Agencies struggle with pay for performance

IRS’ lessons learned

Richard Spires, deputy commissioner of operations support at the Internal Revenue Service, said the agency has learned firsthand from its seven years’ experience with establishing pay for performance that agencies must:

• Move cautiously to establish the program that is right for the organization.

• Communicate often.

• Establish an effective performance evaluation system and review the system to ensure evaluation consistency.

• Train managers properly to use the system and make sound evaluations.

• Evaluate programs often and be willing to make changes to the pay-for-performance system to meet changing needs.

Pay for performance has been heralded as an approach that would allow agencies to reward the good work that people do rather than their time in service while also allowing government pay to catch up with the private sector.

However, critics claim that implementing pay-for-performance plans across government has been inconsistent and lacks transparency. Even agency executives in charge of implementing the alternative pay systems that have shown progress say that it will take time for the government to get it right.

The Office of Personnel Management released a survey in July on trends in pay for performance that reported agencies granted higher performance awards and pay adjustments to their top performers in fiscal 2007. The results indicate that given time and proper implementation, performance-based pay systems can be effective, said Linda Springer, then OPM administrator.

Agencies are increasingly using performance data as part of employee performance reviews and decisions to reward highly productive employees, the Government Accountability Office said. The performance appraisal and pay systems of Senior Executive Service members require a clear link between individual performance and pay. Agencies can raise SES base pay and total compensation caps if OPM and the Office of Management and Budget certify that their performance appraisal systems link the individual’s performance to the organization’s goals and make meaningful distinctions based on relative performance.

“Performance-based pay cannot be simply overlaid on most organizations’ existing performance management systems,” said Bernice Steinhardt, GAO’s director of strategic issues, at a recent hearing of the Senate Homeland Security and Governmental Affairs Committee’s Federal Financial Management, Government Information, Federal Services and International Security Subcommittee.

Before they change to pay for performance, agencies need to clearly align individual employee’s expectations with the organization’s results; communicate often about individual contributions to annual goals; and make meaningful distinctions in employee performance, Steinhardt said. Executives who are held accountable for results in performance management systems can provide the continuity and focus on the organization’s priorities, especially during periods of transition, she said.  

Determining the most effective approach to compensating public employees is a thorny question, said Jonathan Breul, executive director of IBM’s Center for the Business of Government. Federal agencies increasingly are in competition with the private sector to recruit and retain top performers. 

“Performance pay is an appealing idea, but research indicates that implementation as well as improving government performance remains complex and deceptively difficult, both technically and politically,”
he said at a recent hearing of the Senate Homeland Security and Governmental Affairs Committee’s Oversight of Government Management, the Federal Workforce and the District of Columbia Subcommittee.

The Internal Revenue Service has moved at a deliberate pace to implement its pay-for-performance system over seven years for 7,200 managers, said Richard Spires, the IRS’ deputy commissioner of operations support.

“We have certainly gained experience along the way, made adjustments to our system and are still learning as we go,” he said at the hearing.

A comprehensive plan for pay for performance benefits agencies because employees are rewarded for the quality of their work, he said.

“But perhaps equally important is the fact that such a system necessitates that managers at all levels are forced to interact in such a way that they discuss the agency’s goals and how their individual performance relates to those goals,” Spires said.

For pay for performance to succeed, the performance evaluation process must be fair and nondiscriminatory, he said.  At the IRS, performance evaluation is not just an end-of-year occurrence.

Managers meet with their supervisors about their goals and plans to accomplish them in the beginning of the year, in midyear to discuss progress and finally at the end of the year, when the supervisor rates the managers on how they delivered that performance. A board reviews the performance evaluation to assure objectivity and consistency.

Performance-based increases and bonuses are consistent across all IRS functional units. Therefore, a manager rated as outstanding in the  service’s Wage and Investment Division will receive the same performance increase as a manager in the Small Business Division, Spires said.

The IRS also has established a framework in partnership with federal and professional managers’ groups to improve communications with managers about pay for performance, which the Treasury Inspector General for Tax Administration had recommended. The IRS developed specific communications goals to address questions about performance-based increases to be shared with all managers, Spires said.

However, many agencies must change the experience for SES members, said Carol Bonosaro, president of the Senior Executives Association. SES employees take on more duties and work longer hours to contribute to their agencies’ missions, but they forgo certain pay increases, locality pay and job rights that accompany the General Schedule (GS) system, she said.  

“What is clear is that a system that was meant to relieve pay compression, to be transparent and flexible and to reward performance has instead become a disincentive for many of the best employees who might otherwise desire to serve in the highest ranks of the career civil service,” Bonosaro said.
She cited a survey OPM released in May, which reported that only 50 percent of senior executives believed that the current SES pay-for-performance management system was helpful in recruiting qualified applicants for SES positions.

The inconsistency of implementations of pay for performance aggravates the situation. Inconsistency occurs because agencies have total discretion in how to manage their SES pay systems, she said.
“Some of the inconsistency can be caused by budgetary constraints, particularly since all pay adjustments and performance awards are discretionary,” Bonosaro said.

For example, the Treasury Department in January declined to raise any of its SES employees to the higher executive schedule levels authorized for fiscal 2008 because their ratings were based on their 2007 performance. That differs from how other agencies deal with SES pay adjustments, she said. GS employees are automatically raised to the following year’s cap, based on their grade and step.

To be more consistent, Bonosaro recommended that all senior executives who earn a fully successful or better performance rating receive at least some annual increase. Also, performance awards should be included in a senior executive’s salary formula in calculating his or her retirement annuity. Those provisions would make the SES more attractive and acknowledge that performance awards are an integral part of the SES compensation system, she said.

One agency, the Federal Deposit Insurance Corp., realized it had problems and suspended its pay-for-performance system covering employees for the 2007 performance cycle so the agency could make improvements to the system. FDIC Chairwoman Sheila Bair had directed a consulting group to survey FDIC employees, and the findings revealed that only 12 percent considered the pay-for-performance system to be fair.

Consultants from the Hay Group reported that employees found a weak connection between employee performance and pay raises. Special assignments, projects and relationships with supervisors had a bigger effect on pay group assignments.

Bair and the National Treasury Employees Union held discussions about ways to address employees’ concerns and identify some interim changes for the 2008 performance year. Colleen Kelley, NTEU president, said that among those changes, pay distinctions would be tied to scores on employee performance ratings and a new component would link a portion of pay increases for all employees to the agencies achievement of “stretch” goals.

When pay-for-performance systems are well-designed and intelligently implemented, they increase employees’ understanding of what is required of them, their performance and the organization’s outcomes, said Charles Fay, a professor at the Rutgers University School of Management and Labor Relations.

“Flawed programs can and do decrease productivity and employees’ job satisfaction,” Fay said. Programs that work best introduce performance management first, work the problems out of it and then introduce performance bonuses based on performance management system results, he said.

Most employees should be performing at the meets standards level and that designation shouldn’t be considered performance failure, Fay said. Managers rating employees above or below that  level should need to justify it in terms of performance criteria and standards set for the job, he added. 


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