Agencies urged to customize pay-for-performance systems

As pay-for-performance systems become more predominant in the government, an office charged with protecting merit principles is counseling agencies to tailor systems to their specific needs, rather than replicate ones already in place.

The Merit Systems Protection Board last week released guidelines for agency officials designing performance-based compensation systems. Most federal employees are paid under the General Schedule, which offers raises that are automatic for most employees.

The Homeland Security and Defense departments, though, are in the midst of switching to performance-based systems and the Bush administration is seeking to extend the overhaul to the domestic agencies.

"Agencies must tailor pay-for-performance systems to their mission and environment," the MSPB report said. "Agencies have many options when designing a pay-for-performance system … However, there is no universally correct choice for any of these options."

The board presented a number of issues agency heads need to address before designing their systems. One is how costs will be kept under control. The MSPB presented three choices: forced distribution of performance ratings, limiting performance-based rewards to a top percentage of employees or placing caps on pay progression.

Officials also need to decide who will rate employees, the report said. Smaller agencies may choose to make pay decisions in a centralized, top-down manner. Other agencies may use a central board made up of senior managers, but the MSPB warned that these managers may not have enough intimate knowledge of agency subunits to make such decisions.

At the other end of the spectrum, agencies can delegate rating decisions to first-line supervisors. The board counseled that this scenario, however, "involves the natural tendency of supervisors to protect their employees' interests rather than objectively assessing accomplishments."

Designers also need to decide who will provide input on ratings among supervisors, managers, the employees themselves, peers and customers. The MSPB recommended using as many sources of feedback as possible.

Other questions the report said agencies should consider include: Should employees be placed into the system in stages or all at once? What exactly should be rewarded with pay increases? Should performance-based increases come in the form of one-time bonuses, permanent raises or a combination of both?

The underlying message of the report is that while the federal government seems to be moving toward a more heavily merit-based pay system, the systems are at risk of being unwieldy.

"To make pay for performance successful, agencies need to make a substantial investment of time, money and effort," the report said. "Agencies will need to make investments that extend far beyond the money needed to fund bonuses and pay increases," such as extensive training for supervisors on how to work under the new system.