Arbitrator rules against SEC pay for performance system

A mediator ruled on Thursday that the pay-for-performance system adopted by the Securities and Exchange Commission in 2003 is illegal because it resulted in discrimination against African-Americans and employees who are 40 and older.

"This decision should serve as yet another warning against rushing to implement pay-for-performance systems in the federal workplace," National Treasury Employees Union President Colleen Kelley said. "The SEC system failed because it lacks fairness, credibility and transparency, which are critical elements in any merit-based pay system."

"We are reviewing the decision and considering appropriate action," SEC spokesman John Heine said. He declined to comment on what those actions might be. Both SEC and NTEU have 60 days to propose remedies to the arbitrator from the National Arbitration Center.

NTEU has filed separate grievances against the agency on behalf of the 2,200 SEC employees the union represents for every year the system has been in place. It remains to be seen whether those grievances will be addressed separately.

SEC implemented the pay-for-performance system after the Federal Service Impasses Panel found in a November 2002 ruling that the agency's proposal "reflects a pay structure that was well-researched, based on best practices from other agencies, meets the agency's needs, and is comparable to those of other financial regulatory agencies." That ruling was in response to an impasse in negotiations over 2002 pay increases for SEC employees.

The system split SEC employees into 15 pay levels with up to 31 steps in each level. Outstanding employees could receive raises of up to three steps within a level each year, or about 4.5 percent of their salaries.

But, NTEU argued, the agency based the raises on vague performance requirements that were not specific to the jobs the union's members performed.

"The agency success factors were clearly not 'tailored' for each office and division in the agency," NTEU's brief for the case stated. "The failure to use tailored factors was deeply prejudicial to employees, who had little way to know what their supervisors or the compensation committee were looking for in making merit award decisions."

In particular, NTEU said the subjective nature of the performance metrics adversely affected African-American employees, especially those at higher pay grades. A statistical analysis performed for the union showed that only 16 percent of African-American SEC employees received raises of three steps, while 30 percent of white employees received those maximum raises. Ten percent of African-American employees received no merit-based pay increase, compared to only 6 percent of white employees.

That analysis also revealed that while half of SEC employees were 40 or older, 67 percent of the employees who received no merit-based pay increase fell into that age range, and those older employees received only 45 percent of the three step increases.

"The lesson to be learned is the foundation of a viable pay-for-performance system is built upon the foundation of a solid performance management system," said John Palguta, vice president for policy at the nonprofit Partnership for Public Service. "If that foundation is not solid, attempts at pay for performance can and probably will go awry." But both Palguta and Kelley said the ruling should not discredit pay-for-performance systems, but rather, provide an incentive to get them to work properly.

"There is no question that a system intended to reward high-performing employees should be crafted in conjunction with employees and their representatives," Kelley said, adding NTEU already is working with SEC on its performance management and pay systems.

"The value of a performance-sensitive approach to pay is that it forces managers to take the performance management system seriously since they will have to be able to explain their decisions," Palguta said. "Done correctly, a good performance system helps insulate a manager against claims of bias or favoritism."

Kelley said the ruling was further proof that reliance on the Federal Service Impasses Panel can produce bad policy for agencies reluctant to negotiate with their unions.

"The best agreements are those reached and agreed to at the bargaining table by both parties," she said. "The second-best option is bringing in a neutral mediator, when necessary, to aid that process. Too often in this environment, agencies are going to the FSIP to get their proposals imposed. This is an example where such a strategy has backfired on the agency."