oversight

Pay For Performance: State and International Public Sector Pay-For-Performance Systems

Published by the Government Accountability Office on 1990-10-12.

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

GAO


      PAY FOR
      PERFORMANCE
      State and International
      Public Sector Pay-For-
      Performance Systems
_--.-   _..-.._.”   ._..   .._“.-_-.-   --“.l   ._-   -....   “-“1-11   _.   .   .._.   I   ..-_   I   .   -_   ..--_   .-.-   -----
General Government Division

13-239836

October 12, 1990

The Honorable Norman Dicks
House of Representatives

The Honorable Vie Fazio
House of Representatives

The Honorable Steny Hoyer
House of Representatives

This report responds in part to your request to examine the federal government’s pay-for-
performance system. This system is known as the Performance Management and Recognition
System (PMRS).As you know, prior reports provided information on how PMRSwas operating
and on how it was viewed by employees who were covered under the system and by federal
agencies’ personnel directors.

This report goes beyond the federal PMRSsystem and examines whether and to what extent
state governments are operating pay-for-performance compensation systems. It also
identifies some of the problems experienced by those systems and notes that such problems
are similar to those experienced under PMRS.The report also presents some general
information on the extent to which pay-for-performance systems are being used
internationally.

Copies of this report are being sent to the Chairman of the House Committee on Post Office
and Civil Service and the Senate Committee on Governmental Affairs; the Director of the
Office of Personnel Management; the states that participated in this review; and other
interested parties.

The major contributors to this report are listed in appendix V. If you have any questions on
this report, please call me on 2766074.




Bernard L. Ungar
Director, Federal Human Resource
  Management Issues
                                                                                                  ,
Executive Summary


                   -
                       This report was prepared as part of GAO'Sresponse to a request for pay-
Purpose                for-performance information from Congressmen Norman B. Dicks, Vie
                       Fazio, and Steny H. Hoyer. It identifies those states that employ a pay-
                       for-performance system, describes how these systems are structured
                       and operated, and contains insights into how the systems are viewed by
                       state officials and employees. The report also explores whether and to
                       what extent pay-for-performance systems are being used
                       internationally.

                       The administration and Congress are giving consideration to expanding
                       the government’s use of pay for performance and will also be deter-
                       mining whether any changes are needed in the basic structure of the
                       government’s current pay-for-performance system. GAObelieves the
                       information contained in this report will aid in those deliberations.


                       The Performance Management and Recognition System (PMRS)is the fed-
Background             eral government’s pay-for-performance system. Applicable to about
                       130,000 grade 13 through 16 managers and supervisors, the system pri-
                       marily relies on performance appraisals as the basis for pay and mone-
                       tary reward decisions. Through an annual performance appraisal
                       process, each PMRSemployee receives a summary rating reflecting one of
                       five !evels of performance- fully successful, two levels above fully suc-
                       cessful, and two below.

                       Although the results of PMRShave been generally disappointing, Con-
                       gress recently reauthorized the program through March 1991 with only
                       minimal change. Congress decided to reauthorize PMRSin this manner
                       because there was general support for the concept of pay for perform-
                       ance but little agreement on how PMRScould be improved. The Office of
                       Personnel Management (OPM) is currently evaluating the program
                       through a contract with the National Research Council.

                       To obtain the information for this report, GAOcontacted a total of 51
                       states and territories and visited 6 state governments that operated pay-
                       for-performance systems. Additionally, to find information on the
                       nature of and extent to which pay for performance was being used
                       outside the United States, GAOperformed a literature review and spoke
                       to various international personnel management officials.


                       Although several states have adopted pay for performance, there is no
Results in Brief       clear consensus as to what constitutes an ideal pay-for-performance


                       Page 2                                       GAO/GGD-91-l   Pay for Performance
                              ExeeutiveSummary




                              system. State pay-for-performance systems varied with regard to
                              funding, methods for rewarding employees whose performance justified
                              additional compensation, the number of performance levels in use to
                              assess employee performance, and the percentage of the work force cov-
                              ered by pay for performance. Also, some state pay-for-performance pro-
                              grams were not fully implemented because funding for such programs
                              was not consistently provided.

                              Countries other than the United States are also moving toward pay for
                              performance. As of September 1988, 13 of the 24 countries affiliated
                              with the Organization for Economic Cooperation and Development
                              (oEn)-a   European-based research organization-either    had or were
                              proposing a performance-based pay system.



Principal Findings

There Is a General            GAOidentified 23 states that use pay-for-performance   systems. A review
                              of the international literature on performance appraisal and pay-for-
Movement Toward Pay for       performance systems indicates that other countries are also moving
Performance                   toward pay for performance in the public sector. As reported by OECD,
                              13 of its 24 member countries have implemented or are testing the pay-
                              for-performance concept on an experimental basis.

                              GAOfound that, just as in the federal government, there is no general
                              consensus on how best to structure a pay-for-performance system. How-
                              ever, the varying methods used by other public organizations to imple-
                              ment pay for performance provide information that can be helpful in
                              considering the future direction of PMRS.For example:

                          9 Under PMRS,persons who are eligible for a merit increase do not receive
                            the full amount if it places their salary above the top of their pay range.
                            Four states have compensated for this by allowing the denied salary
                            amount to instead be paid as a bonus. (See p. 20.)
                          l One of the criticisms of PMRShas been that rewards are too small to act
                            as a motivator. For fiscal year 1988, the latest year for which data was
                            available, the average bonus award amount for PMRSwas $1,149. State
                            employees GAOinterviewed generally shared that view with regard to
                            their own systems. In the eight states from which GAOwas able to obtain
                            such information, award amounts ranged from a low of $400 to a high of
                            $2,831 per employee. GAOalso found that some state programs were not


                              Page 3                                       GAO/GGDSl-1   Pay for Performance
                         ExecutiveSummary




                       always implemented. For the 3-year period ending in fiscal year 1989,7
                       of the 23 states did not fund their pay-for-performance system during
                       one or more of these years. (See p. 22.)
                     l PMRSrewards its employees by using a combination of salary increases
                       and bonuses. Nineteen of the 23 states granted performance awards that
                       were added to the employee’s base salary; 9 of the 19 also granted
                       bonuses; but in 4 states, only bonuses were used. In one of these latter
                       states, a personnel official said that the general rationale for only using
                       bonuses was a belief that a salary increase could long outlive the per-
                       formance that triggered it. He also pointed out that bonuses constitute
                       one-time payments and, as a result, are less costly. (See p. 20.)
                     . PMRSuses five rating levels to assess the performance of its employees
                       and consideration has been given to reducing the number of rating levels
                       to two (pass/fail). Twelve of the 23 states that had implemented per-
                       formance-based systems used a 5-level system; but none employed 2
                       levels. One state official said that, in his opinion, two levels would not be
                       sufficient to assess employee performance. He also said that because it
                       was unlikely that many employees would fail, a two-level system would,
                       in effect, make no distinctions at all. (See p. 19.)
                     l As was the case under PMRS,all states required an assessment of
                       employee performance, and most of the 23 states also based an
                       employee’s performance reward amount directly on his/her rating. (See
                       p. 17.)
                     . PMRSis currently applicable to only a portion of the federal workforce-
                       grade 13 through 15 managers and supervisors. Data compiled by GAO
                       show that although none of the states has made pay for performance
                       applicable to all of its employees, some states have included employees
                       other than supervisors and managers. (See p. 15.)


                         Because this report is informational in nature, GAOis not making any
Recommendationsand       recommendations. However, GAO'Sfindings clearly demonstrate that
Comments                 whatever type of pay-for-performance system is adopted for federal
                         employees, adequate funding is critical to meeting the system’s objec-
                         tives and for achieving credibility among covered employees.

                         GAOdiscussed the information presented in this report with personnel
                         officials from the various states it visited. With the exception of a few
                         minor technical corrections that were made, the officials agreed with the
                         information GAOpresented.




                         Page 4                                       GAO/GOD-91-1   Pay for Perfommnce
Page IS   GAO/GGDSl-1   Pay for Performance
                                                                                              r
Contents


Executive Summary                                                                                      2

Chapter 1                                                                                           8
Introduction          Studies Have Identified Problems With PMRS
                      Objective, Scope, and Methodology
                                                                                                    9
                                                                                                   12

Chapter 2                                                                                          15
Stat& Are Moving      Several States Have Adopted Pay for Performance
                      States’ Performance Appraisal Systems
                                                                                                   15
                                                                                                   17
Toward Pay for        State Performance Award Payout Process                                       19
Performance           States’ Pay-For-Performance Funding Levels Varied                            22
                      Ratings Distributions                                                        22
                      State Employees’ Views of Pay for Performance                                23
                      Conclusions                                                                  24
                                                                                   -

Chapter 3                                                                                          26
Pay for Performance   Performance Appraisal
                      Pay-For-Performance Systems
                                                                                                   26
                                                                                                   26
in Other Countries    Conclusions                                                                  29

Appendixes            Appendix I: Letter Sent to State Personnel Agencies                          32
                      Appendix II: Respondents to Our Letter                                       34
                      Appendix III: Additional Information on State Pay-For-                       36
                          Performance Systems
                      Appendix IV: Amounts Spent by States on Performance                          48
                          Awards for Fiscal Years 1987 Through 1989
                      Appendix V: Major Contributors to This Report                                49

Tables                Table 1.1: Performance Increases Under PMRS                                   8
                      Table 2.1: State Pay for Performance (PFP) Background                        16
                          Information and Employee Coverage
                      Table 2.2: Components of States’ Performance Appraisal                       18
                          Systems
                      Table 2.3: Types of State Performance Awards                                 20
                      Table 2.4: Components of States’ Pay-For-Performance                         21
                          Systems
                      Table 3.1: 13 Countries That Either Have or Are Planning                     25
                          a Pay-For-Performance System
                      Table 3.2: Canadian Performance Award Increases by                           29
                          Rating Level


                      Page 0                                      GAO/GGD-91-l   Pay for Performance
Contents




Table 111.1:Awards as a Percentage of Base Pay in Idaho,                        39
    Fiscal Year 1989
Table 111.2:Illinois Merit Increase Guidelines, Fiscal Year                     41
     1990
Table 111.3:South Carolina Employee Performance                                 44
    Ratings by Fiscal Year
Table 111.4:Utah Performance Appraisal Guidelines,                              46
    Fiscal Year 1989
Table 111.6:Utah Merit Increase Funding as a Percent of                         46
    Payroll, Fiscal Years 1979-1989
Table 111.6:Utah Merit Increase Guidelines, Fiscal Year                         46
     1989




Abbreviations

EPAS       Employee Performance Appraisal System
GM         General Merit
GS         General Schedule
MPS        Merit Pay System
OFXD       Organization For Economic Cooperation and Development
OPM        Office of Personnel Management
PFP        Pay for Performance
PMRS       Performance Management and Recognition System
POPS       Performance Oriented Pay System


Page 7                                        GAO/GGDSl-1     Pay for Performance
Chapter 1

Introduction


                                           The Performance Management and Recognition System (PMRs) is the fed-
                                           eral government’s pay-for-performance system for approximately
                                           130,000 grade 13 through 15 supervisors and managers.’ The system
                                           primarily relies on annual performance appraisals as the basis for pay
                                           and monetary reward decisions. Each PMRSemployee receives a sum-
                                           mary rating based on five levels of performance with the middle level
                                           considered to constitute fully successful performance. There are also
                                           two levels above fully successful and two levels below. The lowest cate-
                                           gory is for unacceptable performance.

                                           A rating of fully successful or higher entitles the employee to the full
                                           amount of any general pay (comparability) increase that is granted to
                                           the General Schedule (GS) workforce. A rating of at least fully successful
                                           also makes PMRSemployees eligible to earn merit increases in their rates
                                           of basic pay (advancement within the ranges for their pay grades) that,
                                           for the most part, meet or exceed the salary adjustments available to GS
                                           employees in the form of within-grade increases. As shown in table 1.1,
                                           the amount of a PMRS merit increase is determined by the employees’
                                           summary ratings for the year and the employees’ position in the salary
                                           range for his/her grade.


Table 1.1: Performance Increases Under PMRS
                                                                               Salary range
Performance rating             Lower third               Middle third                   Upper third                       At maximum rate
Level5                         Full merit increase       Full merit increase             Full merit increase              No merit increase
Level 4                        Full merit increase       One-half merit increase         One-half merit increase          No merit increase
Level 3 (fully successful)     Full merit increase       One-half merit increase         One-third merit increase         No merit increase


                                           A rating of at least fully successful also makes employees eligible to
                                           earn performance awards-one-time        “bonus” payments that are not
                                           part of basic pay. Employees who rated two levels above fully suc-
                                           cessful are required under the PMRSlegislation to receive a performance
                                           award of at least 2 percent of their base salary. PMRSlegislation also
                                           requires that an agency’s total payout for performance awards not
                                           exceed a maximum of 1.5 percent of its aggregate PMRSsalaries.




                                           ‘PMRS was signed into law on November 8, 1984, as Title II of the Civil Service Retirement Spouse
                                           Equity Act of 1984 (Public Law 98-616,98 Stat. 3196,3207) and was recently reauthorized until
                                           March 3 1, 1991, by the Performance Management and Recognition System Reauthorization Act of
                                           1989 (Public Law 101-103).



                                           Page8                                                        GAO/GGD-Sl-1PayforPerPormance
                          PMRSalso reduces or withholds pay increases for less than fully suc-
                          cessful performance. Under PMRS, employees rated one level below fully
                          successful receive one-half of any general pay increase and no merit
                          increase, and employees rated two levels below fully successful receive
                          neither.

                          Additionally, Congress’s October 1, 1989, reauthorization of PMRS legisla-
                          tion established new procedures requiring agencies to place each
                          employee whose performance was below fully successful on a perform-
                          ance improvement plan. If the employee does not improve his or her per-
                          formance to a fully successful level or higher once the performance
                          improvement plan has been completed, he/she may be reassigned,
                          reduced in grade, or removed.


                          We and the U.S. Office of Personnel Management (OPM) have reviewed
stuales Have              and reported on PMRS since its passage in November 1984. Essentially,
Identified Problems       these reviews have shown that the results of pay for performance under
                          PMRS have been generally disappointing.
With PMRS

Results of OPM            OPM  is required by law to evaluate PMRS and has issued three annual
Evaluations               reports on the system.2 Although OPM’S evaluations reported that PMRS
                          employees were better paid than they were under either the Merit Pay
                          System or the General Schedule,3 it cited problems associated with per-
                          ceptions of inequity, assessing employee performance levels, “labeling”
                          employees, high percentages of employees receiving awards, low actual
                          dollar awards, and the increased administrative burden placed upon
                          supervisors. For example, OPM’S June 1989 annual report on PMRS made
                          the following statements:

                      l   Although federal agencies showed wide variation in                    PMRS   ratings, the
                          performance rating distribution was inflated.




                          2Performance Management and Recognition System, OPM, June 1989, June 1988, and July 1987.

                          3The merit pay system-the system in effect prior to PMRS-was established by the Civil Service
                          Reform Act of 1978. Merit Pay fundamentally changed the manner in which most of the govern-
                          ment’s GS-13through -16 supervisors and managers were compensated. Under this system,
                          employees received a reduced annual salary adjustment and had to compete for pay increases from a
                          fixed merit pay fund on the basis of how well they performed their jobs.



                          Page 9                                                      GAO/GGDz)l-1    Pay for Performance
    chapter 1
    Introduction




l   Randomly selected and interviewed employees expressed a broad range
    of opinions on how effective PMRSwas in reaching its goals and objec-
    tives. Most employees supported the concept of pay for performance but
    were dissatisfied with its implementation under PMRS.

    Although OPMreports identified and reported on the continuing
    problems with the PMRSsystem, no changes or remedial actions were rec-
    ommended. Commenting on this issue, the Director of OPMsaid during
    congressional testimony on the reauthorization of PMRSin July 1989 that
    although essentially no one wanted to go back to the regular General
    Schedule for the PMRSpopulation, there was no consensus as to exactly
    how PMRSshould be changed. Also, OPMstated in its 1989 annual report
    on PMRSthat there was no indication that continuing the current system
    beyond September 1989, with only minimal changes, would cause
    serious short-term operational problems. However, OPM also said that it
    appeared that more substantial changes were essential for the long-term
    success of the pay-for-performance concept. OPMstated that it would
    continue to study the PMRSsystem and would also examine alternative
    pay-for-performance systems.

    In September 1989, OPMcommissioned a study by the National Research
    Council of the National Academy of Sciences to evaluate the state of
    performance appraisal technology and, in particular, to find out if there
    were effective performance appraisal systems in place in the public and
    private sectors that could serve as models for redesigning the federal
    pay-for-performance system.4 The underlying question to be addressed
    by the Council is whether a pay-for-performance or merit pay system
    would help promote excellence in the federal work force. According to
    the Council’s project leader, the scope of the work will involve a review
    and synthesis of the research literature on (1) performance appraisal,
    (2) compensation linked to performance appraisal, and (3) the organiza-
    tional variables potentially influencing the effectiveness of any pay-for-
    performance system. The period for completing the contract is 13
    months, with a final report to be issued in December 1990.




    4The National Research Council was organized by the National Academy of Sciencesto associate the
    broad community of sciences and technology with the Academy’s purposes of furthering knowledge
    and advising the federal government. The Academy is a private, nonprofit, self-governing corporation
    that was established in 1863 by congressional charter.



    Page 10                                                       GAO/GGDSl-1     Pay for Perf’ornmnce
                    Chapter 1
                    Introduction




GAO’s PMRSReviews   We first reported on the implementation of PMRS in various federal agen-
                    cies in January 1987.6 In that report, we pointed out that factors unre-
                    lated to individual performance resulted in employees with the same
                    grade and rating receiving significantly different award amounts. We
                    also reported that although the PMRS legislation prohibits agencies from
                    prescribing ratings distributions, various factors--including budgetary
                    constraints -put pressure on agencies to influence the distribution of
                    ratings.

                    In May 1989, we again reported on PMRS.~ Despite 4 years of experience
                    with the system, PMRSemployees and the SES members we spoke with
                    raised most of the fundamental problems initially identified in our Jan-
                    uary 1987 report. Also, in general, these individuals indicated that PMRS
                    was not fully meeting its objective of motivating and rewarding
                    employees. Nearly everyone we spoke with said that they believed that
                    performance was not a major factor in determining who received per-
                    formance awards and that awards were too small to act as motivators.

                    Although most of the people we spoke with were unhappy with PMRS,
                    they had few suggestions for improving the system. In the absence of
                    concrete suggestions, we solicited comments on a number of reforms
                    that had been suggested by various personnel management groups. We
                    found that a proposal to adopt a satisfactory/unsatisfactory   two-tier
                    rating system was not supported by most of the employees. Also, most
                    did not support using an awards panel to make performance award deci-
                    sions as a substitute for basing award decisions on an individual’s per-
                    formance appraisal. We also found that there was strong support for a
                    proposal to increase the pay of managers and supervisors.

                    In September 1989, we obtained the views of federal agency personnel
                    directors and issued a fact sheet entitled Pay for Performance: Agency
                    Personnel Directors’ Views (GAO/GGD-89-126~s).    The problems we identi-
                    fied in our prior work continued to surface. For example, about 80 per-
                    cent of the personnel directors who responded to our letter said that, in
                    general, the views of employees at their agencies agreed with the views
                    we previously presented in our May 1989 briefing report.



                    “Pay for Performance: Implementation of the Performance Management and Recognition System
                    (GAO/GGD-87-28, Jan. 21,1987).
                    “Pay for Performance: Interim Report on the Performance Management and Recognition System
                    (GAO/O-89-69BR,       May 18,198Q).



                    Page 11                                                   GAO/GGD-91-1   Pay for Perfornumce




                                                   I
                                                                                                                       r
                           Chapter 1
                           Introduction




                           In response to other questions in our letter, about 73 percent of the per-
                           sonnel directors said that PMRSdid not meet or only partially met the
                           goals their agencies wanted to achieve through a pay-for-performance
                           system. Although the personnel directors expressed little agreement on
                           how PMRSshould be changed, two suggestions frequently cited were
                           (1) to give agencies more flexibility in designing pay-for-performance
                           systems to fit their goals and culture and (2) to increase funding for
                           performance awards.


                           This assignment was done as part of our response to a request from Con-
Objective, Scope,and       gressmen Norman B. Dicks, Vie Fazio, and Steny H. Hoyer. Its overall
Methodology                objective was to identify and gather information on the design and oper-
                           ations of state government pay-for-performance systems.

                           Although there has been an increasing interest in the topic of reward
                           systems for public employees, we were not able to find any recent
                           survey information on state pay-for-performance systems and practices.
                           Accordingly, we sought to fill this gap by identifying those states that
                           use a pay-for-performance system; describing how these systems were
                           structured and operated; finding out how these systems were viewed by
                           state employees; and, to the extent possible, comparing these state sys-
                           tems to PMRS.It was our view that such information might be useful in
                           assisting Congress and OPMin considering possible modifications and
                           improvements to PMRS.Additionally, as agreed with the requesters, we
                           expanded our work to include gathering information on whether and to
                           what extent pay for performance was being used internationally.

                           To identify those state governments that used a pay-for-performance
                           system,7 we sent a letter of inquiry to a total of 51 states and territories
                           requesting information on various aspects of pay for performance. Spe-
                           cifically, we requested information on

                       l whether the state operated a pay-for-performance system for its
                         employees;
                       . the structure of the performance appraisal portion of the system;
                       l the process used to determine who gets awards, bonuses, and base pay
                         increases; and


                           7For purposes of our study, we defined a pay-for-performance system as a system that discriminates
                           between satisfactory and other higher performance levels by rewarding employees differently. The
                           reward may be an adjustment to base pay, a one-time bonus payment, or some combination of these.



                           Page 12                                                      GAO/GGDSl-1     Pay for Performance



                                                        ./
  Chapter1
  Introduction




. the source of funds and the funding levels for the performance-based
  pay system.

  We received a total of 44 responses to our letter of inquiry. Appendix I
  contains the letter we sent to state personnel directors and appendix II
  contains a list of states that responded.

  To further develop our information on state experiences with pay for
  performance, we made field visits to a judgmentally selected sample of
  states that had pay-for-performance systems. These were Arizona,
  Florida, Idaho, Illinois, South Carolina, Tennessee, and Utah. With the
  exception of Tennessee- which terminated its pay-for-performance
  system in 1988 because of problems, such as a lack of adequate program
  funding-the     sampled states represented a mix of pay-for-performance
  systems. The systems varied in terms of appraisal rating levels,
  employee coverage, and degree of supervisory control over
  performance-based pay awards. Our field visits involved gathering
  information from a total of 20 state personnel officials and 75 managers,
  supervisors, and other employees to get their perspectives and views on
  how well their pay-for-performance systems were meeting their needs
  and the needs of their state organizations. The managers, supervisors,
  and other employees were from various organizational levels within
  state government and were selected for our field interviews, in most
  cases, by state personnel officials. Because of the judgmental nature of
  employee selection, their views cannot be assumed to be representative
  of all state employees and supervisors nor of all employees and supervi-
  sors in the state locations or agencies we visited.

  We gathered and examined available statistical information related to
  each state’s pay-for-performance system, such as employees’ summary
  performance ratings, performance award amounts, and general pay
  increases. We did not verify the accuracy of the statistical data provided
  to us by the various state employees and officials. Also, we did not
  examine the basis for the state officials’ views or the validity of the
  statements they made. Nevertheless, we believe that the testimonial and
  documentary information we received provided us with a more
  informed perspective than we had initially on the pay-for-performance
  practices in operation at the state level.

  To identify information on whether and to what extent pay for perform-
  ance was used internationally, we reviewed pertinent literature,
  including international publications, professional journals, and other
  media articles. We also spoke with officials of the U.S. Department of


  Page13                                        GAO/GGDsl-1Payfor Performance
                                                                  I




chapter 1
Introduction




State; OPM;the National Academy of Sciences; the Federal Manager’s
Association; Professional Managers’ Association; the International
Public Management Association; and the Organization for Economic
Cooperation and Development (OECD),a European-based research organ-
ization, to gather information on the use of overseas performance-based
compensation systems. Lastly, we spoke to Canadian and corresponded
with United Kingdom personnel management officials familiar with
their countries’ public sector pay compensation systems.

The information gathered on the pay-for-performance systems used by
other countries was limited. We had difficulty obtaining sufficient detail
on the pay arrangements that applied to public sector employees of
these countries. Also, the literature indicated differences in the style of
public sector management and the role of public servants from country
to country. However, we were able to identify a recent study by the OECD
on general trends in pay for performance among its member countries.
We also gathered some detailed information on pay for performance in
both the United Kingdom and Canada. We highlighted these two coun-
tries because of the availability of pay-for-performance information.

We gave state personnel officials from the various states we visited an
opportunity to review the facts we presented in this report. They gener-
ally agreed with the information presented and we made the technical
changes they suggested. We did our field work between August 1989
and January 1990 in accordance with generally accepted government
auditing standards.




Page 14                                      GAO/GGDfJl-1   Pay for Performance
StatesAre Moving Toward Pay
for Perfomance

                      Twenty-three states indicated that they had a system in which the pay
                      awarded to certain employees was based on demonstrated performance.
                      The rewards included adjustments to base pay, one-time bonus pay-
                      ments, or some combination of these.

                      The types of state pay-for-performance systems in place varied in levels
                      of funding, methods for rewarding employees whose performance justi-
                      fied additional compensation, the number of performance levels in use
                      to assess employee performance, and the percentage of the work force
                      covered by pay for performance. In addition, as indicated in this chapter
                      and highlighted in the case summaries included in appendix III, some of
                      the problems reported about the federal PMRSprogram were also
                      expressed to us at the state level.


                      On the basis of the information provided by those 44 states and territo-
Several States Have   ries that responded to our letter of inquiry, we identified 23 states that
Adopted Pay for       use pay-for-performance systems. Most states (14 of 23) had imple-
Performance           mented their systems within the last 10 years. At least three other
                      respondents-Virginia,    Montana, and Missouri-indicated     that they
                      were either in the process of studying or actually implementing a state
                      pay-for-performance system. For example, Virginia officials said that in
                      anticipation of a move toward pay for performance, the state had devel-
                      oped new position descriptions for all its employees and implemented a
                      new performance evaluation process to support a closer link between
                      pay and performance. After completing our fieldwork, we were advised
                      that Virginia’s system-“The     Incentive Pay Plan”-was implemented in
                      July 1990, with performance awards based upon the new appraisal
                      system scheduled to begin in December 199 1.

                      As table 2.1 indicates, not all state employees are covered under state
                      pay-for-performance systems. For example, in Maryland, only about 400
                      of the state’s approximately 96,000 employees are covered.




                      Page15                                        GAO/GGDSl-1Payfor Performance
                                       Chapter2
                                       StateaAre MovingTowardPay
                                       for Performanm




Table 2.1: State Pay for Pertormance
(PFP) Background Information and                                                                                        Employees covered
Employee Coverage                                                    Year PFP        Total state       Employees        Managers or
                                       State                     implemented         employees          under PFP       supervisors Other
                                       Alabama                             1987            8i,379            33,000     Yes             Yes
                                       Arizona                             1973            53,228            33.000     Yes              Yes
                                       Arkansas                            1986            46,846            19,200     Yes              Yes
                                       California                          1984           366,056            27,7008    Yes              No
                                       Connecticut                         1979            65,790             2,500     Yes              No
                                       Florida                             1968           156,883            98,476     Yes              Yes-
                                       Idaho                               1979            14,400             9,366     Yes              Yes
                                       Illinois                            1978           159,839            10,944     Yes              Yes
                                                                                                                                       ___.
                                       Indiana                             1983           102,363            37,070     Yes              Yes
                                       Iowa                                1977            59,723             3,000     Yes              Yes
                                       Kentucky                            1986            74,344            35,700     Yes              Yes
                                                                                                                                        __-
                                       Maryland                            1989            96,191                400    Yesb             No
                                       Massachusetts                       1987           104.930             3,600     Yes              No
                                       Michigan                            1980           158,249                400c   Yes              Yes
                                       Minnesota                           1985            79,597                900    Yes              No
                                       Mississippi                         1985            50,256            27,000     Yes              Yes
                                       Nebraska                            1987            34,724            14,500     Yes              Yes
                                       New York                            1981           304,628            14,000     Yes              No
                                       Oregon                              1981              59,650           l,lOOd    Yes              No
                                       South Carolina                      1970              83.040          56.853     Yes              Yes
                                       South Dakota                        1986              15,995           9,000     Yes              Yes
                                       lJtah                               1969              34,531          13,631     Yes              Yes
                                       Wisconsin                           1969              88,208           9,275     Yes              Yes
                                       %r 1984, California established a performance-based    bonus system for 2,700 managers. In 1987, a sim-
                                       ilar bonus system was added for 25,000 supervisors.
                                       bMaryland’s pay-for-performance   system applies only to senior executives

                                       ‘In 1980, Michigan established a performance-based pay system for 400 senior executives. In 1988, the
                                       state established an incentive system for 50 pension plan investors employed by the Michigan Depart-
                                       ment of Treasury.

                                       dOregon does not have a statewide pay-for-performance     system, but it has two state departments   that
                                       use such a system.


                                       Our survey showed that the categories of employees most likely to be
                                       covered were managers, supervisors, professionals, technicals, and cleri-
                                       cals. The employee groups most often not covered by pay for perform-
                                       ance generally included educators, hourly workers, elected officials, and
                                       law enforcement personnel.




                                       Page10                                                           GAO/GGD-91-1
                                                                                                                  Payfor Performance
                          chaptl?trz
                          SW.WArelUOVillgTOWRFdpllg
                          for Perlormtunm




                          A review of the literature on performance management indicates that a
States’ Performance       major objective of a performance appraisal system is to provide a sys-
Appraisal Systems         tematic and uniform method to evaluate an employee’s job performance.
                          Additionally, a performance appraisal system should be used to

                      l help employees understand their responsibilities and their relationship
                        to organizational goals;
                      . advise employees of the level of performance expected of them;
                      l provide periodic feedback to employees on how well they are meeting
                        expectations and coach them in improving performance;
                      l help employees set career goals;
                      . provide a basis for personnel actions, such as training, promotions, and
                        pay; ami
                      . recognize and help to deal with performance problems,

                          Employee performance appraisal systems were utilized within all 23 of
                          the state governments that reported having a pay-for-performance
                          system. Many of the above employee evaluation system objectives were
                          typically cited in information we obtained that described the perform-
                          ance appraisal systems in place.

                          All but two of the reporting states required the establishment of per-
                          formance standards to measure employees’ actual job experience. We
                          found that in many of the reporting states, work standards for an
                          employee were jointly developed by the employee and the supervisor
                          and formally agreed upon. For example, in Arizona, the evaluation por-
                          tion of the pay-for-performance system -the Employee Performance
                          Appraisal System (EPAs)-consisted of performance factors, each of
                          which is weighted according to its degree of importance to the job. Prior
                          to the performance appraisal period, the rater and the employee jointly
                          selected performance factors applicable to the work being performed.
                          The rater, with input from the employee, then determined the weight of
                          each performance factor, and this was formally recorded on employee
                          performance documentation forms. The performance factors included
                          the knowledge, skills, and abilities required to complete employee tasks
                          and included such factors as work habits, policy and procedures, inter-
                          personal relationships, and communications skills.

                          With one exception, all the reporting states indicated that they annually
                          conducted employee performance appraisal reviews. Also, we found
                          that most states used a fixed date, either the anniversary date of a
                          person’s employment or an evaluation date for all employees, for con-
                          ducting the annual performance evaluation. Table 2.2 summarizes some


                          Page 17                                      GAO/GGDSl-1   Pay for Perfommnce
                                                  /                                                                           ,

                                   cllaplmr 2
                                   &at.aeAreMovingTowardPay
                                   for Performance




                                   of the major components of the 23 state performance appraisal systems
                                   we surveyed. More details on the particular components of the appraisal
                                   systems for the six pay-for-performance states we visited are included
                                   in appendix III.

Table 2.2: Components of States’
Performance Appraisal Systems                                    Standard-                                                           Interim
                                                                 setting                        Ratings                              ratings
                                   state                         required             Frequency      Date’                           requiredb
                                   Alabama                       Yes                  Annual            Anniversarv                  No
                                   Arizona                       Yes                  Annual            Fixed                        Yes
                                   Arkansas
                                   --                            Yes                  Annual            Anniversary                  No
                                   California                    Yes                  Annual            Fixed                        Yes
                                   Connecticut                   Yes                  Annual            Fixed                        Yes
                                   Florida                       Yes                  Annual            Anniversary                  No
                                   k%ho                          NoC                  Annual            Fixed                        No
                                   Illinois                      NoC                  Annual            Anniversary                  No
                                   Indiana                       Yes                  Annual            Anniversary                  No
                                   Iowa                          Yes                  Annual            Anniversary                  No    __
                                   Kentucky                      Yes                  Annual            Fixed                        Yes
                                   Maryland                      Yes                  Annual            Fixed                        No
                                   Massachusetts                 Yes                  Annual            Fixed                        Yes
                                   Michiaan                      Yes                  Annual            Fixed                        Yes
                                   Minnesota                     Yes                  Annual            Fixed                        No
                                   Mississippi                   Yes                  Annual            Anniversary                  Yes
                                   Nebraska                      Yes                  Annual            Fixed                        No
                                   New York                      Yes                  Annual             Fixed                       Yes
                                   Oregon                        Yes                  Annual             Fixed                       No
                                   S.Carolina                    Yes                  Annual             Anniversary                 No
                                   z Dakota                      Yes                  Semiannual         Fixed                       No
                                   Utah
                                   --                            Yes                  Annual             Fixed                       No --
                                   Wisconsin                     Yes                  Annual             Fixed                       No
                                   aA fixed date rating period means all employees are rated at the same time during the year. This differs
                                   from rating periods, which are usually based upon some employee anniversary date, such as date of
                                   last promotion or employment start date.
                                   bin many of the states, interim ratings are required for new employees hired for a probationary     period

                                   CThese two state employee performance appraisal systems require ratings based on employees’
                                   accomplishments toward preestablished work objectives rather than performance standards.




                                   Page 18                                                           GAO/GGDsl-1       Pay for Performance
                             chapter 2
                             StateaAre Mom TowardPay
                             for Performance




States Primarily Use a       Because one of the PMW reform proposals being considered during 1989
Five-Tier Rating Appraisal   by Congress involved the implementation of a two-tier rating system
                             instead of the five-tier system that was being used, we inquired as to the
System                       number of rating levels that were being used by the states.

                             We found that 12 of the 23 surveyed states used a five-tier rating
                             system. The next most favored system was three rating levels, with 7 of
                             the 23 states favoring such a system. Of the remaining four states, two
                             used four rating levels, one used six rating levels, and one used an eight
                             rating level system. None of the surveyed states employed a two-tier
                             rating system.

                             In commenting on a two-tier rating system, one state personnel official
                             told us that while it might be difficult at times to draw distinctions
                             among performance levels under a five-tier system, the simple “pass or
                             fail” rating provided for under a two-tier system does not contain suffi-
                             cient information on the level of employee performance. Also, the offi-
                             cial indicated that, in all likelihood, few employees would be rated
                             “unsatisfactory”; thus, the two-tier rating system would, in effect, make
                             no distinctions at all.

                             The results of a 1989 performance management survey of over 3,000
                             U.S. private and public organizations by the Wyatt Company-a private
                             personnel management consulting firm-also showed that a five-tier
                             rating system is the one that is most prevalently used. Wyatt reported
                             that 67 percent of the organizations it surveyed used five performance
                             rating levels within the organizations’ performance management
                             systems.

                             In reporting this information, the Wyatt Company also stated that there
                             were some problems and challenges associated with using any number
                             of performance levels effectively. It said that the levels must be clearly
                             defined and that the ratings process must be carefully monitored to
                             ensure that ratings are not interpreted and granted inconsistently.


                             Of the 23 states we surveyed, all contained a payout system for per-
State Performance            formance awards in which the amount of pay awarded to an employee
Award Payout Process         varied depending on the employee’s performance. The basis for these
                             award payouts varied among the responding states. Most of the 23
              Y              states directly linked the performance award amount to the employee’s
                             performance rating. Some states provided a mechanism to accelerate
                             new employees’ wages toward the market rate by providing a shorter


                             Page19                                        GAO/GGDOl-1   Pay for Performance
                                        cbaptm 2
                                        States Are Moving Toward     Pay
                                        for Perfommnce




                                        performance evaluation period, such as 6 months, for new employees as
                                        opposed to a l-year period for senior employees. Also, a number of
                                        states applied a matrix payout system when an employee’s pay position
                                        within a particular pay range and performance level together deter-
                                        mined the amount of the performance award. For example, in Idaho, an
                                        employee at the lower end of the pay range was eligible for a larger
                                        percentage increase in base pay than an employee at the higher end of
                                        the pay range, even though both employees may have demonstrated
                                        equally commendable performance.

                                        PMRS  rewards its employees by using a combination of base pay
                                        increases and bonus performance awards. Table 2.3 summarizes the
                                        various pay-for-performance award combinations used by the 23 states
                                        we surveyed.

Table 2.3: Types of State Performance
Awards                                                                                                                               Number
                                        Type of performance award                                                                   of states
                                        Base oav and bonus
                                                I   1
                                                                                                                                              5
                                        Base oav onlv                                                                                         10
                                        Base pay with bonuses paid to employees at pay range maximum                                          40
                                        Bonus only                                                                                            4
                                        Total                                                                                                23
                                        aOne of these states also pays bonuses for the portion of any award that exceeds 3.5 percent of an
                                        employee’s base salary.

                                        As pointed out in table 2.3, four states exclusively used a one-time lump-
                                        sum bonus under their performance award payout process. A state per-
                                        sonnel official from one of the four states told us that the general ratio-
                                        nale for the lump-sum option was the belief that a base salary increment
                                        could long outlive the performance that triggered it, and that work and
                                        performance are time-bound. The official said that conceptually, true
                                        pay for performance should be given in the form of lump-sum bonuses
                                        separate from salary and tied into a specific time period of performance.
                                        The official also pointed out that granting performance awards in the
                                        form of bonuses would be less costly to the state government than the
                                        alternative of increasing the base salary.

                                        Table 2.4 summarizes the available information on the payout processes
                                        used by the reporting states.




                                        Page 20                                                        GAO/GGDol-1      Pay for Performance
                                       Chapter 2
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Table 2.4: Component8 of Statea’ Pay
For-Performance Sydems                                            Award type and range
                                       State                     Base pay         Bonus              Comments
                                       Alabama                  O-IO%                   None
                                       Arizona                                                       Bonuses for those at pay range
                                                                O-7.5%                 2.5-5%        maximum.
                                       Arkansas                 2.5-5.5%                none
                                       California                                                    Panel sometimes used for award
                                                                 none                                decision.
                                       Connecticut                                                   Bonuses are given to managers at
                                                                                                     pay range maximum and those who
                                                                O-3.5%                 3.5-8%        receive awards above 35%.
                                       Florida                                                       Bonuses for those at pay range
                                                                3-5%                     3-5%        maximum.
                                       Idaho                    O-10%              o-$1,000
                                       Illinois                 O-8%                    none
                                       Indiana                  O-4%                    none
                                       Iowa                     O-IO%
                                       Kentucky                                                      No funds have ever been
                                                                                                     appropriated by state legislature for
                                                                 none                  O-$50         performance awards.
                                       Marvland                 O-6%                     none        Panel is used for award decision,
                                       Massachusetts                                                 Bonuses are limited to 15 percent of
                                                                 none                  53,000        eliaible manaaers.
                                       Michigan                                                      Bonus based, in part, on group
                                                                4-7%                     none        performance.
                                       Minnesota                O-5%                     none
                                       Mississippi                                                   Legislature has not funded pay for
                                                                O-3%                     none        performance since 1986.
                                       Nebraska                 O-7.5%                 O-7.5%
                                       New York                                                      Bonuses only available for those at
                                                                 O-33%8          $400-3,000          pay range maximum.
                                       Oregon
                                       __I-                      O-IO%                   none
                                       South Carolina            O-3%                    none
                                       South Dakota              none                     1.75%      Bonuses are capped at $500.
                                       Utah                      O-6%              O-$2,000
                                       Wisconsin                 2-10%           $100-1 .ooo
                                       aNew York’s base salary award is not a percentage of base pay. It is a percentage of the salary range
                                       amount for a particular salary grade. For FY 1988, the maximum amount that could be earned was
                                       $5,500.

                                       Using information from state personnel officials and state funding docu-
                                       mentation we received, we determined that the pay-setting process for
                                       these 23 states typically involved 4 separate state organizations-the
                                       state personnel department or agency, the state budget office, the state
                                       governor’s office, and the state legislature.



                                       Page 21                                                         GAO/GGD91-1      Pay for Performance
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                        chapter 2
                        States Are Moving   Toward   Pay
                        for Perfommnce




                        Although generally limited, funding information we gathered from the
States’ Pay-For-        states shows some variance as to whether and at what amounts states
Performance Funding     were funding their pay-for-performance systems. For example, for the
Levels Varied           three l-year performance award periods from fiscal years 1987 through
                        1989,7 of the 23 states did not spend any money for one or more of
                        those periods on their pay-for-performance systems1 Further, one state
                        had never spent any money for its pay-for-performance system even
                        though the system had been established by legislation passed in 1986. In
                        addition, during the same 3-year period, 19 of the 23 states, including 4
                        of the 6 states we visited, spent some funds for general salary increases
                        (cost of living increases) in addition to the pay-for- performance awards.
                        These general salary increases generally ranged between 3 and 5 percent
                        of an employee’s base salary.

                        We also found that the amount of employees’ performance awards
                        varied among the responding states. Although the funding information
                        we gathered on state performance award payouts was limited, we identi-
                        fied some data on the range of performance award amounts granted to
                        state employees. We found that the average annual performance award
                        amount for the eight states from which we were able to obtain data
                        ranged from a low of about $400 to a high of $2,831 per employee. The
                        available state information we received on overall state funding levels
                        and average performance award amounts is summarized and included in
                        appendix IV. According to an OPMofficial, for fiscal year 1988, the latest
                        year for which data was available, the average performance award
                        amount under the federal PMRSprogram was $1,149.

                        Data on the number of state employees receiving performance awards
                        were generally not available. However, for one state we found that
                        about 72 percent of eligible employees received an average performance
                        award of $1,200, which represented about a 2.6 percent increase in
                        average salary base.


                        In our prior work on PMRS, we reported a concern that management pres-
Ratings Distributions   sure and quotas were influencing performance ratings and awards. For
                        the six states we visited, we asked management and employees about
                        the use of forced ratings distributions for employees. State personnel


                        ‘Different states funded their pay-for-performance systems in different ways. Some established pay-
                        for-performance budgets that were considered and approved by the state’s legislature. In other states,
                        no separate budget was set aside for their pay-for-performance systems, and costs have to be
                        absorbed through vacancies and savings from other operations.



                        Page 22                                                       GAO/GGDBl-1      Pay for Performance
                       chaptm 2
                       Stata Are Moving   Toward   Pay
                       for Performance




                       officials we spoke with said their state personnel agencies did not pre-
                       scribe rating distributions but acknowledged that a number of factors,
                       including budgetary constraints and the desire to give substantial per-
                       formance awards for quality performance, exerted influence on ratings
                       distributions. The officials generally viewed the issue of forced ratings
                       distributions as a basic dilemma associated with having to distribute
                       among employees a finite amount of money in amounts significant
                       enough to reward exceptional performance without damaging the
                       morale of those who did not receive such awards. They indicated that
                       these issues were often considered to be part of the individual state
                       agency’s responsibility for managing its performance award budget.

                       We identified two examples that demonstrate how states were handling
                       this issue. First, in Illinois, in order to assure equity in performance
                       awards among state agencies, an average performance award increase
                       guideline was established by the state personnel agency (see app. III, p.
                       38). Under this guideline, base salary increase ranges were set for each
                       performance rating category. Each state agency was required to control
                       its performance award increases during the year to assure that the
                       guideline was being followed. Similarly, in New York, the state per-
                       sonnel agency instituted a requirement that state agencies pay perform-
                       ance increases to no more than 40 percent of the eligible employees.


                       In general, 63 of the 75 state employees we interviewed believed that
State Employees’       although pay for performance was a means for rewarding exceptional
Views of Pay for       employees, inadequate or inconsistent state funding sometimes hindered
Performance            or undermined the system’s goals. For example, Mississippi did not
                       appropriate funds to award performance increases for fiscal years 1987
                       through 1990. A fiscal year 1989 Mississippi state legislative report
                       cited the negative impact experienced by state agencies due to this lack
                       of funding. Some of the reported results were as follows:

                   l Performance appraisal systems lost their effectiveness when funding
                     was not provided. Employee morale and incentive to excel suffered.
                   . Pay for performance must be funded every year or the state will not be
                     competitive in attracting and retaining highly qualified technicians,
                     medical personnel, and other professionals.

                       Also, some state employees we interviewed said that, at times, perform-
                       ance increases were perceived to be too small to be an incentive for
                       improved performance. For example, a manager from one state told us
                       that she had difficulty motivating her supervisory employees when, due


                       Page 23                                       GAO/GGD-91-l   Pay for Performance
              Chapter 2
              States Are Moving   Toward   Pay
              for Performance




              to tight state budgets, employees could at best receive a 4-percent
              increase in salary. She pointed out that, at the same time, unionized
              state employees were receiving an 8 percent salary increase.


              The current experience in state government compensation practices sug-
Conclusions   gests a trend toward the adoption of pay-for-performance-based com-
              pensation systems. Since 1980, 14 states have adopted such systems and
              another 3 states are in the process of designing or implementing a pay-
              for-performance system for their employees. This represents a change
              from the more traditional step-based pay plans that based employee
              advancement primarily upon longevity of service.

              Some state pay-for-performance systems we reviewed were operated
              differently from the federal PMRS.For example, under PMRS,employees
              who are at or near the maximum rate of their salary range cannot
              receive a merit increase that would cause their salaries to exceed the
              maximum rate for their grade; but we identified four state pay-for-per-
              formance systems that have compensated for this situation by allowing
              employees at the top end of their pay range to instead receive a lump-
              sum bonus.

              Just as at the federal level, however, there was no clear consensus
              among our surveyed states as to what constitutes an ideal pay-for-per-
              formance system. States varied in the number of performance levels
              they used to assess employee performance and the percentage of the
              work force they covered by state pay-for-performance systems. Further,
              some of the problems reported about PMRSwere also concerns at the
              state level. For example, most state employees we interviewed believed
              that although pay for performance was a means of rewarding excep-
              tional employees’ performance, overall weaknesses, such as inadequate
              or inconsistent state funding, sometimes hindered or undermined the
              system’s goals. Also some employees we interviewed told us that per-
              formance increases were sometimes perceived to be too small to be an
              incentive for improving performance.




              Page 24                                       GAO/GGD-91-1   Pay for Performance
Chapter 3

Pay for Performancein Other Countries


                                           A 1988 report on public sector pay by the Organization for Economic
                                           Cooperation and Development (OECD)indicated that other countries are
                                           moving toward pay-for-performance systems as part of a more general
                                           movement towards flexible pay structures in the public service.
                                           Although Canada and the United States were the first countries to intro-
                                           duce performance related pay for public servants, several other coun-
                                           tries have recently implemented, pilot tested, or planned a pay-for-
                                           performance system. Table 3.1 lists 13 countries OECDidentified as
                                           either having or proposing a pay-for-performance system.

Table 3.1: 13 Countries That Either Have
or Are Plannlng a Pay-For-Performance      Country           Current or proposed system
System                                     Australia         Performance-related pay system for senior executive service and
                                                             middle management grades.
                                           Canada            Performance-related pay ranges for senior civil servants.
                                                             Performance bonus for senior civil servants.
                                           Denmark           Flexible fixino of salaries in central administration aoencies.
                                           Finland           Experimental system for performance-related pay in the Customs
                                                             Department, the State Computer Center, and the Department of
                                                             Roads and Waterwavs.
                                           France            Performance bonuses for civil servants.
                                           Ireland           Performance-related pay ranges for senior civil servants.
                                           Italy             Experimental productivity bonus in the Ministry of Defence and the
                                                             Audit Office.
                                           Japan             Performance allowance for National Public Employees.
                                           The Netherlands   Flexible salary system for central civil service, including performance
                                                             bonuses.
                                           New Zealand       Performance-based pay for senior managers.
                                           Spain             New salary system for civil servants, including a productivity
                                                             complement.
                                           Sweden            Performance-based pay. increases for senior staff in state business
                                                             agencies.
                                           United Kingdom    A variety of performance-related pay components used throughout
                                                             civil service.




                                           According to OECD,most of its 24 member countries operate performance
Performance                                appraisal systems of some type in the public service. These countries
Appraisal                                  use performance appraisal systems for a variety of reasons. Most are
                                           designed to improve communication and performance; however, a few
                                           are also designed to directly link pay to performance. In general,
                                           according to the OECDreport, while there are variations in approaches to
                                           appraisal, the primary emphasis is on employee accountability, perform-
                                           ance review, and improving performance in the current job, as opposed
                                           to assessing potential or promotability. Appraisal is becoming integrated


                                           Page 26                                               GAO/GGD-91-1    Pay for Performance
                                                                                                         I
                      Chapter 3
                      Pay for Performance   in Other Countries




                      with other aspects of performance management, particularly the setting
                      of work goals and standards, linking individual targets to organizational
                      goals, and measures for performance improvement.

                      Some OECDmember countries, require that staff be assessed annually in
                      writing, although in other countries appraisal is less formal or is con-
                      ducted at longer intervals. In a few countries there is no provision for
                      some form of regular appraisal. The direction in which appraisal sys-
                      tems are moving in OECDcountries is expressed in the following excerpt
                      from an 0EcD report:

                      “The increasing concern with accountability and achievement of results has led to a
                      major emphasis on the use of appraisal to improve performance in the current job,
                      and this is considered to be the main purpose of an increasing number of systems.
                      This trend is reflected in the use of appraisal systems to set individual performance
                      objectives, and to evaluate achievements in relation to these objectives, There has
                      been a corresponding shift away from appraisal criteria based on character traits,
                      such as judgment, determination, and initiative, to criteria designed to reflect job
                      content and results achieved.”



Pay-For-Performance   employees covered and in the appraisal and payout components of their
Systems               pay systems. Thus, it is not possible to draw precise comparisons among
                      those OECDcountries with pay-for-performance systems. In this section,
                      we have presented a few common pay-for-performance features and, for
                      Canada and the United Kingdom, provided separate, more detailed
                      descriptions of their systems. These two countries were selected due to
                      the availability of information describing their systems. Canada intro-
                      duced its pay-for-performance system in the 1960s whereas the United
                      Kingdom introduced its system in 1985.

                      According to OECD, pay-for-performance systems often exclude the
                      highest positions in the public service and political appointees because
                      of the difficulty of finding an appropriate person to assess performance
                      for these positions. Also, the systems apply primarily to managerial
                      staff, particularly senior managers, although in several countries cov-
                      erage extends down to lower levels. Another pay-for-performance fea-
                      ture found among member countries is the use of lump-sum bonuses as a
                      type of performance-linked pay award. They are normally awarded once
                      a year and have to be re-earned each year. Bonuses may be expressed as
                      a percentage of basic salary or a cash amount. The size of bonuses
                      varies widely between systems, as does the method of selecting
                      employees for awards.


                      Page 26                                              GAO/GGD-91-1   Pay for Performance
                       Chapter 3
                       Pay for Performance   in Other Countries




                       A review of the OECDreport indicates that member countries’ perform-
                       ance appraisal systems are subject to the same types of problems associ-
                       ated with PMns-insufficient performance standards, rating subjectivity,
                       rating inflation, and a high administrative burden. For example, in the
                       United Kingdom, a 1985 evaluation of the performance bonus system
                       identified employee dissatisfaction with the system due to a lack of
                       clarity in the system’s criteria and procedures for distributing perform-
                       ance awards. Feelings of inequity were generated by the fact that the
                       number and size of bonuses varied considerably from one department to
                       another, and there was a perception that employees in more visible posi-
                       tions were more likely to get bonuses. The imposition of a ZO-percent
                       quota on the proportion of staff who could qualify for bonuses led to a
                       widespread attitude that the bonuses were not worth competing for
                       since only a small proportion could receive them.

                       The more recent performance-related pay systems, such as those used in
                       the United Kingdom and Denmark, have sought to overcome these
                       problems by linking rewards to performance appraisal outcomes, aban-
                       doning explicit quotas, and providing for more significant rewards.
                       However, inadequate funding has hindered the operation of several pay-
                       for-performance systems.


The United Kingdom’s   The United Kingdom is progressively extending pay for performance
Pay-For-Performance    throughout its public service after having piloted a pay-for-performance
                       system for senior managers in 1985. After an internal evaluation of the
System                 pilot program in 1987, the system was revised and pay for performance
                       has been gradually expanded to include other groups of employees.
                       According to OECD,as of April 1990, virtually all nonindustrial civil ser-
                       vants are covered. Pay for performance has also spread in other areas
                       of the public sector, including the National Health Service, public utili-
                       ties, and local government.

                       The United Kingdom’s system provides for step increases based on satis-
                       factory performance and additional step increases for outstanding per-
                       formance. In the United Kingdom system, employee performance is
                       assessed annually using a five-level performance rating system. The five
                       levels are outstanding, significantly above requirements, fully meets
                       normal requirements, not fully up to requirements, and unacceptable.
                       The appraisal system requires supervisors and employees to establish
                       work objectives and performance standards upon which performance is
                       rated.



                       Page 27                                       GAO/GGD-91-l   Pay for Performance
                     Chapter 3
                     Pay for Performance   in Other Countries




                     The collective bargaining agreement establishes pay scales, divided into
                     steps, for each covered pay grade. Each scale has a pay maximum but
                     also has at least four steps above the maximum. These four steps are
                     used to reward outstanding performers who have reached the normal
                     pay maximum. Employees below the range maximum who receive an
                     outstanding performance rating may receive an extra step increase.
                     Employees at or above the pay range maximum are eligible for a step
                     increase after one outstanding rating, three consecutive significantly
                     above requirements ratings, or five consecutive fully meets normal
                     requirements ratings. Also, there is a limit (generally 25 percent) on the
                     number of staff that can receive step increases at any one time.


Canada’s Pay-For-    Canada has had some type of pay for performance since the 1960s. It
Performance System   instituted a bonus program, in addition to existing performance-linked
                     base salary increases, for senior managers in 1981, but the bonus system
                     was not funded until 1985. In 1988, the system covered 4,537 man-
                     agers-about 2 percent of total employees in the Canadian federal
                     public service. The Treasury Board of Canada is the central agency with
                     oversight responsibility for the pay-for-performance system. Perform-
                     ance appraisals are required annually at most government agencies.
                     Employee performance is assessed using a five-level performance rating
                     scale: outstanding, superior, fully satisfactory, satisfactory, and unsatis-
                     factory. No more than 30 percent of employees can receive the top two
                     ratings (outstanding and superior).

                     The Canadian appraisal system provides for both assessment of objec-
                     tives achieved and a brief assessment of the employee’s qualifications,
                     including professional or technical competence, knowledge, skills and
                     abilities, and responsiveness to the needs of other employees and of the
                     public. Managers are appraised against a broad range of criteria relating
                     to factors such as management of staff and other resources, communica-
                     tion with staff and the public, policy formulation, and negotiating
                     ability. Individual agencies establish a set of performance elements
                     under which supervisors and employees set work objectives and per-
                     formance standards.

                     The Canadian pay-for-performance system for managerial employees
                     was suspended for several years due to lack of funding, and even when
                     it did operate, the rewards paid were often small. Since 1985, however,
                     the system has been altered and funds have been made available for it
                     to operate as intended.



                     Page 28                                        GAO/GGD-91-l   Pay for Performance
                                            Chapter 3
                                            Pay fer Performance   in Other Countries




                                            There are no automatic pay increments under the Canadian pay-for-per-
                                            formance system. Salary increases for a given individual are determined
                                            solely on the basis of merit, Employees who are below the pay range
                                            maximum and who receive performance ratings at the fully satisfactory
                                            level and above can receive base salary increases of 0 to 10 percent.
                                            Performance award increase amounts vary by rating level as indicated
                                            in table 3.2.

Table 3.2: Canadian Performance Award
Increases by Rating Level                   Rating level                               Increase as a percent of base salary
                                            Outstandina                                                               7 to 10%
                                            Superior                                                                    5 to 7
                                            Fully satisfactory                                                          3 to 5
                                            Less than fullv satisfactorv                                                       0


                                            Canada’s pay-for-performance system also provides performance
                                            awards in the form of bonuses for staff who have reached the top of
                                            their salary scale. Employees who are at their salary range maximums
                                            and have performance ratings of fully satisfactory or above are eligible
                                            for performance bonuses of up to 10 percent. Individual bonus amounts
                                            are governed by the following guidelines:

                                        l Those who receive a rating of outstanding are eligible for a bonus of up
                                          to 10 percent of their base salary.
                                        . Those who receive a rating of superior are eligible for a bonus of up to 7
                                          percent of their base salary.
                                        l Those who receive a rating of fully satisfactory are eligible for a bonus
                                          of up to 5 percent of their base salary.

                                            The Canadian pay-for-performance system controls the allocation of
                                            employee performance awards (base pay and bonus awards) through
                                            the use of quotas for the distribution of ratings. The number of
                                            employees assessed as “outstanding” should not exceed 5 percent of an
                                            agency’s staff in any one year, and the number rated “superior” should
                                            not exceed 25 percent. Also, it is expected that approximately 65 per-
                                            cent of the staff will be rated as fully satisfactory and may be eligible
                                            for base pay increases of 3 to 5 percent of base pay.


Conclusions                                 are testing pay for performance concepts on an experimental basis.
                                            These countries are moving toward pay for performance as part of a



                                            Page 29                                        GAO/GGD91-1   Pay for Performance
Chapter 3
Pay for Performance   in Other C4mntries




more general movement towards flexible pay structures in the public
service.

Much like our analysis of the states’ systems, our analysis of other coun-
tries shows that OECDcountries’ pay-for-performance systems also vary
in the groups of employees covered and in the appraisal and payout
components of their pay systems. Further, these countries’ pay-for-per-
formance systems are subject to the same types of problems associated
with the federal PMRS-such as insufficient performance standards and
inadequate funding of performance awards for employees. Despite these
problem areas, performance-based pay overseas represents a new way
for many countries to attempt to motivate staff and make them more
accountable for achieving results.




Page 30                                       GAO/GGD91-1   Pay for Performance
Page 31   GAO/GGDOl-1   Pay for Performance
4
                                                                                                                  ,
      Appendix I

    I Letter Sent to State PersonnelAgencies                                                                               ’



                   GAO     United States
                           General Accounting
                           Washington.
                                                 OPflce
                                         D.C. 20548

                           General    Government   Division




                          August        16,    1989




                          Dear
                          The U.S. General        Accounting        Office,      an evaluation      arm of
                          the Congress,        is studying       performance        management     systems.
                          We are particularly          interested        in pay-for-performance
                          system5 --frequently        called      merit     pay systems--that         are
                          designed    to reward      and motivate          outstanding      employees.

                          During     our most recent      studies     of the federal      government's
                          pay-for-performance        system     for managers      and supervisors,                    we
                          found that       the system was not functioning            as well   as
                          intended.        As part of our search        for solutions,       we are
                          gathering      information    on how various       state    governments'
                          pay-for-performance        systems      are designed     and operated.
                          We would appreciate           your help in this      effort.          We ask that
                          you write       to tell     us whether   your state      operates        a pay-for-
                          performance        system.      If your state   does operate            a pay-for-
                          performance        system,    we would like    a brief       explanation         of
                          the system       and copies       of any documents     that      explain      the
                          specific      feature5     of your performance       management          system as
                          well     as any studies       made of it in recent        years.         To assist
                          us in another         area of our work, we would also               like    a
                          description        of the procedures      your state      uses to identify
                          poor performers          and to help them improve          their      performance.
                          If your state     does have a pay-for-performance           system,  we
                          would appreciate      having  the name of a person        to contact    for
                          more information.        Among other    things,  we would be
                          interested    in discussing     the following    questions:
                                 --      When was it          started        and what   number   and categories
                                         of employees           does    it    cover?
                                 --      Who is responsible        for preparing  and reviewing
                                         performance   appraisals,       how many rating   levels                 does
                                         the appraisal     system have, and what adjectives                       are
                                         used to describe       these levels?




                         Page   32                                                         GAO/GGDI)I-1   Pay   for Performance
     Appendix I
     Letter Sent to State Personnel   Agencies




      --     what    is the process         used to determine      who gets
             awards,    bonuses,      and    base pay increases--for
             example,     supervisory        judgment,   automatic    payout
             based on ratings,         or    judgments   of a “review
             panel”?      If a review        panel   is used, how is it
             comprised?
      --     what is the structure       of awards,    bonuses, and base
             pay increases,    including      the minimum and maximum
             dollar   amounts and/or     percentage    of base pay
             provided    for under law or regulations?
      --     For the most recent        year for which data are
             available,    how many and what percentage          of
             eligible    employees    received   bonuses,    awards,   and
             base pay increases,        and what were the range       and
             average    amounts    in dollars   and percentages      of base
             pay?
      --     What are employees’    perceptions     on the extent     to
             which the system effectively       rewards   and motivates
             them, and whether   they view the system as fair?

We would      appreciate    receiving         your     response   as soon   as
possible.        The return    address        is:

Bernard     L. Ungar
Director,     Federal   Human Resource               Management   Issues
Room 3858A
U.S. General      Accounting  Off ice
441 G Street,      NW
Washington,     DC 20548.

If you have any questions,     please   contact     Deborah Parker or
Norman Stubenhofer    on (202) 215-6557.        Thank you for your
time and contribution    to our effort.

Sincerely,



Bernard   L. Ungar
Dir% tar,     Federal    Human Resource
   Management     Issues




      Page 33                                                      GAO/GGD-91-l   Pay for Performance
Appendix II

Respondentsto Our Letter


                1. Alabama
                2. Arizona
                3. Arkansas
                4. California
                6. Colorado
                6. Connecticut
                7. Delaware
                8. District of Columbia
                9. Georgia
               10. Guam
               11. Hawaii
               12. Idaho
               13. Illinois
               14. Indiana
               16. Iowa
               16. Kansas
               17. Kentucky
               18. Louisiana
               19. Maine
               20. Maryland
               2 1. Massachusetts
               22. Michigan
               23. Minnesota
               24. Mississippi
               25. Missouri
               26. Montana
               27. Nebraska
               28. Nevada
               29. New Mexico
               30. New York
               3 1. North Carolina
               32. North Dakota
               33. Ohio
               34. Oklahoma
               35. Oregon
               36. Pennsylvania
               37. Rhode Island
                38. South Dakota
                39. Utah
                40. Virginia
                4 1. Washington
                42. West Virginia



               Page 34                    GAO/GGD91-1   Pay for Performance
Appendix II
Respondents   to Oar Letter




43. Wisconsin
44. Wyoming




Page 35                       GAO/GGD91-1   Pay for Performance
ADDendix III

Additional Information on State Pay-For-
PerformanceSystems

                        To further develop our information on state experiences with pay for
                        performance, we visited 6 of the 23 states that reported having a pay-
                        for-performance system. These states were Arizona, Florida, Idaho, Illi-
                        nois, South Carolina, and Utah. The following information summarizes
                        by state the type of pay-for-performance systems in use, the available
                        statistical information on the systems, and state employees’ views on
                        how the systems are operating.


                        Arizona first implemented its pay-for-performance system in January
Arizona                 1986. The system, entitled “Performance-Oriented Pay System” (pops),
                        replaced a standard governmental pay and merit system for state
                        employees. The new pay system recognized and rewarded employees for
                        performance rather than longevity of service. Under pops, employees are
                        awarded salary increases ranging from 1.2 percent to 7.5 percent of
                        their base salary. In addition, agencies can grant l-year special perform-
                        ance awards to those exceptional employees at the top of their salary
                        range.

                        In order to administer the pops program, performance standards and
                        other job-related criteria were established in each agency to measure
                        employees’ performance. The appraisal component of the system was a
                        management-by-objectives process entitled the “Performance Planning
                        and Evaluation System.” According to a state personnel official, how-
                        ever, the Performance Planning and Evaluation System was dropped in
                        1987 and replaced by a simpler and more uniform rating system with an
                        automated processing capability, called the Employee Performance
                        Appraisal System (EPAS). The change occurred due to concerns that the
                        old system was too subjective and involved too much paperwork.

                        About 33,000 (62 percent) of Arizona’s employees are covered by its
                        pay-for-performance system. Generally, state legislative and judiciary,
                        university, and public safety employees are not covered by the system.
                        The Arizona Department of Administration oversees the system through
                        the development of policies and procedures that address such personnel
                        issues as awarding performance increases and annual performance
                        assessment requirements.


Performance Appraisal   Arizona’s EPAS consists of performance factors, each of which is
                        weighted according to its degree of importance to the job. Initially, 26
System      u           factors were available for use, but in 1988 the number was changed to
                        13 to simplify the process. Of the 13 possible factors, 3 are mandatory-


                        Page   36                                     GAO/GG;DI)l-1   Pay for Performance
                     Appendix III
                     AdditIonal  Information   on State Pay-For-
                     Performance    Systems




                     work habits, relationships with people, and policy and procedures. With
                     the employee, the supervisor selects the applicable performance factors
                     and weights. According to a state personnel department official, most
                     supervisors use from three to six factors.

                     A numerical rating is determined for each performance factor based on
                     the employee’s performance appraisal documentation. Each perform-
                     ance factor is rated using a rating scale that contains four categories of
                     performance, each of which is divided into two numerical scales-
                     exceeds standard (7 and S), standard (5 and 6), below standard (3 and
                     4), and unacceptable (1 and 2). A final cumulative numeric score or
                     rating is generated by computer for each employee and is the basis for a
                     performance award for the employee. Thus, the employee’s pay is
                     directly linked to the performance rating or appraisal.

~~.
Award Process        Arizona’s performance award payout process allows state agencies to
                     reward different levels of contributions by employees by providing base
                     pay increases ranging from 1.2 percent to 7.5 percent. In addition, agen-
                     cies could grant l-year special performance awards to those exceptional
                     employees at the top of their salary range. These awards are made on a
                     lump-sum basis and must be within 2.5 percent to 5.0 percent of the
                     employee’s base salary. According to an Arizona Department of Admin-
                     istration official, agencies are granted a great deal of flexibility in
                     granting performance awards. For example, the criteria for receiving
                     special performance awards can either be the same or different from the
                     criteria for regular base salary increases.


Employee Views       Overall, six of the eight employees we interviewed were satisfied with
                     the pay-for-performance system and its administration by state govern-
                     ment. They indicated that certain refinements, such as changing the
                     biannual appraisal requirement to annual, were improvements to the
                     system. Some of the employees thought that more money should be
                     appropriated for the program, that higher increases should be awarded,
                     and that subjectivity and favoritism still existed in the evaluation pro-
                     cess at times.

                 1
                     Idaho has had a pay-for-performance system since 1979. The goals and
Idaho       y        objectives of the system are to recognize different degrees of employee
                     performance with differing salary rewards and to provide such
                     increases solely on the basis of merit. However, until recently, Idaho’s


                     Page 37                                       GAO/GGDSl-1   Pay for Performance
                                                                                                 .
                        Appendix III
                        Additional InformatIon   on State Pay-For
                        Performance Syetmw




                        state legislature has not appropriated money specifically for its merit
                        program. In 1989, the state legislature appropriated a S-percent (of
                        salary budget) increase for merit pay. Employee performance awards
                        are in the form of salary increases and bonuses. Idaho has 9,366 state
                        employees (about 65 percent of the state work force) covered by the
                        state merit pay system.

                        The Idaho Personnel Commission has overall responsibility for over-
                        seeing the state merit pay system. However, each state department
                        establishes its own procedures for merit pay administration within the
                        general principles set forth by the Commission. Most state agencies
                        within the Idaho pay-for-performance system use a five-level rating
                        system for employee performance evaluations. The five levels are supe-
                        rior, very good, satisfactory, needs improvement, and unsatisfactory.
                        Employees are evaluated once a year on their anniversary date, and
                        there are no required interim reviews.


Performance Appraisal   Idaho personnel law specifies that an employee’s immediate supervisor
System                  is responsible for preparing the employee’s performance evaluation. The
                        performance evaluation process is individually structured by each state
                        department or agency. The Personnel Commission makes available a
                        standard appraisal form for this purpose; however, departments may
                        revise or use their own appraisal forms. According to Idaho Personnel
                        Commission officials, each department has sufficient flexibility for
                        designing its performance appraisal process. For example, some state
                        agencies use four rating levels rather than the five levels suggested by
                        the Commission.


Performance Award       The Idaho State Legislature is the funding source for pay-for-perform-
Payout Process          ante money. The funding for performance-based salary increases, which
                        has to be appropriated each year by the legislature, was not provided
                        until 1989. In that year, the State Legislature appropriated about $19
                        million for merit increases to be awarded, in increments of 2.5 percent,
                        to employees rated satisfactory or above. Also, employees at their
                        salary maximum are eligible to receive a bonus award of up to $1,000
                        per year.

                        Different state agencies implemented the performance award process in
                        different ways in 1989. Some chose to award all eligible employees a 5
                        percent merit increase in order to make awards to as many employees as
                        possible. Other agencies, such as the Idaho Personnel Commission, chose


                        Page 38                                      GAO/GGD-91-l   Pay for Performance
      .
                                        Appendix IJI
                                        AddMonal    Information  on State Pay-Fop
                                        Performance    Synte1118




                                        to make merit awards based on a combination of performance appraisals
                                        and employee position within the step pay range. (See table III. 1.)

Table 111.1:Award8 a8 a Percentego of
Baee Pay in Idaho, Fircal Year 1989                                                             Pay Steps
                                        Ratins                                       A to c        D to H           I to M
                                        Superior                                       10.0%          7.5%             5.0%
                                        Very Good                                       7.5           5.0              2.5
                                        Satisfactorv                                    5.0           2.5%             2.5%


                                        The state personnel director estimated that for fiscal year 1989 about 72
                                        percent of eligible employees received merit increases. The average
                                        annual performance-based pay award was about $1,000, representing
                                        about a 2.6 percent increase. No information was available for the
                                        amount spent on bonuses.


Employee Views                          Nine of 12 state employees we interviewed thought that the overall
                                        strength of Idaho’s pay-for-performance system was that it offered a
                                        means for rewarding exceptional performers. However, the employees
                                        also thought that merit pay funding levels were either inadequate or
                                        inconsistently provided.


                                        Illinois’ pay-for-performance system-the Merit Compensation
Illinois                                System-has been in operation since 1978. The system covers approxi-
                                        mately 11,000 employees in professional, supervisory, or managerial
                                        positions not subject to collective bargaining. It features an annual per-
                                        formance evaluation that requires managers to give an overall rating
                                        based on attainment of pre-established objectives. Employees’ anniver-
                                        sary dates are used as the basis for timing the appraisal process and
                                        annual performance increases. Illinois uses four rating levels under the
                                        performance appraisal portion of its pay-for-performance system.

                                        The Illinois Department of Central Management Services oversees the
                                        Merit Compensation System and, each year, issues a merit compensation
                                        plan to be followed by participating agencies. Under this plan, perform-
                                        ance awards or base salary increases vary in amount, depending on the
                                        employees’ level of performance and position in the state salary range.
                                        To assure equity among state agencies, an average salary increase




                                        Page 39                                        GAO/GGBSl-1   Pay for Performance
                                                                                                                                   -F




                        Appendix Ill
                        Additional  Information   on State Pay-Fop
                        Performance    Systems




                        guideline is assigned to each agency. Each agency must control its per-
                        formance awards during the year to assure that the guideline is
                        followed.

                        The Illinois Department of Central Management Services suggests that
                        performance plans be updated quarterly but does not require formal
                        interim ratings. In general, implementation of the performance appraisal
                        system is decentralized to the state agencies and departments. Although
                        the state personnel department does not prescribe rating distributions, a
                        personnel official told us that some state agencies have told raters not to
                        give superior performance ratings because of budget constraints.


Performance Appraisal   Illinois used a management-by-objectives performance appraisal system
                        with four rating levels- significantly surpasses, fully accomplishes,
System                  marginally accomplishes, and unacceptable.’ State merit compensation
                        employees are rated on each objective included in their employee per-
                        formance plan, but there is no set formula to calculate an overall sum-
                        mary rating. Instead, managers subjectively weigh the importance of
                        each objective in determining the summary rating.


Performance Award       At the beginning of the fiscal year, Illinois’ Department of Central Man-
Process                 agement Services publishes suggested salary increase ranges for each
                        rating level. The Department bases its suggested increase ranges on
                        market pay data, the state budget situation, and the size of union con-
                        tract increases. These centralized payout guidelines were adopted to
                        ensure some degree of consistency in performance awards among state
                        agencies. For fiscal year 1990, the Illinois Department of Central Man-
                        agement Services provided state agencies with merit increase guidelines
                        or goals for the range of individual performance award amounts
                        (expressed as a percentage of base salary) to be granted at each per-
                        formance rating level. Additionally, the personnel department asked
                        that all agencies maintain approximately a 4-percent average merit com-
                        pensation increase during fiscal year 1990.




                        ‘Effective July 1, 1990, Illinois changed its number of rating levels to five-superior,   exceeds expec-
                        tations, meets expectations, needs improvement, and unacceptable.



                        Page 40                                                           GAO/GGD91-1      Pay for Performance
       .
                                      Appendix III
                                      Mdttional  Information    on State Pay-For-
                                      Performance Systema




Table 111.2:llllnois Merit Increase
Chidelines, Fiscal Year 1990          Rating                                        Increase as a percent of base salary
                                      Significantly surpasses                                                        5to8%
                                      Fully accomplishes                                                             2 to 5
                                      Marainallv accomdishes                                                         0 to 2
                                      Unacceptable


                                      Merit Compensation employees do not receive general cost-of-living
                                      increases; all available funds are used for the performance-linked
                                      increases. Performance award increases are paid to employees on their
                                      anniversary dates rather than at one specific date every year. Having
                                      ratings and payouts spread out throughout the year spreads out the per-
                                      formance assessment work load. In addition to base pay performance
                                      awards, Illinois awards “intermittent increases” to employees for out-
                                      standing performance. Intermittent increases are permanent base salary
                                      increases that can be awarded to an employee for outstanding perform-
                                      ance at a time other than the employee’s anniversary date. Agencies
                                      awarded 384 intermittent increases in fiscal year 1989 totaling $44,000.

           - ~.~
Employee Views                        All six of the state employees we interviewed said that the size of indi-
                                      vidual performance awards (4 percent of average base pay increases)
                                      under the state’s pay-for-performance system was too small to motivate
                                      employees to perform better. Further, three of the six employees
                                      believed that, due to the limited funding available for performance
                                      awards, some supervisors rated their employees similarly so that all
                                      employees received the same performance award amount. The
                                      employees said that they believed this practice undermined the principle
                                      of merit pay.


Florida                               always been funded. The goals and objectives of Florida’s merit pay
                                      system are to recognize different degrees of performance with differing
                                      salary rewards and, when funded, to provide salary increases on the
                                      basis of merit. Florida uses a three-tier rating system under the perform-
                                      ance appraisal portion of its merit pay system. Statewide appraisal
                                      guidelines issued by the Florida Department of Administration, the
                                      agency that oversees the merit pay system, require that each employee
                                      at least annually receive a performance appraisal based on standards
                                      defined and identified as being part of the requirements of their
                                      position.



                                      Page 41                                           GAO/GGD91-1   Pay for Performance
                        Appendix III
                        Additional  Information   on State Pay-Fop
                        Performance    Syetmm




                        Florida’s merit pay system covers about 98,000 career service
                        employees. Essentially, all state employees except those who are elected
                        or appointed are covered. Merit funding was not appropriated for fiscal
                        year 1990 by the state legislature. Merit funding was available in fiscal
                        years 1986 through 1989, when the Florida legislature appropriated 1.6
                        percent of the total base salary paid to career service employees.


Performance Appraisal   Florida’s performance appraisal guidelines require that supervisors and
System                  employees meet at least annually, at the end of the employee’s appraisal
                        period, to assess performance in relation to the performance standards
                        that have been set for the position. For career service employees, the
                        performance appraisal period is based on the employee’s anniversary
                        date. Employees are rated using a three-level rating scale. The three
                        levels are exceeds performance standards, achieves performance stan-
                        dards, and below performance standards.

                        A Florida Department of Administration analyst told us that the state
                        has no overall policy that sets the distribution of performance ratings.
                        In practice, however, most employees are rated as achieving perform-
                        ance standards.


Performance Award       According to an Administration official, over the last few years, merit
Process                 funds were either not appropriated or the funding levels were particu-
                        larly small. Although the Florida legislature did not appropriate funds
                        for merit pay for fiscal year 1990, the occupations of Professional
                        Health Care, Law Enforcement, and Security Services (Correctional
                        Officers) did receive appropriations for longevity-based increases.

                        State instructions for merit pay for fiscal years 1986 through 1989
                        required that only those employees currently rated “Exceeds Perform-
                        ance Standards” were eligible for merit pay increases. Each state agency
                        head is responsible for developing the specific criteria for determining
                        which employees should receive merit increases, determining the per-
                        centage increase to be given, and informing all employees of the selec-
                        tion criteria. State employees at or above the maximum of the salary
                        range were granted either a lump-sum bonus or an increase to their base
                        rate of pay, depending on the specific instructions for that fiscal year.
                        According to a Department of Administration official, statistical infor-
                        mation on merit payouts for previously funded fiscal years was not
                        readily available.



                        Page 42                                       GAO/GGDSl-1   Pay for Performance
                        Appendix III
                        Addkloml   Information   on State Pay-For-
                        Performance System13




Employee Views          According to responses from 26 state employees we interviewed about
                        the overall strengths of Florida’s program, 12 said that the program pro-
                        vided a means for rewarding exceptional employees, 9 said that it pro-
                        vided hope for rewarding good performers, and only 5 said that it
                        offered a way for employees to move through the pay range. Regarding
                        overall weaknesses of Florida’s program, 15 of 25 employees said that
                        funding was inadequate, 6 said that funding was inconsistent, 6 said
                        that ratings were inconsistent, and 5 said that favoritism existed in the
                        award selection process.


                        South Carolina has had a merit pay program since 1971. However, offi-
South Carolina          cials said that, since 1982, the South Carolina Legislature has not shown
                        a strong commitment to the merit pay program. During this 7-year
                        period, merit increases were authorized in only 2 fiscal years at an
                        average merit increase of 2 percent and 1 percent of the state salary
                        base.

                        The goals and objectives of South Carolina’s pay-for-performance pro-
                        gram-the Employee Performance Management System-are to recog-
                        nize different degrees of performance with differing salary rewards and
                        to provide salary increases solely on the basis of merit. The program is
                        centrally administered by the Human Resource Management Division of
                        state government and covers about 57,000 state employees. Unclassified
                        employees, such as teachers, college professors, and executive compen-
                        sation employees are not covered by the state’s pay-for-performance
                        system.


Performance Appraisal   Employees are rated annually on the their employment anniversary
                        dates. The state does not require or suggest interim performance
                        reviews. According to a state compensation official, the employee has a
                        role in setting expectations at the beginning of the performance
                        appraisal period. South Carolina does not use performance standards.
                        Normally, the employee and the supervisor jointly write the employee’s
                        position description, which lists the duties the employee is performing
                        or has been assigned. South Carolina has four performance levels. These
                        levels are substantially exceeds performance requirements, exceeds per-
                        formance requirements, meets performance requirements, and below
                        performance requirements.

                        According to a state compensation official, South Carolina does not have
                        a policy on forced rating distributions. However, according to personnel


                        Page 43                                      GAO/GGDSl-1   Pay for Performance
                                      Additional Infomadon     on State Pay-For-
                                      Performance System13




                                      officials from one state department, quotas on the number of employees
                                      who could be rated as exceeding performance requirements were set by
                                      the department in order to manage merit funds.

                                      Although complete data on employee performance ratings were not
                                      readily available, the information we were able to obtain on the distribu-
                                      tion of employee performance ratings for fiscal years 1984 through
                                      1989 is shown below.

Table 111.3:South Carolina Employee
Performance Rating8 by FIBCal Year                                                 Number of employees rated at each level
                                      Rating                              1989         1988     1987      1988      1985                 1984
                                      Below requirements                      4            4             3            5           7             8
                                      Meets requirements                 31,845       32,289       -37,710   30,735         30,887      27,633
                                      Exceeds requirements                7,321        6,556         6,166    5,997          6,798       4,249
                                                                                                                                           -
                                      Substantially exceeds
                                      requirements                          119                a

                                      Note: Table reflects data as of June 30 each year.
                                      %ubstantially exceeds level was added to appraisal system in July 1989.




Performance Award                     The South Carolina Legislature, which is the funding authority for merit
Process                               pay funds, has not appropriated funds for a merit increase since fiscal
                                      year 1988. In that year, the merit increase was 1 percent. State per-
                                      sonnel guidelines at that time provided for agencies to award increases
                                      in amounts up to 3 percent, provided that in the aggregate, all increases
                                      average 1 percent of base salary.

                                      Although the state legislature did not consistently fund the merit pay
                                      program in recent years, state employees continued to receive annual
                                      cost-of-living increases. In the last 2 years the cost-of-living increases
                                      were 4 percent a year. In addition to these increases, during fiscal year
                                      1989, the state gave out $12 million in bonus funding at an average of
                                      $366 per employee. This bonus was not related to performance and was
                                      provided to state employees. To be eligible for a merit increase, an
                                      employee must have a current performance appraisal with a rating of at
                                      least “meets performance requirements.”


Employee Views                        In general, 6 of the 11 South Carolina employees we interviewed consid-
                                      ered the overall strength of the state’s pay-for-performance program to
                                      be that it provided a way for exceptional employees to move through



                                      Page 44                                                          GAO/GGD-91-l       Pay for Performance
                                                                                            -              f


                        Appendix IJI
                        Additional Information   on State Pay-For-
                        Perfommnce Syetema




                        the pay range. Also, 8 of the 11 employees cited merit pay funding as an
                        area needing reform.


                        Utah first implemented pay-for-performance in 1969 with the intent to
Utah                    promote open communication between managers and employees and to
                        assess employee performance according to predefined standards. Cur-
                        rently, Utah requires that each employee have a performance plan and
                        receive an annual performance rating based on this plan. Utah uses a
                        three-tier rating system under the performance appraisal component of
                        its merit pay system.

                         About 14,000 of the state’s approximately 35,000 employees are cov-
                        ered by the merit pay system. State elected officials, members of the
                        judiciary, and various state boards are not covered. The Utah Depart-
                         ment of Human Resource Management oversees the merit system
                         through the development of rules and policies that address such govern-
                         mentwide issues as the number of performance rating levels, how per-
                         formance should be related to pay, and annual performance assessment
                         requirements. State agency responsibilities include setting internal time
                         frames for conducting performance appraisals, establishing a perform-
                         ance management implementation strategy, educating and training
                         employees about performance management, maintaining the perform-
                         ance management system, and reviewing its internal effectiveness.


Performance Appraisal   Employees are rated annually in May, and, although the state does not
                        require them, the Department of Human Resource Management strongly
System                  suggests that state agency supervisors complete quarterly interim
                        reviews. At the beginning of the rating period, supervisors and
                        employees are required to mutually establish work objectives and per-
                        formance expectations in a written performance plan. Employees are
                        rated as either exceptional, successful, or unsuccessful. Although Utah
                        Department of Human Resource Management officials said the state
                        does not have a policy on setting performance rating distributions, the
                        Department issues to the agencies an expected rating distribution to
                        guide agencies in monitoring ratings for the forthcoming fiscal year. The
                        following guidelines were in effect for the 1989 fiscal year performance
                        appraisal period:




                        Page 45                                       GAO/GGD-91-l   Pay for Performance
                                                                                                                                   -


                                          Appendix III
                                          Additional  Information   on State Pay-For
                                          Performance    Systfmw




Table 111.4:Utah Performance Appraisal
Quldelines, Fiscal Year 1969              Ratina                                                         Expected distribution
                                          Exceptional                                                                        20%
                                          Successful                                                                         78
                                          Unsuccessful                                                                        2




Salary Increases and                      Utah merit pay employees are eligible for cost-of-living or general
                                          increases and also for merit increases that are additions to base salaries
Bonuses                                   based upon performance ratings. The state legislature appropriates
                                          funds annually for each type of increase as a percentage of covered
                                          employees’ aggregate payroll. The state legislature did not fund merit
                                          pay increases in 6 of the last 11 years, as table III.5 indicates. The 1989
                                          merit increase appropriation of 2.5 percent of payroll was equal to
                                                                                          .
                                          approximately $6.3 million.

Table 111.5:Utah Merit Increase Funding
aa a Percent of Payroll, Fiscal Years     Year                 Merit increase               Year                Merit increase
                                                                                                                            -
1979-1969                                 1979                              0.0%            1985                             2.0
                                          1980                              0.0             1986                             0.0
                                          1981                              4.0             1987                             0.0
                                          1982                             4.55             1988                             0.0
                                          1983                              0.0             1989                             2.5
                                          1984                             1.25


                                          As shown in table 111.6,for fiscal year 1989, the Department of Human
                                          Resource Management provided state agencies with rules on the range
                                          of individual merit increase amounts. These increases are expressed as a
                                          percentage of base salary and are to be granted at each performance
                                          rating level.

Table 111.6:Utah Merit Increase
Guidelines, Fiscal Year 1969                                                           Increase as a percent of base salary
                                          -Rating
                                          Exceptional                                                                  3.0 to 6.0%
                                          ----
                                          Successful                                                                   2.0 to 2.5
                                          Unsuccessful                                                                        0.0


                                          Because 1989 merit increase funding was limited to 2.5 percent of
                                          agency payroll, when one employee received an increase of greater than
                                          2.5 percent, another employee had to receive less than 2.5 percent.
                                          Employees at the top of their pay ranges are not eligible for merit
                                          increases. Department of Human Resource Management officials told us


                                          Page 46                                         GAO/GGD-91-l      Pay for Perfommnce
   .

                     Addltloti   Information   on State Pay-For
                     Perfor&luuwe systeme




                     that data on merit increase amounts broken down by performance
                     rating levels were not readily available.


Employee Attitudes   In our initial meeting to discuss plans for gathering information on
                     Utah’s pay-for-performance system, state personnel officials requested
                     that we not present employee views.




                      Page 47                                     GAO/GGDSl-1   Pay for Performance




                                                       ,
Appendix IV

Amounts Spent by Stateson Performance
Awards for F’iscalYears 1987 Through 1989

               Dollars      in millions
                                                                                                      Average annual
                                                   Performance award amounts                      performance award
               stete                               FY 1967 FY 1966 FY 1989                      amount per employee
               Alabama                                   N/A           N/A        ”      N/A                          WA
               Arizona                                                                 $14.3                                a
                                                         N/A           N/A
               Arkansas                                  N/F          $8.5                8.6                        $460
                                                                                                                            b
               California                               $1.4            1.4               1.4
               Connecticut                                3.5           3.9               4.1                       1,650
               Florida                                   WA            N/A               WA                           4%C
               Idaho                                     N/A           N/A             $19.0                       $1,000
               Illinois                                  N/A           N/A               15.9                     -- 1,616
                                                                d             d
               Indiana                                                                   N/F                          4%d
               Iowa                                      N/A           N/A               N/A                          N/A
               Kentucky                                  N/F           N/F               N/F                          N/F
               Maryland                                  VA            N/A               WA                           WA
               Massachusetts                             N/F           N/F               N/F                          N/F
               Michigan                                 $0.4           $0.5              WA                        $2,831
               Minnesota                                 WA            N/A               N/A                          N/A
               Mississippi                               N/F           N/F               N/F                          N/F
               Nebraska                                 $5.0           $6.0              $6.0                         400
               New York                                  VA            N/A                9.6                         N/A
               Oregon                                    N/A           N/A               WA                           WA
               South Carolina                            N/F           WA                N/F                          1 %e
               South Dakota                                            N/F-                                               I
                                                         N/F                             N/F
               Utah                                      N/F           N/F               $6.3                        $495
               Wisconsin                                 WA            N/A               N/A                        1,130

               N/A = Performance pay funded but state financial data not available.

               N/F = State pay-for-performance system not funded.
               aNo statewide performance award data were available. However, range of awards was available for one
               of the larger state agencies-$391 to $952 per employee for FY 1989.

               bAverage performance award amount for FY 1989 was $1,750 for managers and $500 for supervisors.
               ?n fiscal years 1985-1989, the Florida legislature appropriated 1.5 percent of the total base rate of pay
               for all career service employees, resulting in increases ranging from 3 percent to 5 percent for eligible
               employees. For the FY 1990 performance pay period, no performance increase funds were appropri-
               ated. No other performance payout statistics were available.

               dPerformance award amounts were not available. State pay for performance funded in FY 1987 at 4
               percent and FY 1988 at 4.25 percent of total state salary base. For FY 1988, the average annual
               employee performance award was 4 percent of base pay.
               ePerformance award amounts were not available. For FY 1988, the average annual employee perform-
               ance award was 1 percent of base pay.
               ‘A performance-based cash bonus program entitled “merit cash” was authorized in 1990. South Dakota
               state employees may receive, in cash, 1.75 percent of base pay up to a maximum of $500.




               Page 48                                                                GAO/GGDOl-1   Pay for Performance
Major Contributors to This l&port


-General Government
 Division, Washington,
                 -
                         Mfn.agement Issu?
                         Wllham Trancuccl, Evaluator-in-Charge
                         Deborah L. Parker-Junod, Evaluator
 D.C.                    Ernestine Burt, Secretary


                         Clyde James, Evaluator
Atlanta Regional         Kathy Alexander, Evaluator
Office




                          Page 49                                GAO/GGDBl-1   Pay for Performance
(966408)



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