Pay and Performance Must Be Credibly Managed

And that’s not happening now.

Effective compensation management is not based on a “schedule.” It needs to be responsive to changing circumstances.

In 1990, when Connie Newman, then the director of the Office of Personnel Management, initiated the project that led to the Federal Employee Pay Comparability Act, she formed a group of influential people that met several times to discuss the findings and policy issues. Her strategy was important to building support. 

The National Academy of Public Administration followed that in 1991 with the first of several reports recommending a salary program model to replace the GS system. Each report recommended defining separate salary systems around occupational career ladders. The 1991 report identified 10 groups based on similarities in career progression, basic skills, recruitment, training and performance management. The federal workforce has changed a great deal since then so the groups need to be reviewed. The idea is simple and supports talent management. 

It’s not often discussed but government already has a number of separate pay systems: Senior Executive Service, Federal Wage System, Foreign Service, physicians and dentists paid under Title 38, Law Enforcement Officers, the list goes on. A separate salary system for the STEM occupations (science, technology, engineering and mathematics) would facilitate staffing. Government medical centers could emulate the pay systems common in hospitals.

Effective compensation management is not based on a “schedule.” It is dynamic and needs to be responsive to changing organization circumstances. Pay is central to staffing and talent management.  When linked to organization and individual goals, it supports mission accomplishment. It can and should be a valuable management tool.

A Framework for Managing Salaries

Traditionally the framework for managing salaries has been a series of overlapping ranges. New hires or promoted employees start at or close to the assigned range minimum and progress through the range as they gain experience and develop needed skills. Each range midpoint is aligned with market averages so that when an employee’s salary reaches that level, their pay is “competitive.” Increases above the midpoint are limited to above-average performers. Only the best reach the range maximum.

In switching a program to new grades and ranges, problems inevitably arise because the methods for assigning jobs to grades (job evaluation or classification) are heavily subjective. Jobs can end up higher or lower in the job hierarchy, which inevitably triggers winners and losers—and employee discontent.  

Companies have largely eliminated formal job evaluation as too bureaucratic and inflexible. The dominant practice today is “market pricing,” which is the practice of assigning jobs to the salary range with a midpoint that is closest to the market pay level. It’s simple, expedient, and easy to communicate. It’s also flexible; jobs in high demand can be upgraded as warranted to remain competitive. It takes minutes, not weeks to classify a job.

The federal classification system has become part of the problem. It has not been maintained adequately for decades. The grade inflation problem was discussed in a November paper posted by AEI. There is no realistic expectation that “desk audits” will be conducted to review and “correct” grade assignments. 

Relying on market data would, however, redefine “equity.” Employers for decades relied on internal equity based on a job’s rank in the hierarchy. The problem is that an internal focus is inflexible, costly to administer and unresponsive to market trends. 

The first demonstration project, China Lake, in 1980, was based on the then new program model—salary banding—that is now solidly accepted as the basis for replacement pay programs. The idea minimizes (effectively ignores) the importance of current salary grades. Jobs are simply moved laterally to the appropriate band based on the incumbent’s career level. The concept minimizes the time to classify jobs and, more importantly, minimizes employee anxiety.

Managing Salary Increases

Step increase policies are increasingly rare. It’s safe to say those policies will disappear in the near future.

The alternative, pay for performance, is steadily making inroads in government. It is effectively universal for white collar employees in every other sector. Even the critics in the academic world are paid for their performance. The China Lake demo was based on market pay and pay for performance. Over the past two decades a growing number of state and local jurisdictions have adopted the policy. Indiana switched in 2006. There is solid evidence that the policy can be successful in government.

In the private sector, individual salaries, performance ratings and salary increases are confidential. Co-workers may discuss their pay, but there is no basis for broadly comparing increases. An important difference is that companies focus on the better performers. Businesses celebrate accomplishments.  Poor performers are handled quietly.

In government, there will need to be a stronger commitment to performance management. The incoming administration is likely to demand improved performance and financial rewards are integral to reinforcing the importance of performance. Managers will have to take their responsibilities seriously and accountability has to start at the highest levels.

A trend to improve performance management is to require managers to justify their ratings and recommended pay increases to committees of peers. It increases the honesty and consistency of the decisions. That would alleviate employee concerns.

In addition, a step adopted some years ago by the National Geospatial-Intelligence Agency would help to secure manager and employee buy-in to the change in policy. NGA committed to inviting feedback annually from employees and to making the adjustments needed to insure the policy is managed fairly. 

When managed effectively, there is no question that pay for performance contributes to better results.  All the evidence, however, suggests agencies will need to invest in improving the management of employee performance prior to the change in policy. Moving too rapidly is likely to backfire.