GovernmentExecutive.com

The Bush administration plans to give federal employees a 2 percent across-the-board pay raise in 2004, and create a new $500 million fund agencies can use to raise the salaries of high performers, Office of Personnel Management officials announced.

The president's 2004 budget proposal, scheduled for release Feb. 3, includes a proposal for a 2 percent across-the-board civil service pay raise next year, less than the 2.7 percent across-the-board raise set under the formula that is supposed to be used to determine annual civilian pay increases.

The president also will propose a change in law to create a $500 million Human Capital Performance Fund, to be used by agencies for performance-based raises in 2004. These would be permanent salary increases that also increase employees' pensions and their agencies' Thrift Savings Plan contributions.

"We have an old, outdated, antiquated system that gives everybody the same amount of money every year," OPM Director Kay Coles James said Friday. "Instead of rewarding longevity, the government needs to reward performance. When we have federal employees talking about my pay increase rather than the pay increase, then I think we will have succeeded."

OPM would administer the performance fund and agencies would be required to submit plans to OPM detailing how they planned to use money from the fund to reward excellent performance and improve agency results. According to the Office of Management and Budget, agencies could use fund money to reward employees for performing extra duties, suggesting ideas that save the agency money or taking on managerial responsibilities.

The money could also be used for recruiting and retaining employees with specialized skills. Such employees would include engineers, nurses and pharmacists, OMB said.

The Bush administration has shown a penchant for performance-based pay measures, modeling its 2002 Freedom to Manage initiative around flexible pay systems and linking employee compensation more closely to job performance. Pay-for-performance measures have picked up momentum in the past few weeks. Newly appointed House Government Reform Committee Chairman Tom Davis, R-Va., has said performance pay is one of his top priorities. Critics of performance-based pay structures say the federal appraisal system used with them is flawed, and fear managers will be too subjective in the evaluation process.

OPM's James and Mark Everson, deputy director for management at OMB, said the performance fund would require a cultural shift at agencies that are unaccustomed to tying pay to performance. While agencies will be required to submit a plan to OPM on how they will award performance-based raises, James said agencies would be given a lot of leeway in how they do it.

"We think this is going to foster a lot of creativity," James said.

National Treasury Employees Union President Colleen Kelley said performance-based pay should not come at the expense of raises for all federal employees.

"Where is this $500 million coming from?" Kelley asked. "Would the pay raise have been 2.5 percent or 3 percent if they didn't create this fund? I asked this question and was told no, but I don't know how they ever will be able to show me that, and if this is coming at the expense of the General Schedule pay raise for 2004, I think that would be inappropriate."

Kelley said NTEU has proposed funds similar to the Human Capital Performance Fund in the past that focused on recruiting and retention.

"We've talked about the need to provide a fund like this and give money to the agencies for programs that are well-established, like student loan repayment programs and child care subsidies, none of which appear to be covered by this fund," Kelley said. "This reminded me that we're still waiting for the report on how much money was paid to political appointees for bonuses."

Officials at the American Federation of Government Employees, the largest federal employee union, said they would fight the proposed changes and any move by the administration to overhaul the civil service system.

"This will be a big slush fund for political appointees and managers who work for them, to reward one another. We don't think rank-and-file employees will see a dime of this money," said Jacqueline Simon, public policy director for AFGE. "It's just a continuation of what we've experienced as a war on federal employees, trying to privatize our jobs, trying to destroy the civil service system, trying to destroy the merit system that the civil service is based on, all with this sort of nice sounding rhetoric - pay-for-performance."

Rep. Steny Hoyer, D-Md., a long-time champion of federal employees, said the performance pay fund is fine if it's implemented in an environment where the salaries of federal employees are in line with those of private-sector workers.

"The proposal is made in lieu of doing what is fair to federal employees and what the law requires," Hoyer said. "It shortchanges all federal employees, and frankly it shortchanges those who are performing outstandingly by giving them an adjustment, but not giving them an adjustment on a salary that is comparable to those of their private sector counterparts," he added. "I don't mind the $500 million being added on to pay Michael Jordan-type federal employees to recognize their outstanding federal performance, but you need to pay the rest of the performers who are making your team work a fair wage."

The government already has a system for raising top performers' base pay. Managers can grant their employees quality step increases, which are bumps up the steps of the General Schedule ahead of the normal tenure-based step increases. Federal managers often complain that requirements to justify quality step increases makes them hard to give out. In 2000, managers awarded 61,551 quality step increases, with an average value of $811. The total cost of quality step increases that year was $49.9 million.