Issue Briefs

Following is an article in a recent MSPB publication assessing the history and prospects for wider use of pay for performance in the federal government.

The President’s Management Agenda (PMA) and OMB Memorandum M-17-22 call on Federal agencies to recommit to maximizing performance as well as to reassess and reform any human capital or performance management policies that are ineffective, inefficient, or fail to hold Government accountable. To that end, the PMA proposes restructuring how Federal employees are compensated and rewarded, moving from the current General Schedule system toward one that places a greater emphasis on performance-based pay.

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Compensation systems with enhanced pay for performance elements are not new to the Federal Government, having already been widely debated, authorized, and, in some agencies, rescinded. Given the potential promises and pitfalls, we outline the benefits and risks of pay for performance and highlight elements of an effective system, drawing on MSPB’s 2006 report Designing an Effective Pay for Performance Compensation System.

What are the potential benefits and risks of pay for performance? If designed and implemented properly, a pay for performance system can do the following: (1) communicate and reinforce organizational values and goals; (2) aid in the recruitment, recognition, and retention of highly skilled, high-performing employees; and (3) make more efficient and strategic use of funds. However, a pay for performance system that is poorly designed or implemented can be ineffective or counterproductive. For example, a system that rewards quantity of work may increase output at the expense of quality; a system that focuses on individual contribution could devalue important but intangible aspects of organizational performance, such as teamwork. Also, a system that lacks adequate safeguards may be viewed as unfair, potentially producing a culture of mistrust and division instead of the intended focus on performance and positive outcomes.

What are the essential features of an effective pay for performance system? Maximizing the benefits and minimizing the risks of a pay for performance system require deliberation and persistence. The table below summarizes seven essential features of an effective pay for performance system. As shown, it is not enough to get the policy right; even a well-conceived system may fail without good practice.

A look at the benefits and risks of pay for performance and key success factors.

Seven Features of a Successful Pay for Performance Environment Organizational Culture

The organizational culture and leadership support the principle and practice of pay for performance through words and actions. Open communication and trust across all levels of the organization must be present.

Training—Advance and continuous training and education on how the pay for performance system works and on the values underlying the system.

Effective Supervision—Supervisors treat employees fairly when assigning work, evaluating performance, and allocating rewards. Supervisors also monitor and document employee performance, providing frequent, timely, and accurate feedback.

Performance Evaluation—Performance evaluations reliably distinguish between levels of performance, capture the most critical outcomes and behaviors, omit the least critical outcomes, and are clearly understood by all employees.

Fairness—The pay for performance system includes checks and balances to ensure fairness and pay and bonuses are distributed based upon merit-based performance measures.

Funding—To ensure sufficient motivation, adequate funding is available so that employees receive compensation that corresponds to their efforts and contributions.

Evaluation—Systematic and ongoing evaluation and assessment of the extent to which the pay for performance compensation system is accomplishing the desired outcomes fairly, efficiently, and effectively is incorporated as part of the system.

Introducing a pay for performance system is not a simple process. Agencies must design a system that is compatible with their mission, culture, and available resources. Then, they must implement the system, which includes monitoring and honoring the system’s commitments to pay for performance. The Federal Government’s track record suggests that success is possible but also that substantial and sustained investment of political and financial capital are necessary.