Paybanding Pitfalls

Agencies buying into the compensation craze could run into roadblocks.

At the intersection of 17th and G streets in Washington, there's a small government agency going its own way on personnel reform. The Office of Federal Housing Enterprise Oversight-created in 1992 to ensure financial soundness for mortgage enterprises Fannie Mae and Freddie Mac-was given authority from its inception to design its own personnel system.

OFHEO did just that, and, along with similar financial institutions such as the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, the agency adopted a new-wave compensation approach known as paybanding.

At first, employees were assigned to one of seven bands according to their occupations. Placement within a band depended on complexity of work, scope of responsibility and extent of supervisory duties. Individuals could move horizontally within a payband once a year, based on performance.

But nine years into the system, Chief Human Capital Officer Janet Murphy says OFHEO dumped the bands and returned to a system that looks strikingly like the General Schedule. The agency's new system has 18 pay grades, which represent six occupations, such as secretary or senior specialist.

"We don't suggest [that paybanding is] not a good thing," Murphy said at a lunch this fall sponsored by the government human resources technology provider Avue Technologies Corp. But in some situations, "broad paybands may be too broad," she said.

So why did this 221-employee agency choose to move in the seemingly opposite direction from the rest of government? According to Murphy, employees wanted more vertical promotion. Broad paybands offered horizontal movement and greater opportunities for raises, they said, but not enough of a career ladder.

"That one really surprised us," Murphy says. "I thought pay was what it was really all about."

Another reason for the switch was that paybands led to overcompensation, according to Murphy. Employees moved quickly within the bands-based on performance ratings-and soon started earning beyond their market value.

OFHEO's new system is still market- and performance-based, but sans bands.

Tried and Tested

OFHEO's switch is especially noteworthy in light of the personnel reforms under way throughout government. In the Homeland Security and Defense departments, final regulations are in place to use paybands. The Bush administration also has proposed legislation that seeks to implement similar changes in all government agencies.

The trend among decision-makers seems to signal one message to federal employees: Say goodbye to the good old General Schedule. The existing 15-grade system is on track to be replaced, compressing its grades into a handful of broader bands based on occupation and making a wider range of salaries available for each job.

A classic paybanding system might contain three broad salary bands within a handful of career tracks-one for entry-level, one for full performance and a third for senior expert. Employees are hired into the band at any level and move through bands based on performance only-no more automatic step increases, and across-the-board pay adjustments will be discretionary.

The Defense Department finalized its plans this fall to move about 650,000 civilian employees to paybands under the new National Security Personnel System. Defense says it's not going in blind, however. Two decades of paybanding experience, in the form of demonstration projects, provided insight to officials designing the new system.

"Demos provide firsthand, real-world testimony to the benefits of the NSPS performance-based initiative," says a promotional NSPS video. "NSPS is using one of the key features common to the department's many successful personnel demonstrations: paybands."

OFHEO is among a handful of agencies that provide what can be termed "real-world testimony" to life under bands, either through demo projects or full exemptions from personnel rules.

What do these agencies have to show for their paybanding experiences? Unlike OFHEO, most have stuck with it. But even agencies still using the system say there are pitfalls to paybanding.

Moving Up

Murphy is not the only one to discover that employees' desires for promotions are not necessarily tied to money. In the span of a year, members of the Senior Executive Service in the Air Force and the Navy seem to have taken two steps forward and one step back on the matter of paybanding. The entire SES switched from six levels of pay to one broad payband last year, but the Air Force and Navy then layered a three-tier system back onto their band.

The tiers, according to Pentagon spokeswoman Lt. Col. Ellen Krenke, are based on an employee's placement within the organization, scope of duties, level of leadership and mission criticality. She says the tiers offer "a clear framework for career progression," something that seemed to be missing from the one-size-fits-all payband.

There's also the pride factor, says Carol A. Bonosaro, president of the Senior Executives Association, a professional advocacy group. Its SES members "tend to be human and like the notion of some prestige, and they don't have that" with a single band, she says.

And for the Defense Department, it's a matter of practicality as well. Civilians need to know where they stand with their military counterparts, who are in a rigid rank system. Indeed, in the Air Force the tiers are in lieu of rank. Tiers give SES members visiting military installations "the same customs and courtesies afforded general officers in the equivalent grade," Krenke says.

The Internal Revenue Service, which switched to a payband system for its senior and departmental managers in 2001, inserted steps into its bands right from the start. "We were, in a sense, the first of a new wave in government to go this route," says IRS CHCO Beverly Ortega Babers. "It was important to us that we did manage the change well and that we didn't scare away our workforce. So we did intentionally build into the design some familiarity that could link to the GS system."

At the IRS, managers move between steps only if they achieve a certain performance rating, but the rigidity of the steps hinders the purpose of pliable paybands, Babers says. So the IRS is weaning itself from them. When front-line managers recently were put into paybands, they weren't given steps.

As a transitional tool, it's a smart idea to retain some GS features, says W. Scott Gould, a vice president of IBM's Business Consulting Services and co-author of a forthcoming book on federal personnel reform titled The People Factor, to be published this fall by The Brookings Institution. "It made it easier to swallow," Gould says. "The similarity to the previous classification system made it culturally easier to accept."

Gould-a staunch supporter of federal workplace reforms-agrees with this compromise approach to paybanding. He even has a term for these nonstep steps: gates.

"Whereas the steps measure criteria met, the gates would measure performance," Gould says. "Enter a few gates in there to measure distinct changes in performance; inject into these broad bands some subtle distinctions to give [employees] a signpost."

Babers says the method worked for IRS at the time, but warns other agencies going to paybanding to "look very carefully at the budget implication of a system with steps." She explains that because the steps don't align exactly with the GS steps, managers have to bump up salaries in the transition, increasing payroll costs.

Hitting the Ceiling

At the National Institute of Standards and Technology, an elite group of scientists, engineers and their support staff in Gaithersburg, Md., and Boulder, Colo., have been under a paybanding system-consisting of four career paths, each with five bands-since 1987.

NIST's well-educated employees generally are high performers (the agency boasts three Nobel Prize winners in physics since 1997), perhaps too high. Seventeen years after paybanding began, about one-third of its employees have reached the upper limit of their bands, according to NIST's chief of advisory services, Robert Kirkner.

Paybands, of course, are primarily a tool to support pay for performance and flexible hiring. But for employees who have reached the end of their paybands, there is no opportunity for a pay raise, no matter their achievements.

At NIST, the pay pool for performance-based raises is taken only from what used to be within-grade and quality-step increases. So employees, as long as they perform satisfactorily, still get a congressionally determined across-the-board and locality raise-which keeps even those at the highest level moving up.

That's not true everywhere, though. The Federal Aviation Administration, like NIST, has been a paybanding trailblazer. In 2000, FAA implemented an agencywide alternative personnel system, which includes 13 paybands from student to attorney.

Unlike NIST, FAA doesn't provide across-the-board raises to increase base pay for everyone, says Tim O'Hara, a management analyst in FAA's 10th band. O'Hara is representing 2,000 pay-capped FAA employees in a lawsuit against the agency; he says he hasn't had a raise in four years.

"It's a major disincentive," O'Hara explains. "I thought, for example, last year I had a stellar year. I was made acting manager for six months because my manager had been sent away on temporary assignment. My group completed all work assignments, we did it with high quality, we had no complaints against the quality of our work. To not give any raise whatsoever, it hurts. To say I'm bitter is putting it in the kindest light possible."

NIST and FAA both reward pay-capped employees with lump-sum bonuses. NIST modified its system in October to require that pay-capped high performers in the top two rating levels receive a minimum bonus equal to the amount of pay increase they would have received if they were not salary-capped.

Bonuses don't factor into the high-three formula used to calculate retirement annuities, however. FAA program analyst Carrol Hansen, who is part of O'Hara's lawsuit, estimates that four years without a pay raise means $12,000 less on which to base her annuity.

Paybanding advocates argue that the pay-cap problem exists in the General Schedule, too-at some point, you reach the limit of pay available in a federal job.

"Pay is kind of a nice thing, but it's a secondary incentive," says John Palguta, vice president for policy and research at the Partnership for Public Service. "What happens when [General Schedule employees] topped out? They didn't become slugs, they still worked hard, and they just kind of recognized that they still might be eligible for a performance bonus."

FAA officials say capped-out employees represent a minor problem in an otherwise efficient system. "There is a very small percentage of FAA employees who have reached the top of their paybands and in lieu of getting their pay-for-performance increase, any monetary reward they get is in their lump-sum payment," says FAA assistant administrator for human resources management, Ventris Gibson.

The problem is also one that may resolve itself over time, says Gibson. She admits that employees are clustered near the top of the bands, but says that's because many FAA employees have been there so long, a signal of employee satisfaction. As these top employees retire, there will be a more even distribution. "It's a problem that any organization that does this will have initially," Gibson says.

But what the system seems to be telling O'Hara and Hansen-who among other things are claiming age discrimination in their lawsuit-is that it's built for newer employees, allowing bigger raises and starting salaries for high-performing employees at the start or middle of their careers at the expense of older, more experienced workers.

Salaries Rise

With all those capped-out employees, the new system can be expensive. There's been much debate about the cost of implementing paybands. Agency and administration officials insist it's budget-neutral. Employee groups argue that pay pools will become an easy target for penurious agency heads.

The Defense Department says it will cost $158 million to implement the NSPS through fiscal 2008, but labor unions say that is a gross underestimation. After implementation, the unions also say if money for pay raises no longer is congressionally mandated, it will become attractive to budget cutters during tight times.

"The money has to be there," National Treasury Employees Union president Colleen M. Kelley says. "The first time it's not, they'll have no credibility with employees and the system will fail."

In November testimony before the Senate Homeland Security and Governmental Affairs Subcommittee on Oversight of Government Management, acting Deputy Secretary of Defense Gordon England, who heads up the NSPS effort, said he heard union concerns about funding and has responded.

"Funding will not be less than the amount that would have gone to step increases and promotions . . ." England said. "DoD is committed to this funding."

It might not be less, but England might want to prepare for it to be more. According to the Office of Personnel Management, costs vary among paybanded agencies. OPM tracked the Navy's famed China Lake demonstration project over a 10-year period and found about a 2 percent to 3 percent increase in average salary over General Schedule rates.

NIST, on the other hand, saw average salaries rise even more significantly-about 10 percent over equivalent GS salaries after eight years. But that spike, OPM says, was a conscious decision on the part of NIST to spend more on salaries to recruit better employees.

Experts say overcompensation can be controlled. "There's a very natural limitation, which is the overall budget," Palguta says. "You set your salary and expense budget. . . . Simply put that budget in place and say to your managers this is how much money you have to spend."

James Colvard, a member of the team that developed the China Lake paybanding system 25 years ago, says the costs not only are manageable, they're worth it. Paying slightly higher salaries for higher-performing workers evens out in the end. When asked to respond to the questions of rising costs, capped-out high performers and career stagnation in his brainchild, Colvard says those are problems of management-not systems.

"My conclusion is [that] the greatest difference between the private sector and the public is the lack of discretion to act without prior approval," Colvard says. "All systems are passive. The system doesn't do anything. The system permits the human to make a judgment."

Managers will have more discretion under paybanding and more room for error. They will assume responsibility for providing opportunity for career progression, rewards for the pay-capped and keeping costs under control.