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After more than a year of wrangling with employee unions, the Homeland Security Department in late January issued final regulations to replace decades-old civil service rules with a new personnel system. The plan is that employees will receive raises based on performance and market conditions, and department managers will have more control over assigning work and disciplining workers.

But will the new system have any impact on the department's ability to defend the homeland? Former DHS Secretary Tom Ridge expects it will. "I've always believed that rewarding performance and success and ingenuity is a better way to compensate people," he says. The system will boost the morale of top employees, who will be able to advance more quickly, Ridge argues. Pay for performance also will attract more high achievers, who might have been turned off by the standard annual raises provided under the General Schedule, he says.

At the same time, managers no longer will have to negotiate with unions over the deployment of personnel, work assignments or the use of new technology, allowing the department to launch initiatives and respond to changing conditions more rapidly. "[On] many occasions where we have to move people around quickly, we don't have latitude to sit down and discuss it or bargain," says Ridge. Stricter disciplinary rules are intended to make it easier to replace poor performers. Under the previous civil service rules, employees rarely were removed for performance.

The approach that Homeland Security took in designing its system, which involved more than a year's worth of discussions with union leaders and collaboration with the Office of Personnel Management, won widespread praise in Congress and from the Government Accountability Office, but didn't assuage labor leaders' concerns.

John Gage, president of the American Federation of Government Employees, says that the new system "won't serve as an incentive, but a morale buster. . . . It will drive away the best and brightest, not attract them." Gage believes tight budgets in years to come will prompt DHS to skimp on raises. Previously, the department had to find a way to pay for raises approved by Congress; now the size of raises will be discretionary. Employees with poor performance reviews will get nothing.

The impact of the changes will be determined by how they are put into effect. Implementation will take years, cost a lot of money and require tremendous management exertion. The new pay system, which will eventually affect 110,000 DHS employees, will be phased in over four years, with the bulk of the department-80,000 people-not affected until 2009. (Another 70,000 employees, including uniformed military, administrative law judges and Transportation Security Administration personnel, will remain outside the new system.) Each year, the department plans to conduct compensation surveys for different professions and to hold extensive training sessions for managers and employees on the intricacies of the new rules.

If performance reviews turn out to be perfunctory, if good performers see slower wage gains than they would have under the General Schedule, then unions will claim vindication. Already, AFGE is suing, arguing that the new collective bargaining rules violate Congress' intent and that stricter disciplinary rules deny employees due process. Even so, the Bush administration in February proposed legislation that would allow all federal agencies to revamp their personnel systems using DHS as a model.