Government Needs to Rethink Employee Compensation Plans

The Office of Management and Budget is committed to improving government’s performance. But while reorganizing and eliminating unnecessary jobs could reduce costs, that does not necessarily lead to better results. Reorganizations actually tend to disrupt working relationships so, for a time at least, performance often declines. Real gains come from assembling essential talent, adopting management practices that encourage collaboration and focus on organizational goals, and empowering employees to proactively achieve goals.

In that context, recognition and reward practices can reinforce desired behavior, provide focus for work efforts, and influence the level of effort. That’s broadly accepted and backed by extensive research.

It all falls apart, however, when managers and supervisors are ineffective—that includes micromanaging staff—or top management adopts policies that fail to acknowledge employee contributions. It’s when the work experience turns negative that employees become disengaged and their productivity declines.

Compensation is a core issue, of course. The way pay is managed can increase employee engagement or it can trigger disengagement and performance problems. Perceived fairness governs employee reactions.

It’s clear the administration is uncertain how to address the compensation issue. On some basis the plan is to transition to pay for performance. One might expect former business executives to propose new policies similar to those widely used in business, but that’s not reflected in plans announced thus far. 

The business model for rewarding performance combines a market competitive budget for salary increases—currently that’s 3 percent—plus funds for group or team incentives that would add at least 10 percent to the pay of managers, supervisors and other professionals. Instead, the administration plans to freeze salaries and add a small performance pay fund—$1 billion is 0.5 percent of executive branch wages—to “reward and retain high performers”.

As reported, the fund will be used by agencies for “pilots and innovation tools that different organizations have been trying.” As a cautionary comment, this is not a time to throw open the doors for agencies to experiment. Agencies do not have the in-house experience planning compensation systems. Leaders would never consider doing something similar in finance. Experimenting with pay affects careers and could be highly disruptive. No corporation would ever adopt this idea.

Government has had almost 40 years of experience with innovation in demonstration projects. The focus has been on banded salary programs, an idea originally copied from university faculty salary systems. The idea is proven and used in other sectors. It’s simple, flexible and substantially reduces the time and resources needed for administration. It also shifts the focus from automatic increases to individual performance and competence. It’s ideally suited to so-called knowledge jobs. The program model has been recommended by both the National Academy of Public Administration and the Partnership for Public Service.  

But before any changes are adopted there is a need to assess how pay affects staffing. The Washington Post recently reported USAJobs.com has “an average of 20,000 vacancies posted at any one time”. The vacancies in the Department of Veterans Affairs have been reported as high as 45,000. In contrast to the annual surveys that underpin the Federal Wage System, government’s white collar jobs have not been “priced” using market surveys in over 20 years. This is a standard practice in other sectors. Pay should never be a barrier to hiring people with critical skills.  

One certainty is that below-market salaries and lump sum payments, in lieu of increases, is not going to attract and keep high-demand talent. Those individuals can command competitive offers that promise rewarding careers. That’s notable in that agencies employ almost 500,000 specialists in STEM and healthcare fields.

There no doubt are employees paid above market but government does not generate survey data valid to confirm that. The critics’ analyses simplistically look at age and education level and fail to consider the scope and level of job responsibilities.  

An open question that should be addressed early in the planning is: Are agencies prepared to invest in the tools and training to assure managers are able and committed to planning, managing and evaluating employee performance equitably? Undoubtedly there are managers who are seen by their people as fair and effective in managing and evaluating performance. However, where discrimination and bias or simply poor supervisory practices exist, agencies should refrain from adopting any pay for performance policy until problems are addressed. Managers are the key to a successful pay for performance policy.

Business executives would undoubtedly agree that cash incentives are a far more powerful tool to drive employee performance. In business as well as healthcare, incentives are an integral component of virtually every compensation program. Further, the payouts are commonly based on company (or hospital), group or team performance metrics along with individual goals. Individual bonuses are rare except in sales.

An alternative that would not require legislation or special funding is the idea adopted by Denver’s city government, called “Peak Performance.”  The concept is similar to gain-sharing plans where employees share in savings attributable to changes planned by work teams. It was reported that Denver has benefited from 2,200 employee-planned innovations generating savings of more than $25 million.

The Denver approach is based on empowered employees. When they see a problem or an opportunity to improve operations, they are expected to tackle it. Success stories across the city encourage other employees to plan new projects. That is now entrenched in the city’s workforce culture. It starts with a management philosophy that recognizes employees want their organization to be successful.

The savings concept could be integrated in goal-sharing plans, a similar concept where payouts are based on achieving group goals. Several years ago I helped a General Services Administration team develop a highly popular plan that produced documented performance gains. The payouts were modest, typically less than 5 percent of salary. GSA’s union initially opposed the plan but after a year wanted it extended to all of GSA. Unfortunately a reorganization and new leaders a couple of years later ended the plan.

Agencies have endless opportunities to develop team or group incentives. Well-designed plans can be expected to generate significant improvement. All incentives are best understood as an equation, linking planned results to defined payouts. Two issues are germane to a plan’s success: 1) the payouts have to be based on a limited number of credible metrics (e.g., improving customer satisfaction), and 2) employees need to play a role in defining performance goals. Everyone who has worked to achieve goals understands the importance of personal commitment.

Incentives rely on predefined calculations—the equation idea. CEOs often like to make subjective adjustments but incentives are most successful when employees know with certainty what they can earn.  Furthermore, team/group-based incentives are far more powerful. Discretionary awards (e.g., spot bonuses) have minimal impact going forward.

Pay for performance should not be understood simplistically as a carrot. The prospect of a salary increase or cash award, when linked to reasonable performance expectations, can be effective but only when it is supported by and consistent with other management practices that reinforce the focus on performance.