Pay for Performance: Problems and Possible Solutions

Pay for performance is coming to federal agencies. Here is one opinion on making it work successfully.

Most readers of know there has been a recent push in the federal government to implement pay for performance systems throughout the federal government.

Some agencies, like the Government Accountability Office (GAO), Federal Aviation Administration, and Internal Revenue Service, are already permitted to have this system for at least some of their positions because of special legislation. Others, like the Department of Homeland Security (DHS) and the Department of Defense (DoD), are in the process of implementing legislation calling for a pay-for-performance system.

Still other agencies have had the pay banding type of pay-for-performance system for a number of years through special OPM-approved demonstration projects that were first approved under the Civil Service Reform Act of 1978.

Once DoD and DHS implement their pay-for-performance systems, the prediction is that most if not all other federal agencies will want –- or be required — to implement their own pay-for-performance programs. In fact, OPM Director Kay Coles James has already suggested that the rest of the government should be given these flexibilities.

Theoretically, it is hard to argue against pay for performance. For example, try arguing with someone you know that works in the private sector that the taxpayers are better served by a system that bases pay increases on longevity rather than performance. Again, theoretically, the system makes perfect sense. One’s pay should be based to a reasonable extent on the results of one’s performance. However, having said that, actually implementing a pay-for-performance system is the difficult part.

My view on this issue is that to implement a successful pay-for-performance system, the first and most important step that agencies must take is to completely revamp their current performance management systems. Unless the agency’s current performance appraisal system is completely overhauled, pay for performance is guaranteed to fail.

Here’s Why.

Since the implementation of the Civil Service Reform Act (CSRA) of 1978, the average federal employee performance rating has increased dramatically. OPM estimates that the average rating federal government-wide is now 4.5 out of 5.0. And, in some DoD and other agencies, the average rating is around 4.75. That means that three out of every four employees receives an “outstanding” rating, and the fourth receives an “exceeds fully successful” rating. Remember when “fully successful” was supposed to be the typical rating?

Simply put, pay for performance will never ever work with so many high ratings. We learned in the early days of the CSRA that performance management really only works when the vast majority of employees are rated as fully successful, without any attempts to force a ratings distribution as then-OPM Director Donald Devine attempted to do.

When the vast majority of employees receive ratings at the top two levels, there simply is not enough of a monetary incentive or enough money available to call it pay for performance. It may be accurately called a “feel good” rating system, (and there may be some value to that), but a true pay-for-performance system only works when the agency’s real superstars – those employees who really make a difference – get large increases and everyone else receives a rather nominal increase.

The Problem Facing Federal Agencies

With so many agencies having so many high ratings, federal agencies will face a real dilemma when pay for performance is implemented government-wide. Managers will be required to rate a large number of employees currently being rated at the top two levels as fully successful. If they don’t, pay for performance will simply not work. Managers and employees won’t like it, and employees will complain and perhaps file grievances, but there is really no other alternative.

On the other hand, when you look at it unemotionally, there is really nothing wrong with a fully successful rating. Fully successful means you are performing the job in a totally successful manner and are a good, solid employee. In truth, most employees in most organizations – public as well as private – are fully successful employees. The problem is that everyone inappropriately views a fully successful rating as a grade of “C.” And, with so many employees now being rated above fully successful, it is going to be very difficult to lower their ratings, even with the implementation of a brand new system.

The Answer

Pass/fail systems will go by the wayside if pay for performance is implemented. For the reasons stated above, five level systems are going to be very difficult to administer. So agencies, if given a choice, may wish to opt for a three-level system of outstanding, fully successful, and unsatisfactory. With a three-level system, the vast majority of employees will receive a fully successful rating, leaving the small percentage of true stars to receive the highest rating and largest pay increases. A three-level system will be a relatively painless way of moving to pay for performance.

As a result, a three-level system should meet everyone’s concept of a pay-for-performance system in a relatively painless way without being an impossible challenge for managers to implement. Since performance appraisal is a pretty subjective process anyway (a topic for another article), three levels may be the best way to approach this controversial issue.

Gary Koca is a senior associate with GRA. He has 35 years of human resources management experience and has authored several publications, newsletter articles, and other articles on human resources management topics.