Hope Springs Eternal

Like most senior executives, Richard Morgante isn't afraid of being judged on his performance. As deputy commissioner of the Internal Revenue Service Wage and Investment Division, Morgante has 10 years under his belt in the Senior Executive Service. By scheduling and training his staff better and routing queries to experts, Morgante has helped the call centers he oversees boost their quality performance rating by more than 20 percent in the past several years. Fewer callers are receiving busy signals and more are hearing answers they understand. It only "makes sense that you tie salary to what you can deliver," he says.

Thanks to 2003 legislation, Morgante-and many of his SES colleagues-are hoping their strong performance will soon pay off. This is the most substantial reform of the Senior Executive Service since its founding more than 25 years ago. It gives agencies freedom to boost executive salaries and dole out more generous bonuses. The base salary cap will rise to $158,100 from the current limit of $145,600 and the aggregate pay limit-including bonuses-will hit $203,000. But there's a catch: Agencies also will have to justify pay raises with rigorous performance evaluations. And the government's 6,272 career senior executives no longer will enjoy regular cost-of-living increases, or locality pay adjustments.

The new SES system, due to take hold by the end of the year, will be the first governmentwide pay-for-performance effort. It's likely to be a model for agencies, such as the Defense and Homeland Security departments, that have received congressional approval to revamp personnel rules for their General Schedule workforces. Support for the changes is strong among senior executives, according to a Government Executive survey, even as most say the pay cap increases are too small to make a difference to them. But there's also a palpable sense of unease among executives about the system's implementation. Though the Office of Personnel Management has set pay-for-performance guidelines and will require agencies to earn certification before implementing the new caps, agencies have been given considerable leeway.

A lot is riding on their success. If agencies succeed, pay for performance may quickly spread to more of the General Schedule workforce, as Bush administration officials eagerly desire. If they fail, opponents will have more ammunition to fight off reform at Homeland Security and Defense. Many questions remain, among them: Will agency leaders prove willing to combat the grade inflation that has marred the current SES rating system? Will raises and bonuses be adequate to retain and recruit a next generation of civil service leaders? Will they yield higher performance?

Leading by Example

Those outside the SES are skeptical. Employee unions have bitterly opposed plans to implement pay for performance, arguing that cronyism is sure to follow and that teamwork will give way to cutthroat personal competition. But a Government Executive survey of 78 SES members found that a clear majority-nearly 60 percent-supports the changes. More striking, 66 percent of the respondents believe that pay decisions based on performance evaluations will be fair.

Executives have embraced the burden of leading by example. "I'm responsible for leading 70-some-odd folks and for providing leadership to another 2,700 members of GSA's acquisition workforce," says David Drabkin, deputy chief acquisition officer at the General Services Administration. "If I'm going to hold them accountable for results, then I need to be held accountable as well." Drabkin's enthusiasm was typical of two-dozen senior executives interviewed for this story. They take considerable pride in their achievements, both in day-to-day work and throughout their careers. They are the government's elite civil servants, and in 2002 performance evaluations, nearly 75 percent received their agency's highest marks.

For many senior executives, IRS' Morgante and Drabkin among them, pay and ratings changes will barely be noticeable. The IRS was one of the first agencies to implement a rigorous performance management system. Its designer, Ronald Sanders, is now OPM's associate director for strategic human resources policy. He wrote the new SES regulations. Drabkin has been working under a performance pay regime since he arrived at GSA in 2000. The agency has had a pay-for-performance system since shortly after the 1978 Civil Service Reform Act and revised it in 2002 and 2003. GSA is one of a handful of agencies that are asking OPM for full certification of their performance appraisal systems, rather than a temporary provisional certification.

Rating Inflation

The changes will be noticed immediately at most agencies. That's because OPM regulations require that agencies adopt multitiered rating systems, with at least one level above "fully successful."

"We don't believe so-called pass-fail systems are consistent with the notion of pay for performance," says Sanders. Six Cabinet departments still were using pass-fail systems when the regulations were issued in July. At those agencies, only five of 1,592 senior executives failed in 2002, according to the most recent statistics. Still, says Kathleen Wheeler, deputy chief human capital officer at the Interior Department, agencies used pass-fail systems for a reason. Wheeler says one of the challenges of multilevel ratings systems is that managers feel pressure to give out good grades. "Employees felt like they should be at the highest level, and there were a lot of grievances if they weren't," she says.

Even where multitiered rating systems are in use, rating inflation is rampant. According to the 2002 data, only 24 of 4,034 employees in those systems received grades below fully successful. The rationale is simple, says Drabkin. "It's an attempt to make sure that your own folks don't get hurt," he says. "If I give good people a C and someone else gives the same level of performance an A, my folks get hurt when they are looking for upward mobility." Drabkin notes that performance evaluation systems tend toward grade inflation. "Every leader has to be committed to giving people a C," he says. "And a C has to be a good thing to get." To end rating inflation, managers should be supervised closely and held accountable for the evaluations they write up, he says.

Some agencies already have embraced grading on a curve as a means of combating inflation. Morgante notes that at IRS, rankings are tied to a certain number of points and managers are limited in the number of points they can award. The agency grants exceptions if managers can make a persuasive case. But other agencies, such as GSA, have eschewed such systems as too rigid. "We want to appraise employees against goals and measures, not against a point system," says Gail Lovelace, GSA chief human capital officer. Whatever the approach, Sanders says OPM expects agencies to make meaningful distinctions. "We need to be able to say to people who are not only busting their butts, but also producing results, that you are going to get the rewards," he says. "It's pay for performance. The better you perform, the higher your pay."

Salary Squeeze

The elephant in the room is the fact that the maximum increase in base pay for most executives will be only 8.5 percent due to the pay cap. That's because the salaries of more than 70 percent of senior executives now are compressed at or near the old cap. Furthermore, under some plans, most executives won't even have a shot at 8.5 percent, because agencies are considering establishing their own pay bands for executives. Only those executives at the top of the hierarchy would be eligible for the 8.5 percent increase. Others, even top performers, would have to wait for a promotion to come under the new cap. "For all this effort, it's not a big jump [in pay]," says Morgante. "We've put a lot on the table in [losing] our locality pay and cost-of-living [adjustments] for what? $13,000?"

Reaching the new aggregate pay limit of $203,000 also will be difficult because annual bonuses are limited to 20 percent of salary. To reach $203,000, executives will have to win a distinguished rank award, which carries a 35 percent bonus, or win a substantial relocation or retention bonus in addition to an annual bonus.

Sanders acknowledges the point. "Clearly over time, this hasn't solved pay compression forever," he says. "We hope we can demonstrate with sufficient discipline and rigor in the way we manage performance of executives that if and/or when Congress will [consider raising the cap again], that there will be some credibility."

The Government Executive survey data bears out Morgante's concern. Less than 20 percent of respondents believe that the new system will lead to bigger pay raises, while more than 36 percent worry that raises will be smaller. And the outlook was nearly as clouded when it came to bonuses. Nearly 60 percent said they expected their bonuses would be about the same, or smaller.

Salt on the Wounds

Senior executives still are the envy of many of their lower-ranked colleagues because of their relatively high salaries. But in recent years, SES earning power has declined. Executive raises have been frozen in five of the past 10 years. From 1994 through 2003, executive pay rose only 16 percent, while General Schedule salaries rose 28 percent. If SES pay had kept pace, the maximum salary this year would have been $171,000 instead of $145,600. Executive pay has kept up with inflation, though barely, since the SES' creation in 1979. By contrast, private sector managerial salaries have significantly outpaced inflation.

Under the new rules, however, agencies no longer will have to provide raises whenever the president and Congress agree to boost the executive schedule caps. Instead, they'll weigh pay raises and bonuses against other priorities. Agencies also will be able to start new executives at lower rates of pay. The minimum salary allowed under the new rules is almost $105,000, about $11,500 less than the previous minimum and less than what many GS-15 employees earn. And to throw salt on the wound, poor performers could face 10 percent wage cuts each year under the new system, 5 percent more than they previously could have lost.

That worries Senior Executives Association President Carol Bonosaro, particularly since executives will have little recourse if slapped with a wage cut. Executives can appeal to the Merit Systems Protection Board if they're fired, but not if their salaries are reduced due to poor performance. "If you're in the SES, you have one foot on the banana peel," Bonosaro says.

After the legislation passed last year, agencies were able to use discretion in setting 2004 raises. Many opted to give pay hikes only to employees rated "outstanding" or to those who had received performance-based bonuses in 2003. At several departments, even employees who were rated fully successful did not receive raises. If it turns out that few executives benefit from the new rules, Bonosaro says, "That's going to make this rapidly a system that has no credibility. . . . I sincerely hope it doesn't, but there is no pot of money put aside for this."

On the other hand, now that locality pay has been rolled into base pay, executives could benefit at bonus time. Agencies can grant bonuses of up to 20 percent of base salary. In the past, the base salary did not include the portion designated as locality pay. But the elimination of locality pay could have some unforeseen, and surely negative, consequences. Peter Henry, a 35-year government employee and SES member at the Veterans Health Administration, runs the Black Hills Health Care System, a mid-size VA facility in South Dakota. Last quarter, his facility was rated No. 1 in the entire VA system in patient satisfaction for outpatient care.

But Henry says he's content to spend the rest of his career in South Dakota now that pay-for-performance programs no longer allow VA to provide a locality pay increase for taking a job in a higher cost area. Agencies only can offer onetime relocation bonuses in the year of the move. Look at the VA facility in Los Angeles, Henry says. "Their budget went over $400 million this year. They have 3,500 employees and that poor guy running that makes what I make," even though Henry's system is about one-quarter the size. "How are they going to attract me from South Dakota with no state income tax to L.A. with the same salary and infinitely more grief?"

In several recent instances, large VA facilities filled chief executive officer positions with associate directors, which would have been "really unusual" in the past, Henry says. Los Angeles was among them. "It's a tough place to put your talented freshman quarterback in the game to take on your biggest rival," he says. "It's not the kind of place you want to try your wings as a first-time CEO of a health-care organization."

Henry supports the concept of pay for performance, but, he says, most senior executives are waiting to see how it's implemented. "I don't think anyone is viewing this as a god-awful disaster, or an unalloyed blessing," he says. "The notion of pay for performance hardly seems shocking. We were under the impression that was what we had all along." Henry says that his performance expectations already stretch 30 pages. They include everything from boosting the number of patients who are counseled on quitting smoking to reducing the time patients have to wait for appointments.

Hard to Measure

Other senior executives are more wary. Some jobs, they say, particularly policy-related, scientific or legal positions, don't lend themselves so easily to quantifiable, objective performance standards. "A true sit-down evaluation?" asks Bruce Granger, a chief counsel with the Health and Human Services Department. "I don't think I've ever had one. Everyone is busy." He adds that it "always [has] been difficult to evaluate legal staff. You can't just say you [get high marks if] you win such a percentage of your cases." Managers can evaluate the quality of legal briefs, Granger says, but that's an inherently subjective process.

Drabkin also is doing some soul-searching about how his performance should be measured. He sets policies that guide GSA's huge contracting operation. "In acquisition, we have three measures that we use all the time: cost, schedule and performance." The first two are easy to gauge, he says. "How much does it cost us to spend a dollar? Did we get the best value? On schedule, did we issue the policy in a timely fashion?" But performance is much tougher, he says. One possibility Drabkin has pondered is to rely on customer satisfaction surveys, but then again, he says, "Some customers are satisfied with bad products."

Sanders says managers simply need to think harder: "How do you do it for scientists? How do you do it for attorneys? How do you do it for policy people? There are all sorts of ways to do this, and it's not a stretch." To win OPM certification and start raising SES salaries, agencies will have to show they can think harder.

Doubts aside, senior executives, almost universally, say they support the notion of pay for performance and hope they will be among those who benefit. Hope, it would seem, springs eternal.