Performance-Based Pay Might Work, But Don’t Count On It

The President’s Budget for this year called for creation of a $1 billion fund to help agencies reward high performers. The fund is just one of the many proposals and programs we have seen in the past couple of decades. It’s hard to argue with the idea that top performers should receive some sort of compensation for their work. It is also hard to argue that most performance review processes are credible and effective.

Those performance review processes lack credibility with employees for a lot of reasons. Chief among them is that they are one-sided top-down reviews that seldom include meaningful employee input. Requirements that employees be involved in creating their performance goals have good intentions, but the reality is that many of them are boilerplate or they are the same for everyone who is on the same job description. They are one-sided because they lay out what is expected of the employee, but include nothing about the agency’s role in facilitating performance though resources, training, and other factors. Then there is the lack of training for managers, the intentional or unintentional biases of rating officials, and the lack of money to provide meaningful bonuses and pay raises. All of those mean government needs to rethink its approach to performance management if it truly expects to achieve different results.

The largest attempt at a performance-based pay system was the Department of Defense National Security Personnel System (NSPS). NSPS resulted in disparate treatment of minorities (a problem that could have been corrected) and it had a bias toward higher graded employees and those of all grades who worked most closely with senior managers. It ultimately failed, not because of those problems, but because the George W. Bush Administration used it to go after the unions. The Department of Homeland Security MaxHR system failed for the same reason.

The Trump Administration’s interest in performance-based pay is not surprising. The government is at risk of losing many of its higher performing employees, particularly in higher graded or in-demand occupations. The General Schedule does not provide enough room for differentiating pay based on performance, and agencies typically budget far too little money for performance bonuses and pay raises (such as Quality Step Increases).

The current proposal for a fund to reward high performers is a good start, but far more is necessary if we want to recognize and retain high performers. A few hundred dollars per employee here and there simply will not get the job done. If we want to see changes in pay and more incentives to retain high performers, we need a system with more flexibility and more money for incentives.

Many people tell me that this is a partisan issue. They say Republicans want pay for performance and Democrats do not. That is simply not true. NSPS was established by the National Defense Authorization Act (NDAA) of 2004. The 2004 NDAA passed the House of Representatives with 218 Republican and 144 Democrat votes (83 percent). It passed the Senate with 51 Republicans and 44 Democrats (95 percent). Both parties were well aware of the inclusion of NSPS in the NDAA and they supported it. The vote to do away with NSPS was more partisan, but it was the result of the Bush Administration using NSPS to attempt to, as one federal judge put it, “eviscerate” collective bargaining.

Democrats and Republicans can agree on some things, but gutting the unions is not one of them. My fear is that the good ideas like the fund to reward high performers are mixed in with the same kind of anti-union ideas that killed MaxHR and NSPS. If we want to see more flexibility in pay, and more incentives for higher performers, the issue needs a nonpartisan solution that is focused on performance and not on the unions.

A successful performance-based pay system would have to include far more employee input into the process. That input should come from employees, unions, and professional organizations. It should surprise no one that the people who are experts in a field might also be the best ones to identify what great performance looks like. Any new system should provide for recognition of high performers, but not be overly complicated. The number of rating levels should be limited to three, to enable agencies to distinguish between the large number of employees who do their jobs and those whose performance is exceptional because it is very bad or very good. It must also be funded with enough money to actually make a difference.

A system like that might work, but it will not make a big difference in retention if it is not coupled with changes that can help drive employee satisfaction with their jobs, their leaders, and their working conditions. Put all of those together, and we could see morale and retention start moving in the right direction.

Am I optimistic that it will happen? No. More money for public servants is not politically popular. We are heading into an election year and the toxic political climate is likely to worsen rather than improve. The unions generally don’t want performance based pay, and the Administration doesn’t want unions. That’s not exactly a formula for a Kumbaya moment that might bring everyone together to do the right thing for a change.



Congress Should Act on OPM, But Maybe Not for the Reason You Think

The Trump Administration has proposed “fully reorganizing” the Office of Personnel Management. If the Administration’s proposal is implemented, the bulk of OPM will land in the General Services Administration, while a handful of policy people will end up in the Office of Management and Budget (OMB). I wrote about the budget proposals in more detail on March 13.

Very few people I have talked with believe the House of Representatives is going to pass legislation that would allow OPM’s work to move to GSA. What I hear most often is that it’s not going to happen, so the Administration should drop the idea. As I said in my March 13 post, the status quo wins again. Strong supporters of the federal workforce tell me that’s the best outcome. Just leave it alone.

But is it the best outcome? I think the answer is no. Not because I believe OPM should be abolished, or because I think Congress should support the proposal to move the work, but because OPM has been broken for a long time and the already-approved move of background investigations to the Department of Defense is going to have side effects that will bring the crumbling foundation of OPM into plain sight.

OPM’s problem is not its people, nor is it the Civil Service Reform Act that created the agency, or the changing nature of the federal workforce. The real problem is that OPM was basically gutted by the National Performance Review (“reinventing government”) between Fiscal 1993 and fiscal 1996.

FY 1993 (Actual) FY 1996 (Budgeted)
Budget Staff Budget Staff
$452 million 6,208 $377 million 3,557

Former OPM Director James B. King said “Our investigations unit, which conducted government background investigations, was also made up of highly skilled individuals. We presented them with several options, including that of starting an Employee Stock Ownership Plan, a new employee-owned company that would perform many of the same services but in the private sector. We worked with these employees during the complex negotiations that led to the creation of an ESOP called U.S. Investigations Services (USIS), Inc. By July 1996, 681 of the 706 employees who were offered jobs with the new company had accepted them, and USIS, Inc., began operations, aided by an exclusive contract to conduct investigations for OPM. The creation of USIS, Inc., was the first government privatization of its kind, and we believe it has every prospect for success. A private consulting firm estimated that the action should save the taxpayers $25 million in five years.

NPR declared war on unnecessary regulations and red tape, and OPM responded with the elimination — a year ahead of schedule — of both the all-but-incomprehensible, 10,000-page Federal Personnel Manual (saving an estimated $30 million) and the complicated Form 171 job application. In most cases, people seeking jobs now can simply submit a resume, or even apply by telephone.

OPM has been a leader in using technology to move government toward the goal of a paperless personnel office. For example, job applications that once took many hours for people to score now are scanned electronically in seconds. Telephones now provide access to current and complete job information. New, automated telephone systems have also improved communications with participants in the federal health and retirement programs. In the past three years, we have begun to glimpse the government of the future. It will be smaller, flatter, more focused, more automated, more family-friendly, more customer-oriented, and more market-driven. We at OPM are proud to have played a leading role in this remarkable renaissance in our government.”

OPM reduced its workforce by 43 percent. Following blowback from its handling of the Edward Snowden background investigation, a 2014 cyber attack, fraud charges filed by the Department of Justice, and OPM’s decision to not renew their contract, the parent company of USIS filed for bankruptcy. The “all-but-incomprehensible” Federal Personnel Manual (FPM) (actually 84 percent of it) was replaced with a void that left HR Specialists without guidance on countless subjects. The FPM was not incomprehensible, but it was complex. That’s because the subjects it covered were complex and the underlying overly-complicated and all-but-incomprehensible regulations were mostly left as they were.

The NPR branded OPM as a “systems control” agency and slashed its budget and staffing and that was supposed to lead to great things happening. As the NPR put it “Talk to a federal manager for 10 minutes: You likely will hear at least one personnel horror story. The system is so complex and rule-bound that most managers cannot even advise an applicant how to get a federal job … We must enable all managers to pursue their missions, freed from the cumbersome red tape of current personnel rules. The President should issue a directive phasing out the Federal Personnel Manual and all agency implementing directives. The order will require that most personnel management authority be delegated to agencies’ line managers at the lowest level practical in each agency. It will direct OPM to work with agencies to determine which FPM chapters, provisions, or supplements are essential, which are useful, and which are unnecessary. OPM will then replace the FPM and agency directives with manuals tailored to user needs, automated personnel processes, and electronic decision support systems. Once some of the paperwork burden is eased, our next priority must be to give agency managers more control over who comes to work for them. To accomplish this, we propose to radically decentralize the government’s hiring process.

That really worked out well. The NPR replaced the background investigations in OPM with a company that was accused of fraud, cost $250 million per year and went broke, resulting in much of it being rebuilt as a reimbursable program in OPM. It gave recruiting authority to agencies, but made them follow a 350-page OPM Handbook. It replaced the “dreaded SF-171” with equally dreaded federal-style resumes that are just SF-171s without the boxes. It eliminated the FPM, but kept the complex regulations and eliminated many of the OPM staff who were the real experts who could explain all those regulations. Not to worry – agencies had HR experts who could help. At least they did until the NPR cut them by half, leaving federal HR offices unable to do anything but the most essential work. The initial ideas of the NPR may have been sound (although the original report had a lot of snarky anecdotes), but, at least with respect to federal HR, the NPR was a half-baked set of reforms that broke the mold and did not put something functional in its place.

The NPR radically downsized OPM, resulting in the agency losing much of its experienced workforce and stopping hiring for several years. It moved so much of OPM’s work to a revolving fund, rather than appropriated dollars, that virtually every current or former OPM executive I have spoken with says that OPM’s core mission cannot function on its appropriations alone. If OPM loses the revolving fund money, they believe the agency cannot do its work. They aren’t saying OPM cannot do the work covered by the revolving funds — they are saying OPM cannot do the work covered by the appropriations. Those revolving funds absorb so much of the overhead of running the agency that without those dollars, the policy and oversight work of OPM is at risk.

Moving the mission and money to GSA does not solve the problem, it just moves it and makes it GSA’s problem rather than OPM’s. The move also does not solve the organizational conflict of interest that resulted from the NPR putting OPM in a position where it writes policy, sells services related to those policies, then provides oversight to agencies covered by the policies. Leaving OPM as is, minus the background investigation work, also does not solve the problem.

If OPM will struggle if left alone or struggle as part of GSA, what’s the solution? I believe Congress needs to conduct of thorough review (perhaps via the Congressional Budget Office or the Government Accountability Office) of the funding sources of OPM with the intent of adequately resourcing the agency and eliminating the conflict of interest. Whether the end result is OPM as a stand-alone agency or as a service within GSA, it must be adequately funded to preserve the mission of the agency. Democrats and Republican alike should want an agency that operates efficiently and has sound finances. Whether they can overcome the politics of civil service issues and do the right thing is debatable, but they should try.

My preference would be a smaller OPM with all of the fee-for-service work moved out — Investigations to Defense and the remainder to GSA — and the remaining smaller agency fully funded with appropriated dollars for everything but the work of the trust funds (Civil Service Retirement and Disability, Employees Life Insurance, Federal Employees Health Benefit and Retired Employees Health Benefits Funds). A look at the trust funds and whether they are adequate for current and future needs is probably a good idea as well. After more than two decades of broken funding, we are long past the time to get a handle on what these functions really cost and fund them accordingly.

One last thought — some folks may think the best thing to do is to decentralize all of this and move it out to the agencies (similar to what the NPR proposed in 1993). The result of such a move would most likely be a Balkanized civil service of “have” and “have-not” agencies, with those roles shifting based upon which party is in control at any given time. It would also increase costs, because policy work would be done repeatedly to design workforce policies tailored to the “unique needs” of every agency. Tailored HR programs may sound like a good idea, but the reality is that federal agencies have far more in common than they like to believe. Well-designed and timely programs created by a fully functional OPM, with flexibilities that would allow more choices to agencies, would be far better than an “every agency for itself” approach. It would also be far better than leaving OPM alone and waiting for it to implode.