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Cautionary Tales from Past Attempts at Pay-for-Performance

Merit board warns of pitfalls in changing compensation structures.

The Merit Systems Protection Board on Thursday warned of the potential pitfalls associated with making major changes to the federal civil service system, highlighting past difficulties in implementing forms of merit-based pay.

In a newsletter released Thursday, the agency laid out how previous attempts to move toward pay for performance failed to produce meaningful change as a result of several implementation failures.

The 1978 Civil Service Reform Act established a merit pay system for managers on the upper end of the General Schedule pay scale. That system struggled to find its footing, and by 1984 Congress had replaced it with another system that ended up suffering from similar implementation problems and was terminated in 1993.

The Trump administration has expressed its desire to try its own hand at implementing performance-based pay, starting with a proposed $1 billion interagency workforce fund to use on agency pilot programs. Office of Personnel Management Director Jeff Pon has promised to propose broad civil service reform legislation by November’s midterm elections.

Among the problems with the previous attempts at performance-based pay programs were that they were implemented before they could be adequately tested and without the necessary guidance from the OPM, which MSPB wrote used a “non-prescriptive approach” and was more focused on compliance, rather than agency pay systems’ effectiveness.

“Good performance appraisal systems take time to develop, test and refine to ensure that clear standards are established and used to measure employee performance,” the board wrote. “However, the merit pay system became operational before many agencies could protest their appraisal systems, train employees on the merit process, or train supervisors on how to properly assess employee performance.”

Additionally, the merit pay system did not address how merit-based pay raises could be impacted by an agency having multiple pay pools, and limited funds often undermined confidence that pay increases were doled out fairly.

“Under merit pay, lower-rated employees in one pay pool often received larger—sometimes much larger—increases than a higher-rated employee of the same grade in a different pay pool in the same agency,” MSPB wrote. “This situation was mostly due to the differing composition of the various pay pools and contributed to employee perceptions of unfairness.”

Another problem for merit pay programs is the assumption that an employee’s performance can be rooted in “measurable and objective” criteria. In practice, however, MSPB concluded that such metrics are “more difficult to achieve,” particularly as federal employees have become more highly educated “knowledge workers.”

MSPB offered advice to those considering how to implement performance-based pay systems moving forward: make sure you’re backed by the evidence, and think hard about how to make them functional.

“We note that some smaller-scale pay for performance systems have been successfully introduced, suggesting that failure is not inevitable,” the agency wrote. “The message to architects of future pay-for-performance programs seems to be that they should take care to validate any assumptions underlying those systems and to anticipate and address the implementation issues that plagued the CSRA’s merit pay approach.”

The newsletter also provided a broad defense of the Civil Service Reform Act’s approach to removing employees, attributing long-cited difficulties with firing poor performers to managers, rather than the law itself. Although the law provided an alternative method for removing an employee, only 42 percent of performance-based personnel actions between 1996 and 2017 used this new authority.

MSPB noted that many agencies go far beyond what is required both in the Civil Service Reform Act and in OPM regulations in providing employees an opportunity to improve their performance.

“Not only do many agencies have policies requiring formal improvement plans, but many require additional steps, such as a minimum duration for the improvement period or offering an informal improvement opportunity before the official improvement period,” the agency wrote. “[The] CSRA attempted not only to make it easier to fire poor performers, but also to improve the government’s ability to manage employee performance. MSPB’s research indicates that the key to addressing poor performance lies not in the language of the laws and regulations, but in effective implementation and having supervisors who are willing, prepared and permitted to address poor performance.”

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