Just Rewards

Pay for performance can work if systems are properly designed and managed.

Paybanding has become a loaded term, with different meanings for different groups. To top managers, it means pay for performance and an enhanced ability to hold employees accountable. To mid-level managers, it means more control over pay, promotion and assignments. To many rank-and-file employees, it represents a threat to a cherished tradition of guaranteed pay increases.

In my recent report for the IBM Center for the Business of Government, I found that despite all the controversy, most payband systems bring only incremental change from the General Schedule. For example, most are designed to deny poor performers some or all of the annual general pay increase. The reality is that in most such systems, a small percentage receive low performance ratings. In 2002, only 0.2 percent of workers in the Navy Demonstration Project in China Lake, Calif.-the first federal payband system-were rated at the lowest two rungs of the five-level appraisal system.

A few agencies have systems that are a more radical departure from the status quo, the report shows. At the Government Accountability Office, the comptroller general controls the size of the agency's general pay increase each year. In 2006, he set the annual adjustment at 2.6 percent, compared with 3.4 percent for GS employees. The goal is to allocate a higher portion of raise funds on the basis of performance rather than longevity. And at the Internal Revenue Service, managers given the mid-range "meets expectations" rating receive only the general pay increase, when in the past they also could get a step increase. One result is that high performers can earn proportionately higher pay increases than they could under the General Schedule.

Payband systems provide important recruitment and retention advantages. Many of the organizations with such systems have high numbers of scientists and engineers, whose jobs are difficult to fill. Such is the case at nine research and development laboratories at the Defense Department and the National Institute for Standards and Technology. Paybanding allows the flexibility needed to compete with the private sector for technical talent. With paybanding, salaries can be set anywhere within the employee's relevant band.

Although many are apprehensive about paybanding, experience shows high levels of satisfaction. At China Lake, employee support grew from 29 percent when the system was first implemented in 1980 to 70 percent by 1994. There also have been high levels of satisfaction with the NIST and Commerce demonstration projects.

Some organizations have struggled to ensure that their payband systems are cost neutral. At NIST, salaries increased by 10 percent more than did salaries for a control group during the first seven years of the project, the report shows. It is ironic, therefore, that paybanding has been proposed as a solution to the high salary costs that result from GS pay policies. But GAO's payband system allows the comptroller general to make annual adjustments taking budgetary considerations into account. The payband system for IRS managers allows the commissioner also to scale pay increases to funding availability.

Although the government's experience with paybanding generally has been positive, there is cause to be wary as it is extended to larger agencies such as the Defense and Homeland Security departments. Experience is mostly in small organizations. Size presents a challenge, particularly because top managers must devote significant attention to design and implementation of these systems. That's why the Pentagon's decision to phase in the new National Security Personnel System is a good one.

Another challenge is management training. Supervisors must be prepared to tell some workers that they are contributing less than others and will receive smaller pay increases. The skills to effectively convey expectations, support employees as they strive to meet expectations and to assist those who are falling short are at a premium. The funds required to provide managers with this type of "soft skill" training is in short supply at most agencies.

Executives contemplating a plunge into paybanding should tread cautiously and heed lessons learned.

James R. Thompson is associate professor and director of graduate studies for the Graduate Program in Public Administration at the University of Illinois-Chicago.