locality pay increases that General Schedule employees receive each year. The General Schedule increase is the cornerstone of current federal compensation policy and should not be included as part of performance-based increases. The purpose of the yearly increase is to keep government salaries competitive with the private sector in hopes of closing the growing pay gap between the two. It is the overwhelming belief of our members that the congressionally appropriated pay raise should remain an across the board increase for performing managers and supervisors in IRS. However, any change in IRS leadership could mean a change in policy in which no one is guaranteed a pay increase regardless of performance rating. We believe including the General Schedule increase in the pool of money available for performance-based increases would be out of line with pay setting practices of other federal employees, including non-management IRS employees who are excluded from the system.

Many managers at the IRS face being in the unfortunate situation of having their annual salary equal to the non-manager employees they supervise. Managers and employees operate under two different pay systems and pay bands and therefore it is not uncommon for managers and the employees they supervise to receive the same pay. As there is no additional compensation for the added workload and increased responsibility, there is an inherent disadvantage to becoming a manager.

Additionally, the IRS must take strides to eliminate the current service-wide performance ratings caps. For the IRS personnel system to be truly pay-for-performance, there cannot be arbitrary caps on the number of higher ratings. Managers must receive the ratings their performance dictates and they should not be harmed by a capricious ceiling. For any personnel system to be fair and effective, evaluative ratings and performance awards must be based on merit, not forced quotas.

Unfortunately, what is happening on the ground now is that each IRS segment is allowed to give a percentage of their managers an “outstanding” rating and “exceeded expectations” rating regardless of the actual performance of the managers in the pool. So even if all managers in the pool have exceeded their performance standards by a large measure, only a set percentage can get the highest rewards. As a result, some managers receive a rating below their performance. This negates the inherent principle behind a pay-for-performance system.

Currently, a manager’s salary cannot exceed the top of the band in which he/she is placed. The top and bottom salaries of each band shift upward each year based on the GS increase appropriated by Congress. (For example - if the top of the band is $100,000 and the GS increase is 3 percent, the new top of the range is $103,000). The increase managers at IRS receive is based on a percentage of their pay. (For example – 8 percent for outstanding, 6 percent for exceeds expectations and 3 percent for meets expectations). Assume the range goes up by 3 percent and a manager receives an outstanding rating worth 8 percent. Since the manager reached the top of the band with the 3 percent increase, the additional 5 percent (8 percent minus 3 percent) is lost to the manager. However, if the manager had received a “meets expectations” rating and the IRS decided to award less than the GS raise for this rating, the performing manager is no longer at the top of his/her pay band. On one hand, a manager cannot exceed the top of the range; on the other, a performing manager can fall below the top. A policy change should be enacted to equalize this disparity to ensure managers at the top of the band continue to be recognized for their performance. We at FMA also believe an additional performance bonus should be awarded to managers whose performance ratings would have resulted in a higher increase in salary, if not for their being at the top of their band. The additional performance bonus should be equal to the amount of performance increase denied due to the salary cap.

Lastly, the current awards pools fail to adequately reward managers for performance and for the compensation risk they face. In determining the awards pools, compensation should reflect the appropriate risk aspect of pay-for-performance. Increasing the pool available for performance awards will accomplish this goal.

CONCLUSION

We are in an historic time of civil service reform. With so many varied demonstration projects and pilot personnel systems underway throughout the federal government, there is now hope that the antiquated personnel systems of the past will soon enter the history books. Nonetheless, in closing a chapter and opening a new one, we must ensure that we are all reading the same book and turning the page at the same time. A shift in the culture of any organization cannot come without an integral training process that brings together the managers responsible for implementing the new personnel system and the employees they supervise. At this point, we are unsure this is occurring at the Department of Defense. Additionally, Congress must ensure any new endeavor receives proper funding in order for the system to achieve its intended results.

It is the ongoing position of the Federal Managers Association that any employee performing at an acceptable level in a performance-based system should receive no less than the General Schedule increase each year. “Rewarding” top performers with a raise lower than their GS counterparts will heighten animosity towards a pay-for-performance system, as there would be no incentive to perform at an above average level. This policy must come from top agency leadership supplied with adequate funding from Congress.

There are many challenges ahead, but we at FMA cannot emphasize enough the need to take a cautious and deliberate path as employees continue to transition to new personnel systems. We recommend continued collaboration with management and employee groups as well as independent review and auditing by the Government Accountability Office, with the oversight of Congress. Through these checks and balances, we are hopeful that a set of guiding principles will emerge to assist other agencies in their expected personnel reform efforts.

Thank you again for the opportunity to express our views before the subcommittee. Should you need any additional feedback or questions, we would be glad to offer our assistance.