Implementing a more market-based and performance-oriented pay system (in government) is both doable and desirable.
— David M. Walker, U.S. Comptroller General
Will performance-based pay replace the General Schedule (GS) and wage grade pay and personnel system in all federal agencies by 2010? Legislation now being considered on Capitol Hill (the Working for America Act of 2005) would mandate that agencies implement personnel reforms similar to those now being instituted at the Departments of Defense and Homeland Security. All agencies would finalize plans by 2008 and have them sanctioned by the U.S. Office of Personnel Management before they are implemented.
Advocates of performance-based pay contend that it will bring stronger accountability, better budget control, and improved execution of mission to the leadership of federal agencies. Federal managers, they argue, will have powerful tools and metrics at their fingertips with which to evaluate employee performance and reward top performers. Taxpayers will get a bigger bang for their buck by having the hard work of federal employees rewarded and recognized in tangible and public ways.
While consensus is growing that bringing private sector-style pay practices to the government workforce is a good idea, little attention has been paid to what’s necessary to ensure the successful implementation of such systems in federal agencies. Instituting performance-based pay systems in government agencies involves far more than simple “administrative housekeeping” or installation of specialized human resources (HR) software on the computers of government workers. Doing it right requires careful attention to a whole array of organizational, cultural, and people issues that must be addressed if such systems are to take firm root in agencies.
For example, federal managers and chief human capital officers must develop meaningful distinctions between different levels of performance and come up with objective performance metrics by which people’s job performance will be evaluated. Jobs and the relationships between managers and their subordinates need to be redesigned because managers will have greater discretionary power in awarding pay raises to employees. Sufficient agency funds must be available to meaningfully reward people for outstanding performance and to sustain the long-term organizational commitment to reward for performance (R4P). Finally, vigorous top leadership support of performance-based pay (from both political and career civil service leaders) is critical if it is to be successfully introduced in agencies and accepted by frontline supervisors and employees.
This article provides guidelines on how to successfully introduce performance-based pay approaches in agencies today using recent Watson Wyatt (WW) human capital research as the basis for doing so. It explores how use of specific rewards practices, R4P, can facilitate the transition to performance-based work. It also outlines issues about which you, as a government executive or human capital officer, need to think as you move toward implementing pay for performance in your organization.
Transformational Change
Instituting R4P pay practices in federal agencies today is the biggest change in how federal employees have been supervised and rewarded for work since the implementation of the General Schedule in 1949. It will dramatically alter the nature of employee performance reviews, eliminate “automatic” within-grade pay increases, and change job descriptions and reporting relationships—no surprise that government unions are voicing strong reservations about implementing R4P pay practices. They are concerned about inequity and favoritism in the administration of such practices.
Risks of Implementing R4P Systems
Because it hasn’t been widely implemented in federal workplaces, initiation of R4P pay systems is risky if not done right (see insert ). So says Bob Tobias, former president of the National Treasury Employees Union and founder of the Institute for Public Policy Implementation at American University. R4P relies on collecting information on each employee’s individual job performance to determine pay raises. It also involves defining people’s jobs on the basis of specific distinctions and assigning salary values and variable pay options to people on the basis of rigorous external market research known as market pricing.
But Tobias says, “If you don’t define jobs and distinctions among jobs in ways that people find credible, and don’t create pay bands based on objective criteria, people won’t believe that performance-based pay is being administered fairly.” Tobias adds that federal employees also fear being evaluated by supervisors who don’t understand the jobs they do, and who don’t have experience or training in providing people with coaching and feedback on their job performance. “For 56 years, since the General Schedule was created, managers haven’t been asked to make the kinds of performance distinctions among people that performance-based pay asks them to make.”
Employee concerns about managers administering pay for performance fairly are borne out by research. For example, a 2003 study by the U.S. Merit Systems Protection Board, a quasi-independent federal agency, found that only 47 percent of federal employees felt their supervisors have good management skills, and only 37 percent thought their supervisors made good promotion decisions.
R4P Already in Action
Notwithstanding these perceived obstacles, performance-based pay practices have been instituted in a number of federal agencies in the last few years. One of the biggest champions of performance-based pay in government today is U.S. Comptroller General David M. Walker, director of the General Accountability Office (GAO), who in the last two years has moved aggressively to implement a performance-based pay system at GAO. GAO will scrap General Schedule pay practices in January 2006 when it starts to reward professional workers on the basis of their job performance. The agency will move more than 2,000 analysts and lawyers to new pay bands with pay ranges based on private-sector market research. GAO needs to be able to recruit and retain high-quality professional talent, according to Walker, thus the move to a more “market-based and performance-based” system.
| Challenges of Implementing Rewards for Performance in the Public Sector |
| Linking rewards to performance can help increase the federal government’s effectiveness by aligning employee activities with the organizational mission, attracting and retaining top performers, and encouraging managers to provide more direct and honest feedback to their employees.
Public-sector implementation of R4P systems, however, has its challenges. For example, performance metrics are more difficult to determine in the public sector, since public service rather than profit is the primary mission. Second, fundamental employee motivations for public service (such as to affect public policy and the future of our nation) may make it difficult to provide meaningful monetary incentives to improve performance. And third, employee protections within the civil service system make it uncomfortable and cumbersome for many managers to do the right thing when employee performance lags.
Nonetheless, empirical evidence confirms that people and organizations perform better when they are rewarded for their performance and that linking rewards to results focuses employee performance on being recognized and valued for individual contribution. R4P is thus a strong management tool to be used in creating a high-performance organization.
As your agency begins to embrace R4P as an operating principle, here are some key issues about which to think:
- Instituting pay for performance requires time and careful planning. Your system must be carefully linked to individual and team performance goals and metrics.
- Don’t simply impose new R4P operating criteria on your existing performance appraisal or performance management system. First, develop key distinctions among jobs, and then link those distinctions to job definitions, job clusters, and salary/reward ranges on the basis of their value to the organization.
- Focus on building support and ownership of R4P throughout your organization. To do this, it’s critical that leaders at all levels of the organization buy into its importance and communicate with employees in clear and consistent ways about it. (WW research on the “return on investment” of effective communication shows that managers and supervisors have key roles to play, not only in communicating change to employees, but in building employee support for change.)
- To succeed, R4P must become an operating principle supported by all levels of executives and managers in your organization. Use of R4P principles must be built into the job descriptions and performance metrics of all managers and executives.
- Design monetary and nonmonetary rewards and incentives that are valued by the organization and that align employees with overarching mission goals. ( To this end, organizations must give careful thought to their optimal mix of monetary and nonmonetary carrots, using specific analytical HR tools and techniques such as employee surveys to do so.)
- Make sure that you set enough money aside for meaningful performance rewards. Your R4P system and principles won’t be taken seriously by employees unless you are willing to pay high-performing employees in meaningfully different ways.
- Develop specific tools to help increase understanding and support of R4P principles in your organization. Such tools can include training, team goal-setting, town hall meetings, skip-level meetings, feedback systems (such as online confidential access of employees to top-level agency leaders), small employee group discussions, and other communications channels.
- Develop safeguards to ensure equity, nondiscrimination , and consistency in your rewards and recognition system.
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The Federal Aviation Administration also uses performance information to influence pay decisions for its employees. Employees can earn bonuses on the basis of individual job performance.At the organizational level, they are also eligible for pay increases based on the agency’s performance on thirty-one key performance measures in the agency’s strategic plan, known as the “Flight Plan.” Employees get pay raises comparable to what GS workers receive on the basis of whether “actual performance” meets goals. At the end of fiscal year 2004, 78 percent of employees were included in the agency’s performance-based pay system.
The Veterans Health Administration uses performance information to create incentives for its network directors. Directors are incentivized on the basis of key performance criteria, such as clinical waiting times, the percentage of patients receiving cancer screenings, and patient satisfaction.
Meanwhile, the U. S. Department of Labor’s Employment and Training Administration uses performance information to provide incentives for and apply sanctions to state programs that receive grants under Title I of the Workforce Investment Act. R4P pay practices are also in place at the Federal Reserve and were instituted in the federal government’s Senior Executive Service in 2004.
Creating Trust between Employee and Supervisor
We submit that implementation of R4P pay systems will, in the long term, actually improve the level of trust between managers and employees—in large part by objectifying the performance appraisal process and by clarifying the performance expectations by which individuals are both evaluated and rewarded for their work. It will also improve organizational performance by creating more efficient processes and aligning management practices and people’s performance with achievement of specific agency or mission goals.
But how do you actually implement pay for performance? More specifically, how do you create the organizational conditions and receptivity necessary for R4P systems to actually take hold? According to the Partnership for Public Service, 90 percent of Fortune 100 companies and 75 percent of all U.S. companies link at least some of an employee’s compensation to measures of performance—typically through bonuses and increases linked to job ratings.
Recent WW research of companies across all major North American industries identified a number of key practices that “high-performing” private-sector organizations use to drive performance today. Though based on private-sector research, these findings have implications for federal agencies as they think about implementing R4P systems in the years ahead.
We found that high-performing private-sector firms develop “total” reward strategies designed to shape employee behavior in specific ways, reward individual job performance, and influence employee affiliation with their organization. A total rewards strategy encompasses the full spectrum of monetary and nonmonetary incentives that employers use to attract, engage, and motivate employees.
Role of Monetary Rewards
The research shows that monetary reward programs (for example, base salary, short-term incentives, long-term incentives, health and welfare benefits, and retirement benefits) play a critical role in attracting and retaining top-performing employees and aligning employee behavior with business goals and desired culture. In our 2004 Strategic Rewards® research, for example, base pay garnered the highest marks from organizations when it comes to meeting basic attraction and retention goals with executives (47 percent), professionals (64 percent), and all others (71 percent). At the same time, 92 percent of respondents rated short-term incentives (awards or bonuses) as the most effective reward tool for aligning behavior with business goals.
These findings we re further corroborated in research conducted as part of WW’s 2005 Human Capital Index® survey. That research showed that organizations that make large pay distinctions between top performers and lower performers in the payment of bonuses have greater increases in shareholder returns than those that make smaller distinctions between top performers and low performers.
Role of Nonmonetary Rewards
What about nonmonetary rewards? Nonmonetary rewards include training and development, a flexible work environment (characterized by telecommuting, flextime work arrangements, casual dress code, and so forth), and non-cash recognition (such as employee-of-the-month awards, time-off awards, use of the boss’s parking space, and other appreciation awards).
Sixty-four percent of survey respondents in our 2004 Strategic Rewards survey noted that “work environment” factored prominently in attracting, motivating, and retaining employees, and 58 percent found the work environment effective at aligning behavior with business goals.
Implications of the Research Findings for Federal Managers
Monetary Rewards
While base pay is clearly important in attracting high-quality employees to government service, short-term incentives (variable pay) may be the most effective and immediate way to generate high levels of job performance. Why? Because short-term rewards (and pay distinctions that are truly significant) drive short-term changes in behavior and encourage employees to take performance-based pay seriously. In this respect, variable pay appears to be an excellent tool for helping drive government transformation—and doing so quickly—a key goal of The President’s Management Agenda.
At the same time, embracing performance-based pay approaches is very likely to increase an agency’s overall operating effectiveness—its ability to accomplish its public mission. The result is higher taxpayer regard and confidence in the ability of government to fulfill its mandates.
Nonmonetary Rewards
For these, the research message is equally significant. A strong focus on creating informal and congenial workplaces (and, to a lesser extent, use of various kinds of appreciation awards) is clearly vital to motivating employees. Our research indicates, in fact, that significantly improving some nonmonetary elements of total rewards programs can have just as strong or even a stronger impact on employee commitment as improving certain monetary components.
The bottom line: federal managers shouldn’t under-estimate the value of nonmonetary performance improvement approaches because the data indicate they really do work. And they can be an important (and sometimes inexpensive) complement to monetary incentives.
What Rewards Can and Can’t Do for You
As you think about implementing performance-based pay in your organization, here are some things to keep in mind. First, rewards can’t create a business strategy, build a culture, or compensate for bad leadership. Second, rewards alone can’t guarantee that you’ll retain top performers or improve overall morale and employee commitment to your organization’s goals. Doing that requires strong leadership and a culture that emphasizes, recognizes, and rewards job performance.
What rewards can do is shape and motivate behavior, drive results, reinforce the importance of critical skills, and contribute to an organization being perceived as a highly desirable place to work. How exactly do you shape human behaviors—at the level of individual jobs—to affect large-gauge organizational outcomes? Many organizations presume that, to improve their performance, they should simply increase the size of their rewards, but, in fact, it’s important to first look at what your organization wants to reward and is rewarding before taking action on changing your rewards structure.
As part of looking at its rewards mix, organizations need to do front-end organizational assessments, asking themselves specific questions (Figure 1).
Effectiveness and Cost
In the end, the success of any total rewards program is a function of effectiveness and cost. The effectiveness of rewards is measured by how well they align employees with specific levels of individual or team job performance and whether employees perceive them as being of value. Total reward design,in other words,is a two-way street. It has to serve the needs of the employer and the employee.
As for costs, organizations should view their rewards costs as investments and seek a return on these investments, just as they would with other organizational expenditures. There’s good reason to do so. While implementation of R4P pays dividends to organizations in terms of short-term performance, our survey research shows it also pays off over time. For example, our 2005 Human Capital Index survey found that firms with a total rewards strategy had a three-year total return to shareholders (TRS) of 37 percent and a “market premium” of 36.9 percent. Those without a total rewards strategy had a three-year TRS of 33 percent and a market premium of 17.8 percent.
| Figure 1. Front-End Organizational Assessments |
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What behaviors do we want to reward as part of achieving our mission? |
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What behaviors and skills do we need to reinforce to achieve our mission? |
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What behaviors and skills are we rewarding now that don’t contribute to achieving our mission? |
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What’s the best way to reward and recognize people for acquiring and developing the skills we need? |
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What’s the optimal mix of individual and team rewards? |
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What’s the optimal mix of annual incentives and short-term or “spot” incentives? |
Market premium measures the extent to which the market value of a company exceeds the cost of its assets. It represents the market’s assessment of an organization’s ability to generate future profits from intangible assets, such as brand equity and human capital. A public-sector organization’s ability to “effectively and efficiently accomplish its public mission” is the federal-sector equivalent of “market premium.” That ability is certain to rise with the careful and methodical implementation of performance-based pay systems in federal agencies today.
Configuring a Total Rewards Approach
Every organization will have different objectives for its rewards plans. But regardless of the mix of monetary and nonmonetary rewards an organization adopts, it’s critical to set aside a large enough budget so that people will take performance awards seriously.“If you go to all the trouble of setting up a performance pay system, but then don’t give people meaningful differences in salary, your efforts to ‘improve performance’ won’t be taken seriously,” says Chris Sonnesyn, a government consultant and veteran of numerous human capital strategy engagements.
Conclusions
In the years ahead, performance-based pay approaches will be introduced across all federal departments and agencies. This will occasion tremendous organizational transformation and the radical redesign of people’s jobs, reporting relationships, and incentives through which people are motivated to perform at work.
By applying strategic human capital practices, and with high-level agency leaders clearly and energetically involved, public-sector organizations can create the climate necessary to ensure the successful introduction of R4P pay systems, in accordance with The President’s Management Agenda, and to answer increasing calls by tax payers and Congress for greater governmental responsiveness and accountability.
Once implemented, such systems will help agencies increase their organizational effectiveness, align competencies and resources, and reward people not for activities, but for concrete, measurable results. This will bring much greater efficiency to government while providing federal executives and managers with the tools necessary to ensure continuous process improvement and organizational renewal.
References
Wyatt,Watson. 2005 Watson Wyatt Human Capital Index®:
Maximizing the Return on Your Human Capital Investment. 2005.
www.watsonwyatt.com/us/research/
resrender.asp?id=w-822&page=1.
Wyatt,Watson. Strategic Rewards® and Pay Practices:Advancing the
Total Rewards Perspective. 2004–05.www.watsonwyatt.com/
us/research/resrender.asp?id=w-782&page=1.
Bill Trahant is national leader of the Government Consulting Services practice of Watson Wyatt Worldwide in Arlington,VA.You can reach him at william.trahant@watsonwyatt.com or 703-258-8022.
Steve Yearout is a senior consultant at Watson Wyatt and can be reached at stephen.yearout @watsonwyatt.com or at 703-258-8005. Copies of various WW reports are available from its Web site, www.watsonwyatt.com/gov.