Agency decides pay banding is not the answer

At least one federal agency has given up a broad pay banding system similar to ones proposed in recent personnel reform packages in favor of a pay grade structure resembling the traditional General Schedule.

The Office of Federal Housing Enterprise Oversight, a small independent agency founded in 1993 to oversee the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), made the switch in 2002 from seven broad pay bands to a structure with 18 pay grades. OFHEO officials said Wednesday that they changed the system to provide employees more opportunities for promotion and to control overcompensation. The General Schedule has 15 pay grades. The proposed Defense Department system, in contrast, replaces the General Schedule with pay bands that have broad salary ranges for categories of work, such as entry-level or supervisory.

OFHEO is exempt from many standard civil service personnel rules, including those for compensation systems. It receives funding from assessments on the two mortgage entities it oversees rather than congressional appropriations.

At its inception, OFHEO adopted the seven broad pay bands. According to a 1995 Government Accountability Office report, employees were assigned to one of the bands based on their occupation. Placement within the band depended on complexity of work, scope of responsibility and extent of supervisory duties. Individuals could move horizontally within the pay band once a year, based on performance.

Nine years into system, however, the office decided to switch, OFHEO's Chief Human Capital Officer Janet Murphy said at a lunch sponsored by the government human resources consulting firm Avue Technologies Corp. OFHEO now has a pay structure with 18 grades. There are three grades for each occupation type, such as secretary or senior specialist.

"We don't suggest [that pay banding is] not a good thing," Murphy said. But in some situations, "broad pay bands may be too broad," she said.

One of the problems OFHEO encountered with the initial system was that employees wanted more opportunities for vertical promotion, Murphy said. Broad pay bands offered more horizontal movement and more opportunities for raises within the same job classification, but not enough of a career ladder, she said.

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

Murphy said employees insisted that they wanted promotions, not just higher salaries.

Broad pay bands also led to overcompensation, Murphy said. Employees moved quickly within the bands, and were soon earning beyond their market value when compared with similar financial institutions such as the Federal Deposit Insurance Corporation and the Federal Reserve Board, she said.

A hypothetical pay band at OFHEO could range from $50,000 to $100,000 a year for an occupation when comparable agencies paid the top employees in that occupation $80,000, Murphy said. Employees were quickly moving horizontally within pay bands and clustering at the top compensation levels, she added.

The switch in systems did not, however, change the pay-for-performance aspect of salaries for OFHEO's approximately 250 employees. All pay raises are "100 percent merit-based" with "no automatic anything," including cost of living or within-grade increases, Murphy said.

The 18 pay-grade structure is numbered from 10 to 27, so as not to mirror the General Schedule, Murphy said. This pay system may be a good fit for OFHEO because the agency is small, she said. But she added that she thinks other agencies can learn from OFHEO's experiences.