Posthearing Questions Related to Pay for Performance

Published by the Government Accountability Office on 2003-05-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548

          May 19, 2003

          The Honorable Jo Ann Davis
          Subcommittee on Civil Service and Agency Organization
          Committee on Government Reform
          House of Representatives

          Subject: Posthearing Questions Related to Pay for Performance

          Dear Madam Chairwoman:

          On April 1, I testified before your Subcommittee at a hearing on “Compensation
          Reform: How Should the Federal Government Pay Its Employees?”1 This letter
          responds to your request that I provide answers to follow-up questions from the
          hearing. Your questions, along with my responses, follow.

          1. What standards must an agency implement to safeguard against a pay-for-
          performance system that might be abused by managers playing favorites?

          At the request of Representative Danny Davis, we developed an initial list of possible
          safeguards for Congress to consider to help ensure that pay for performance systems
          in the government are fair, effective, and credible. We believe that the following
          could provide a starting point for developing a set of statutory safeguards in
          connection with any additional efforts to expand pay for performance systems.

          •   Assure that the agency’s performance management systems (1) link to the
              agency’s strategic plan, related goals, and desired outcomes and (2) result in
              meaningful distinctions in individual employee performance. This should include
              consideration of critical competencies and achievement of concrete results.

          •   Involve employees, their representatives, and other stakeholders in the design of
              the system, including having employees directly involved in validating any related
              competencies, as appropriate.

          •   Assure that certain predecisional internal safeguards exist to help achieve the
              consistency, equity, nondiscrimination, and nonpoliticization of the performance
              management process (e.g., independent reasonableness reviews by Human

          U.S. General Accounting Office, Results-Oriented Cultures: Modern Performance Management
          Systems Are Needed to Effectively Support Pay for Performance, GAO-03-612T (Washington, D.C.:
          Apr. 1, 2003).

                                                                   GAO-03-793R Pay for Performance
    Capital Offices and/or Offices of Opportunity and Inclusiveness or their equivalent
    in connection with the establishment and implementation of a performance
    appraisal system, as well as reviews of performance rating decisions, pay
    determinations, and promotion actions before they are finalized to ensure that
    they are merit-based; internal grievance processes to address employee
    complaints; and pay panels whose membership is predominately made up of
    career officials who would consider the results of the performance appraisal
    process and other information in connection with final pay decisions).

•   Assure reasonable transparency and appropriate accountability mechanisms in
    connection with the results of the performance management process (e.g., publish
    overall results of performance management and pay decisions while protecting
    individual confidentiality, and report periodically on internal assessments and
    employee survey results).

2. I understand a large percentage of employees now under the General
Schedule are rated on a simple pass/fail basis. How can meaningful
distinctions in performance be made under such a system? Should the
Administration rule out that kind of a system for an agency to participate in
the Human Capital Performance Fund?

A pass/fail system does not provide enough meaningful information and dispersion in
ratings to recognize and reward top performance, help everyone attain their
maximum potential, and deal with poor performers. At your request, and at the
request of Senator Voinovich, we identified the key practices leading public sector
organizations both here and abroad have used for effective performance
management. Among these practices is to make meaningful distinctions in
performance. We believe that this set of practices can serve as the basis for an
agency to demonstrate that it has a performance management system in place that
can support pay and other personnel decisions before it would be eligible to
participate in the Human Capital Performance Fund.

3. If pay and performance management systems are handed over to
individual agencies so they can tailor their systems to their particular needs
and objectives, what role in setting compensation policy would you foresee
for the Office of Personnel Management (OPM) and the Office of
Management and Budget (OMB)?

We have reported that OPM leadership is critical to accomplish its mission in a
decentralized human capital environment in which direct accountability for strategic
human capital management continues to shift to agencies.3 In particular, as noted
above, OPM should certify that an agency has in place an effective performance
management system before the agency is granted the authority to better link pay to
performance for broad-based employee groups. In addition, OPM should gather,
assess, and disseminate leading practices from federal organizations on a full range of

  U.S. General Accounting Office, Results-Oriented Cultures: Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003).
  U.S. General Accounting Office, Major Management Challenges and Program Risks: Office of
Personnel Management, GAO-03-115 (Washington, D.C.: January 2003).

Page 2                                                   GAO-03-793R Pay for Performance
innovative human capital policies and procedures, such as pay for performance.
Further, OPM should build on its White Paper to design and lead a broad research
agenda to develop a more market-based approach to federal pay.

First and foremost, OMB can help to obtain funding for agencies to make the targeted
investments that often are needed to develop and implement performance
management and related human capital systems. OMB also can continue to help
sustain attention on human capital management. For example, in October 2001, OMB
notified agencies that they would be assessed against standards for success for each
part of the President’s Management Agenda, including the strategic management of
human capital. The first agency assessment was made public in February 2002 as
part of the President’s proposed fiscal year 2003 budget. Subsequent assessments
were later released on both the status and progress of agency efforts. In October
2002, OMB and OPM approved revised standards for success in the human capital
area of the President’s Management Agenda, reflecting language that was developed
in collaboration with GAO.

4. The General Accounting Office (GAO) report discusses “line of sight” as
the overarching principle for effective performance management. What is it
and why is it important? Can you highlight the practices that public sector
organizations used in their performance management systems to drive
internal change and achieve results?

Leading public sector organizations used the key practices I referenced above to
create a clear linkage—“line of sight”—between individual performance and
organizational success.4 These organizations have found that to successfully
transform themselves, they must often fundamentally change their cultures so that
they are more results-oriented, customer-focused, and collaborative in nature. To
transform their cultures, high-performing organizations have recognized that an
effective performance management system can be a strategic tool to drive internal
change and achieve desired results.

5. Things seem to move awfully slowly in the government sometimes. I
understand the China Lake pay system experiment is over 20 years old and
other experimental systems have also been used for years now. How many
tests of pay-for-performance do we need before we decide to go for it across
the entire government?

Additional testing of the concept of pay for performance at the federal level is not
what is needed at this point. Our experience at GAO and the experiences of others
have shown that it is possible to better link employee pay to performance. However,
experience also has shown that how it is done, when it is done, and the basis on
which it is done can make all the difference in whether or not such efforts are
successful. In our view, one key need is to modernize performance management
systems in executive agencies so that they are capable of adequately supporting more
performance-based pay and other personnel decisions. Unfortunately, based on
GAO’s past work, most existing federal performance appraisal systems are not
designed to support a meaningful performance-based pay system.

Page 3                                            GAO-03-793R Pay for Performance
We believe that Congress should consider granting governmentwide pay banding
authority in a manner that assures that appropriate performance management
systems and safeguards are in place before the new authorities are implemented in
any respective agency. This approach would accelerate needed human capital reform
throughout the government in a manner that assures reasonable consistency on key
principles within the overall civilian workforce. It also would provide agencies with
reasonable flexibility while incorporating key safeguards to help maximize the
chances of success and minimize the chances of abuse and failure. This approach
would also help to maintain a level playing field among federal agencies in competing
for talent.

6. GAO’s internal pay for performance system is relatively new. How long
do you think it will take before we can tell whether it is a success? How did
GAO develop its competency-based performance management system? What
lessons learned did GAO experience in developing, implementing, and using
its new performance management system?

The most prominent change in human capital management that we implemented as a
result of the GAO Personnel Act of 1980 was a broadbanded pay for performance
system. It should be noted that we had over a decade of experience in the use of pay
banding before we undertook our recent changes, so much of the needed
organizational infrastructure was already in place. In January 2002, we implemented
a new competency-based performance management system that is intended to create
a clear linkage between employee performance and our strategic plan and core

In designing the new system, GAO involved employees at key points through a variety
of channels. Senior management and a diverse cross section of staff selected from
across all employee populations reviewed a preliminary competency model. Once
developed, all analyst and analyst-related staff across GAO validated the model to
ensure the activities and associated behaviors were indeed relevant and important for
analyst work. The new policies were put on the GAO intranet for employee
comments and appropriate changes were made. We see early results of GAO's
implementation of its new competency-based performance management system and
other changes to key human capital programs. For example, GAO has achieved
greater dispersion in its performance appraisals and merit pay decisions, thus making
meaningful distinctions in performance that were not always made in the past.

We realize our approach is not perfect and never will be. High-performing
organizations continually review and revise their performance management systems
to support their strategic goals. In that spirit, we expect to modify our banded system
in the future based on our experience to date.

7. Has GAO found pay for performance efforts that failed?

Yes. Experience from the U.S. and abroad shows pay for performance does not work
when modern, effective, credible, and validated performance management systems,
with appropriate safeguards, are not in place to support pay decisions and

Page 4                                             GAO-03-793R Pay for Performance
consequently, employees and managers lose confidence in the fairness of the
decisions that are made. At your request, and the request of Senator Voinovich, we
are reviewing OPM’s personnel demonstration projects where pay for performance
systems have been established to identify lessons learned from their experiences.
These demonstration projects are required to prepare project designs, conduct
employee feedback, and complete evaluations of their results. Of the 17
demonstration projects that have been implemented, 12 have implemented a pay for
performance system. The projects have taken a variety of approaches to linking pay
to performance and have also made determinations about how much of an
employee’s pay increase should be “at risk”—that is, the amount of the pay increase
that is tied to performance as opposed to provided as an entitlement.

8. When the GAO undertook an assessment of the Federal Aviation
Administration’s (FAA) pay for performance policy, what was the percentage
of employees interviewed by the GAO that stated that the pay system was
unfair? What did the employees think was unfair about it?

In February 2003, we reported that FAA’s human capital reform efforts were still in
progress.5 Many of the FAA managers and employees we interviewed were critical of
the new compensation system. Nearly two-thirds of those responding to our
structured interview (110 of 176) disagreed or strongly disagreed that the new pay
system is fair to all employees. While we did not attempt to evaluate the concerns
raised during the interviews, we did find some evidence that helps explain these
perceptions of unfairness. For example, concerns about air traffic controller pay
disparities were supported by a Department of Transportation Inspector General
report. FAA has since corrected its air traffic control pay policies to clarify
differences in pay scales between those controllers in air traffic control facilities and
those in regional or headquarters offices. In addition, according to both FAA and
external stakeholders, a general perception of unfairness regarding FAA’s new
compensation system has led to increased unionization among both air traffic service
employees as well as those in other FAA business lines.

9. In your research, what performance management system do you find more
effective—an individually based reward system or a group based reward
system? If rewards are given to individuals as opposed to groups, couldn’t
this create teamwork problems in situations where collaboration and
information sharing are essential to good performance? How do you protect
against that kind of behavior? Conversely, if rewards are group-based rather
than individual-based, couldn’t there be problems in which individuals slack
off and hope to benefit from the efforts of others? How do you protect
against that kind of behavior?

Leading organizations reward individuals based on their contribution to team, unit,
and organizational goals. Among the key practices I referenced above is the practice
to connect performance expectations to crosscutting organizational goals. That is, if
individuals are to be successful in achieving results, they must work collaboratively

  U.S. General Accounting Office, Human Capital Management: FAA’s Reform Effort Requires a More
Strategic Approach, GAO-03-156 (Washington, D.C.: Feb. 3, 2003).

Page 5                                                   GAO-03-793R Pay for Performance
with colleagues in other organizational units. To further underscore the importance
of teamwork, leading organizations also set individual performance expectations for
collaboration, interaction, and teamwork. Finally, leading organizations recognize
and celebrate successful teamwork. In our own case at GAO, we are implementing a
new awards program to recognize high-impact work that is produced by matrixed
teams formed across the organization.

For additional information on our work on federal agency transformation efforts and
strategic human capital management, please contact me on 512-6806 or at

Sincerely yours,

J. Christopher Mihm
Director, Strategic Issues


Page 6                                            GAO-03-793R Pay for Performance
                         The General Accounting Office, the audit, evaluation and investigative arm of
GAO’s Mission            Congress, exists to support Congress in meeting its constitutional responsibilities
                         and to help improve the performance and accountability of the federal
                         government for the American people. GAO examines the use of public funds;
                         evaluates federal programs and policies; and provides analyses,
                         recommendations, and other assistance to help Congress make informed
                         oversight, policy, and funding decisions. GAO’s commitment to good government
                         is reflected in its core values of accountability, integrity, and reliability.

                         The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of      through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail
                         this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily
                         E-mail alert for newly released products” under the GAO Reports heading.

Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A
                         check or money order should be made out to the Superintendent of Documents.
                         GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a
                         single address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:     Voice:    (202) 512-6000
                                                TDD:      (202) 512-2537
                                                Fax:      (202) 512-6061

To Report Fraud,
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470

                         Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800
Public Affairs           U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548
This is a work of the U.S. government and is not subject to copyright protection in the
United States. It may be reproduced and distributed in its entirety without further
permission from GAO. However, because this work may contain copyrighted images or
other material, permission from the copyright holder may be necessary if you wish to
reproduce this material separately.