Pay for Performance In Agencies Trying It Out

A summary of pay for performance experience in the limited number of agencies that have used this process in their HR system.

by Gary Koca

Gary Koca is a senior associate with GRA. He has 35 years of human resources management experience and has authored several publications and numerous articles on human resources management topics. Gary Koca may be contacted at or at 630.837.6385 regarding GRA products or services.

The topic of pay for performance has been making news throughout the federal human resources management arena because of the plans by the Department of Homeland Security and Department of Defense to implement pay for performance systems as part of their human resources management reinvention initiatives. Gene Rouleau & Associates (GRA) conducted a recent forum for federal agencies on the topic of Pay for Performance in Washington, D.C. Here is a quick summary of these presentations.

Participants from 35 federal agencies participated. The highlight of the session was a summary by two agencies that have implemented pay for performance systems on their own through special legislation or special circumstances: the Internal Revenue Service and the Government Accountability Office. In addition, a representative from the Office of Personnel Management updated participants on several initiatives related to pay initiatives for government agencies, including pay for performance.

Internal Revenue Service

Bobbie Kelly of the Internal Revenue Service’s Personnel Policy Division updated participants regarding current efforts within IRS on pay for performance for managers. She noted that the current law allows IRS to establish pay banding systems covering all or part of the IRS workforce. However, these efforts are currently limited to top executives and managers at the agency but may be expanded in the future. The guiding principles for this program are to:

• Base compensation on performance, not longevity

• Have managers understand that the higher the pay, the higher the performance expectations

• Increase the rewards for high performance

• Keep the mechanics of the system simple to use

• Be cost-neutral over time

As a result, IRS redesigned its performance management system for all managers beginning in FY 2000, using a pay banding process and performance-based steps to replace the entitlement process formerly in place. Thus far, the system has been implemented primarily for senior managers and department managers. The system has not yet been approved or implemented for frontline managers and frontline employees for a variety of reasons.

A third party survey on the program of senior managers showed the following results:

• 45% are satisfied or very satisfied with the program

• 20% are neither satisfied nor dissatisfied

• 35% are dissatisfied or very dissatisfied

Kelly noted that the newer, younger managers who were at the low end of the pay range and had the most to gain generally approved of the system while more experienced managers at the top end of the band who had the least to gain generally disapproved of the program.

The goals of IRS are to assure pay for performance for all managers and management officials at IRS, provide an incentive for individuals to enter management, and provide a fair and equitable merit-based pay progression system.


The Government Accountability Office (GAO) has a fairly extensive history of implementing pay reforms and, as such, is also a good barometer for other agencies to follow. A 1980 law gave GAO the authority to implement broader salary ranges and pay-for-performance programs, and a 1989 law set up a pay banding system for its lawyers and analysts. Public Law 108-271 provides additional pay for performance initiatives for all GAO employees. Margaret Braley and Linda Garcia brought participants up to date on the current status of pay for performance within GAO.

GAO knew that it needed improvements in its performance management system before implementing pay for performance. It sought employee involvement in those improvements – employee surveys were a key – before implementing meaningful pay reform.

In addition, GAO uses results-oriented performance standards based on competencies as the basis for establishing performance standards for positions in the agency. This competency-based appraisal and pay system began in 2001 and was implemented for all staff in June of 2004.

GAO’s other major problem in implementing pay for performance was to deal with inflated ratings. Because GAO’s average rating for an analyst – 4.6 out of 5.0 – would prevent meaningful pay for performance, the agency implemented a new system with four rating levels – role model, exceeds expectations, meets expectations, and below expectations. It set new clear expectations for performance at each of those levels. As a result, the average rating is now a 2.35 under the new system, which is about halfway between “meets” and “exceeds” and is certainly a drop from the 4.6 average previously noted.

The 2003 GAO Human Capital Reform Act includes certain key provisions designed to make the system a true pay for performance system – It decouples GAO from GS annual increases, requires no automatic increase in pay, and truly allows the agency to provide for salary increases that are driven by performance rather than the passage of time.

When asked about the dramatic but necessary decrease in the average rating in order to implement meaningful pay for performance, the GAO representatives noted several factors:

1. An agency head, David Walker, who is totally committed to making the program work

2. A 15-year term in office that will allow him to carry out his goals as a long-term agency head

3. A relatively homogeneous and small (3200 employees) workforce

4. A non-unionized workforce

GAO will be completely implementing all aspects of this system within the next year. The agency points to the manner in which pay for performance is implemented – “How it is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful” – as keys for any agency implementing a pay for performance system.


Donald Winstead, OPM’s Deputy Associate Director, Center for Pay and Performance Policy, provided an update on pay initiatives in general, including pay for performance. Don discussed transformational initiatives in the areas of Senior Executive Service Pay and Performance Management, Department of Homeland Security and National Personnel Security System (Department of Defense) initiatives, and other areas relating to pay initiatives.

He noted that the SES appraisal system certification criteria for all agencies included nine factors: alignment with organizational goals; consultation with senior executives regarding expectations; results-oriented systems; a balance between results, customer satisfaction, and competencies; assessments of agency performance as a whole in comparison with GPRA and other measures; sufficient oversight of the process in areas such as appraisals; results; and pay adjustments; accountability of senior executives in performance that accurately reflects the rating; differentiation between levels of performance and meaningful distinctions between those levels; and pay differentiation based on relative performance.

Winstead noted that meaningful progress is being made on both the Department of Homeland Security and National Security Personnel System human resources initiatives. Common factors between the systems include adherence to merit principles, pay increases based on performance, and greater market sensitivity in pay.

He also noted that pay for performance initiatives for other agencies based on the same principles mentioned above are likely in the future. From the efforts at DHS and the Department of Defense, a blueprint for more flexible pay and performance frameworks within which agencies may develop systems that meet their own unique mission requirements is emerging. In addition, the lessons learned at these two agencies will assist other agencies as they develop their own systems in the future.

There were clearly common themes throughout the three presentations that will affect other agencies who implement pay for performance systems in the future. These include:

• A fair and equitable system based on the merit principles

• No guarantee of any type of pay increase for employees performing at less than full successful

• Using an improved performance management system, with more relevant expectations, as a basis for decisions on employee performance

• Getting a handle on inflated ratings in effect in virtually all agencies before implement pay for performance

• Pay decisions also based on market-based factors

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47