HR HW WEEK 5

Contents INTRODUCTION TO THIS CHAPTER 2 PERSONEL DEMONSTRATION PROJECTS 2 Description 2 Basic Features 3 Key Results & Findings 3 IRS BROADBANDED PAY SYSTEMS 4 Description 4 Key Features 4 Implementation 4 Current Status 4 DEPARTMENT OF HOMELAND SECURITY 5 Description 5 Key Features 5 Implementation 6 NATIONAL SECURITY PERSONNEL SYSTEM (NSPS) 6 Description 6 Key Features 6 Implementation 7 Modifications 7 Intelligence Community PAY MODERNIZATION 8 Description 9 Guiding Principles: 9 Performance management system 10 Other Key Features: 10 Performance-based payout formula 10 FY 2010 National Defense Authorization Act (Oct 2009) 11 Findings and Recommendations of National Academy of Public Administration (NAPA) (June 2010) 11 Record your thoughts 12 Share Ideas in the Article Presentation Discussion Forum 12 APPENDIX A 14

This chapter takes a look at the successes and failures of the Federal government’s efforts over the last 30+ years to develop and implement performance-based alternative pay systems. The fate of these systems has varied widely, and interest in reforming the General Schedule classification and pay system continues to percolate.

Since personnel demonstration projects were first authorized by the Civil Service Reform Act of 1978, OPM and Federal agencies have invested more than 30 years in developing, approving, testing, and evaluating various approaches to alternative classification, pay, and performance management systems. These demonstration projects have produced clear evidence that performance-based pay systems can work in the Federal government with proper attention to change management and effective leadership practices.

(5 U.S.C. chapter 47)

· authorized by Civil Service Reform Act of 1978

· Demonstration projects may cover—

· qualification requirements

· recruitment & appointment procedures

· classification & compensation

· methods of assigning, reassigning & promoting

· disciplinary procedures

· group or individual incentive bonuses or pay

· hours of work

· involvement of employees, labor organizations & employee organizations in personnel decisions

· reducing overall agency staff or grade levels

· Demonstration projects may not waive laws governing—

· leave programs

· retirement or other employee benefits programs

· merit system principles

· prohibited personnel practices

· political activity restrictions

· Demonstration projects are limited to 5,000 employees each; no more than 10 active projects at any time

· Demonstration projects terminate after 5 years

· OPM develops project plan, publishes Federal Register notice, provides for public hearings, provides 180 days advance notice to covered employees & Congress

· 15 GS grades consolidated into 3 to 5 “bands” or work levels

· Work levels typically defined as “entry,” “developmental,” “full performance,” “senior expert” & “managerial”

· Step increases typically replaced with performance-driven pay progression policies

· Most put annual general increase “at risk” & do not grant annual increase to poor performers

· Demonstration projects generally have been more effective in rewarding high performers & dealing with poor performers than the GS system

· Employees report increased pay satisfaction & a stronger link between pay & performance

· Using a predetermined percentage of payroll for performance-based pay increases (e.g., 2 percent of total payroll costs within an organization) is more effective than linking predetermined pay increase amounts or percentages to specific performance assessments (e.g., providing a 4% pay increase to all employees performing at the “Outstanding” level, 3% at the “Exceeds expectations” level, 2% at the “Satisfactory” level).

· Demonstration projects have resulted in a dramatic reduction in time required to classify positions, as well as in the number & length of position descriptions

· Pay banding facilitates more strategic use of compensation to recruit & retain high-performing employees

· Employee support increases gradually over time

· Sustained, committed leadership is needed at all levels to ensure acceptance and success

(5 U.S.C. chapter 95)

· The Internal Revenue Service (IRS) Restructuring & Reform Act of 1998 authorized the Treasury Dept. to establish one or more broadbanded systems covering all or any portion of the IRS workforce

· The law provides that IRS broad bands must combine GS grades & rate ranges based on criteria established by OPM

· OPM criteria address the minimum & maximum number of GS grades in a band, performance assessments for within-band pay adjustments, and GS locality payments

· Performance-based pay increases depend on annual performance ratings

· Percentage amounts for “met,” “exceeds” & “outstanding” ratings are determined annually based on ratings distribution & other factors

· No performance pay increase for ratings below “met”

· Covered employees receive GS locality payments regardless of performance rating

· 1,600 second-level supervisors are covered by a “senior manager” pay band (GS-14 & 15)

· 400 second-level supervisors are covered by a “department manager” pay band (GS-11 through 13)

· 6,400 first-level supervisors are covered by “front-line manager” pay bands (single GS grades GS-5 through 15)

· The IRS broadbanded pay system remains in effect, but covers only managerial and supervisory employees at IRS.

· Following the 9/11 attacks and concerns about the Federal government’s ability to manage its widely dispersed homeland security functions, Congress enacted the Homeland Security Act in 2002. The Act provided for the development of a “flexible & contemporary” HR management system for a cabinet-level department of 170,000 employees formed from widely disparate elements of other Federal departments & agencies

· A widely praised collaborative design process identified design options for classification, pay, performance management, labor-management relations & adverse actions/appeals procedures. (Your instructor, Mr. Winstead, served as one of the team leaders for the development of the design options.)

· The statute provided for “continuing collaboration” (not “collective bargaining”) with employee representatives over the design and implementation of any new or modified HR provisions

One of the most fundamental changes made by the final regulations (issued in early 2005) was the creation of a pay-for-performance system to replace the GS classification and pay system.

· Basic pay increases based on performance, not time in grade

· Occupational clusters & bands designed to replace GS grades; market-based pay increases could differ by occupational cluster or band; min/max rates of band could be adjusted by different amounts

· Locality rate supplements addressed local market conditions; special rate supplements addressed special recruitment/retention needs

· Performance pay pools designed to allocate pay increases based on performance points linked to the rating of record; performance points determined the relative value of each rating level

· Performance must meet or exceed expectations to warrant performance- and/or market-based pay increase

· Performance pay increases based on funds allocated to performance pay pool, relative point value placed on ratings & distribution of ratings within pay pool

· From the start, the new DHS labor-management relations system was challenged vigorously by labor organizations; courts have prevented implementation so far

· Labor organizations also expressed dissatisfaction with the new pay & performance management systems

· The new performance management system was implemented for about 11,000 non-bargaining unit employees by FY 2008

· Congress froze funding for the new DHS system in FY 2009: performance-based pay features were never implemented

· Despite the apparent failure of the DHS system, its design served as a template for developing other systems

The Department of Defense (DoD) had long sought authority to establish its own performance-based pay system. After the Department of Homeland Security was established, Congress enacted legislation in 2003 allowing DoD and OPM jointly to prescribe regulations to establish a “flexible and contemporary” HR system for DoD civilian employees. Following a period of extensive outreach to DoD employees, employee representatives, the public, and other key stakeholders, DoD and OPM issued joint regulations establishing the National Security Personnel System (NSPS) in late 2005.

· NSPS regulations “waive” or “modify” title 5 provisions on classification, pay (including premium pay), performance management, staffing & employment, workforce shaping, labor-management relations & adverse actions/appeals processes

· NSPS regulations also required DoD to advise and/or “coordinate” with OPM in advance on certain implementing issuances & other actions that could have “a significant impact on other Federal agencies and the Federal civil service as a whole”

· Under the original legislation, the overall amount allocated for compensation of NSPS employees through FY 2008 was guaranteed not to be less than would have been allocated under GS system, but this was not a guarantee for individual employees, as it applied only to the overall amount allocated for compensation of all covered employees

· Under the joint DoD/OPM implementing regulations, career groups were to be based on factors such as mission or function, nature of work, qualifications or competencies, career or pay progression patterns & relevant labor-market features

· Each career group could include one or more pay schedules; each pay schedule could include one or more pay bands

· DoD was permitted to provide different rate range adjustments for different pay bands, including different adjustments for minimum & maximum rates for a band. For example, the minimum rate for a band could be increased by 5%, while the maximum rate received no increase

· Local market supplements (similar to GS special salary rates, to be covered later in this course) could be established for specified local market areas

· Available performance pay funds were to be distributed based on individual performance, individual contribution, team or organizational performance, or a combination of these elements

· Performance pay pools & performance shares were to be used to manage, control & distribute performance-based pay increases & bonuses

· Employees with “Unacceptable” ratings of record would receive no rate range adjustment or performance payout

· Unlike, DHS, DoD could establish alternative forms of premium pay or modify title 5 premium pay provisions

· Federal labor organizations aggressively challenged NSPS labor-management relations provisions in court & pursued major legislative changes

· Strong leadership & commitment to NSPS at all levels (including Deputy Secretary of Defense) nevertheless allowed DoD to phase in its new performance-based pay system beginning in fall 2006; DoD’s Program Executive Office played a key role in implementation

· 205,000 non-bargaining unit employees were covered by NSPS as of March 2009

· In early 2008, Congress passed legislation providing for major modifications in NSPS:

· NSPS employees were placed under title 5 labor relations, adverse actions & appeals procedures (including appeals to the Merit Systems Protection Board); the ban on collective bargaining for pay was retained

· NSPS employees were guaranteed (in the aggregate) to receive at least 60% of the annual pay increase received by other white-collar Federal employees, with the remaining 40% to be allocated to performance-based pay increases. Prior to this legislation, employees were not guaranteed to receive any portion of the annual pay increase received by other Federal employees.

· Blue-collar employees were permanently excluded from the NSPS

· Defense laboratories were excluded from the NSPS through 2011

· The Obama Administration declared a moratorium on further transitions to the NSPS in March 2009, pending recommendations to be made by the Defense Business Board

· Defense Business Board Recommendations (August 2009)

· Initiate “reconstruction” (not abolishment) of NSPS that challenges its assumptions & design

· Engage the workforce & collaborate through Federal employee unions

· Continue the moratorium on further transitions to NSPS pending development of a corrective action plan

· Address specific concerns about NSPS (pay pools, pay bands, trust, best practices)

· Analyze unintended EEO consequences

· FY 2010 National Defense Authorization Act (Oct 2009)

· Repealed NSPS provisions dealing with performance management, broadbanding & performance-based pay as of January 1, 2012

· NSPS may not be extended to any additional employees; conversion of employees back to the GS classification & pay system must begin within 6 months; employees must receive full annual GS pay adjustments during transition period

· DoD may establish “Incentive Fund” to reward performance or attract/retain employees (requires collective bargaining)

· Any new plan to implement additional flexibilities must be developed through collective bargaining & coordination with OPM; any such plan must be submitted to Congress within 6 months & must be approved by Congress as part of the FY 2011 National Defense Authorization Act (No such plan was submitted to Congress)

The U.S. Intelligence Community (IC)--consisting of an unspecified number of employees in as many as 17 different Federal agencies--has long been outside the coverage of the title 5 pay system for other Federal employees. However, it long ago adopted the basic outlines of the GS classification and pay system, and pay levels within the systems covering these employees were very similar to those provided to GS employees. After DHS and DoD obtained authority to establish their own performance-based pay systems, the Director of National Intelligence (a position created after the 9/11 attacks revealed a lack of coordination among the intelligence agencies) directed the IC to establish a new IC Pay Modernization program.

· an overarching performance-based compensation system for the (IC) civilian workforce

· no advisory or assessment role for OPM

· based on a high-level agreement between Director of National Intelligence (DNI) & heads of departments & agencies with authority to set pay for IC employees

· a “system of systems”; incorporates Defense Civilian Intelligence Personnel System (DCIPS) (applicable to Defense intelligence agencies)

· covered civilian employees of—

· Defense Intelligence Agency (DIA)

· National Geospatial-Intelligence Agency (NGA)

· National Reconnaissance Office (NRO)

· Central Intelligence Agency (CIA)

· National Security Agency (NSA)

· Office of Director of National Intelligence (ODNI)

· portions of FBI & Departments of Homeland Security, State, Energy & Treasury

1. Ensure senior leadership commitment

2. Engage employees to build consensus, acceptance & understanding

3. Budget for sufficient funding (no less than GS)

4. Provide sufficient training to supervisors/managers, employees & HR staff

5. Establish implementation milestones to assess readiness

6. Develop a credible performance management system

7. Hold supervisors/managers accountable for managing performance

8. Establish a clear link between performance rating & pay decisions

9. Build in safeguards to ensure transparency, fairness & merit

10. Provide appropriate avenues for reconsideration

· Implemented by most IC Components for FY 2009 rating cycle

· Common core competencies/values:

· Collaboration/Engagement

· Accountability for Results

· Personal Leadership/Integrity

· Critical Thinking

· Communication

· Technical Expertise

· Common rating levels:

· Outstanding: Requires “extraordinary accomplishment”

· Excellent: Exceeds performance expectations

· Successful: Meets all performance expectations

· Minimally Successful: Needs improvement (optional)

· Unacceptable: Failure to meet one or more critical elements

· Replaced “pass/fail” rating system in some IC components

· Common occupational framework

· Common base pay levels & pay ranges, adjusted annually to reflect changes in national & local labor markets

· IC leadership committed to providing rate range adjustments equal to annual GS base pay + locality pay increases

· Employees rated “Unacceptable” not eligible for rate range adjustment or locality pay increase

· Funding for performance-based pay at least equal to amount otherwise expended under GS (or equivalent) system

Based on:

· individual performance ratings for employees in pay pool

· overall performance ratings distribution in pay pool

· current base pay levels of employees in pay pool

· overall pay pool budget for performance-based pay increases

· relationship of employee’s base salary to market point (midpoint of pay band)

· “Pause”—Basic pay may not be set under Defense Civilian Intelligence Personnel System (DCIPS) through December 31, 2010; instead, use previously applicable rules to set pay

Exception: NGA may continue to use performance-based pay

· Within 30 days, DoD/OPM/ODNI must jointly designate an “independent organization” to review DCIPS; report to be submitted to DoD and Congress by June 1, 2010

· Within 60 days after report, DoD/OPM/ODNI must submit report to Congress describing any actions to be taken

· Design of IC Pay Modernization is “fundamentally sound and conforms to accepted principles for designing performance-based compensation systems”

· Implementation has been flawed; leadership must allocate sufficient time and resources to develop a more comprehensive implementation strategy

· DoD should address implementation issues and phase in performance-based elements based on readiness assessments of remaining Intelligence components

SECDEF response to NAPA Report (Aug 2010)

· Major change initiative evoking widespread employee concern could distract from mission focus

· Congressional support is mixed at best

· Repeal of NSPS complicates implementation of pay for performance within IC

· Conclusion: All Defense employees (except NGA employees) will be returned to GS-like pay system; performance management policies will remain in place, but will be used to determine bonus payments, not basic pay

Private Sector Experience with “Pay for Performance”

· The idea of linking pay to performance has gained a strong foothold among many private sector employers—especially in non-unionized environments.

Now that you have reviewed the “chapter 5” (week 5) materials, it is time to reflect upon the concepts learned and your own experience and ideas to participate in the week 5 discussion forum. Consider what you have learned and provide an initial response that addresses one (1) of the following questions. (Be sure to include in the subject line of your message Question 1, 2, 3, or 4 to indicate which question you are addressing. Also, include the text of the question you are responding to at the beginning of your initial post.)

· Question 1: How can the Federal government make use of lessons learned in more than 30 years of experience with performance-based alternative pay systems to make such systems more acceptable to Federal employees & key stakeholders? Or should the Federal government abandon attempts to introduce such systems on a wide scale throughout the government?

· Question 2: Some object to performance-based pay systems out of fear they will be used to reward “cronies” or further certain political objectives. How can these objections be overcome?

· Question 3: Some observers have expressed concerns about developing multiple pay systems for Federal employees formerly covered by the GS system. Are these concerns justified? If so, how can they be addressed?

· Question 4: Now that NSPS has been repealed & performance-based pay aspects of IC Pay Modernization have been eliminated, what does the future hold for performance-based pay in the Federal Government?

Post your initial response by 11:55 pm Eastern time on Wednesday in the Week 5 discussion forum. Review all responses and respond to at least one of your peers by 11:55 pm Eastern time on Sunday elaborating upon their ideas. Be sure to incorporate lesson topics in all required responses. For evaluation criteria and discussion expectations, refer to the Discussion Forum Rubric in the Getting Started section.

Example of Performance Pay Calculations under DHS Pay System

To illustrate how performance pay increases would be calculated under the DHS pay system, consider the following simplified example:

Suppose we have an organization with five employees in the pay pool, with the following annual salaries:

Charles $80,000

Abby 90,000

Logan 100,000

Lilly 110,000

Matt 120,000

Total $500,000 x 2 percent = $10,000 (performance pay budget)

Suppose the point values associated with the performance rating levels are the following:

Outstanding (O) 3 points

Exceeds Fully Successful (E) 2 points

Fully Successful (FS) 1 point

Minimally Successful (M) 0 points

Unacceptable (U) 0 points

If the employees in this pay pool receive the ratings shown below, then the value of a single point is determined as follows:

Charles O = 3 points $10,000 ÷ 8 points = $1250 for 1 point

Abby E = 2 points

Logan E = 2 points

Lilly FS = 1 point

Matt M = 0 points

Total 8 points

Given the salaries, performance point values, and performance ratings used in this example, the performance pay increase received by each of the employees in our example would be as follows:

Charles 3 x $1250 = $3750 (a 4.7% increase over current salary)

Abby 2 x $1250 = $2500 (a 2.8% increase over current salary)

Logan 2 x $1250 = $2500 (a 2.5% increase over current salary)

Lilly 1 x $1250 = $1250 (a 1.1% increase over current salary)

Matt 0 x $1250 = $ 0

Total $10,000

Now suppose the point values associated with the performance rating levels are the following:

Outstanding (O) 10 points

Exceeds Fully Successful (E) 5 points

Fully Successful (FS) 1 point

Minimally Successful (M) 0 points

Unacceptable (U) 0 points

Given the same performance ratings as used in the previous calculation, the value of a single point would be determined as follows:

Charles O = 10 points $10,000 ÷ 21 points = $476.19 for 1 point

Abby E = 5 points

Logan E = 5 points

Lilly FS = 1 point

Matt M = 0 points

Total 21 points

And given the same salaries and performance ratings as used in the previous calculation, the performance pay increases for the five employees in our example would be as follows:

Charles 10 x $476.19 = $4761.90 (a 6.0% increase over current salary)

Abby 5 x $476.19 = $2380.95 (a 2.6% increase over current salary)

Logan 5 x $476.19 = $2380.95 (a 2.4% increase over current salary)

Lilly 1 x $476.19 = $ 476.19 (a 0.4% increase over current salary)

Matt 0 x $476.19 = $ 0

Total $9,999.99

Finally, let’s suppose that the point values for each performance rating level remain the same as in the last example, but the distribution of ratings among employees within this group changes, as follows:

Charles O = 10 points $10,000 ÷ 27 points = $370.37 for 1 point

Abby O = 10 points

Logan E = 5 points

Lilly FS = 1 point

Matt FS = 1 point

Total 27 points

Now, given the same salaries and point values, but a different distribution of ratings, the performance pay increases for the five employees in our example would be as follows:

Charles 10 x $370.37 = $3703.70 (a 4.6% increase over current salary)

Abby 10 x $370.37 = $3703.70 (a 4.1% increase over current salary)

Logan 5 x $370.37 = $1851.85 (a 1.9% increase over current salary)

Lilly 1 x $370.37 = $ 370.37 (a 0.3% increase over current salary)

Matt 1 x $370.37 = $ 370.37 (a 0.3% increase over current salary)

Total $9,999.99

Observations:

· The performance pay increase for any employee under this system is a function of (1) the amount of money in the performance pay pool, (2) the relative point value placed on each rating, and (3) the distribution of ratings within a given performance pay pool.

· The point values assigned to each performance rating level have a significant impact on the performance pay increases received in any performance pay pool.

· Because the calculation of performance pay increases also depends heavily on the distribution of ratings within the performance pay pool, the performance pay increase associated with a given rating cannot be determined in advance, and the percentage pay increase received by an employee with a given performance rating may vary greatly depending on the ratings received by other employees in his or her organization.

· The calculation of performance pay increases under this system does not take an employee’s relative position in the pay range (i.e., his or her current salary) into account, thus resulting in different percentage pay increases for the same performance rating.

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