Payband Balancing Act

Whether or not pay-for-performance systems can work effectively across an entity as large and varied as the federal government remains an open question. And it's also not clear whether federal employees -- many of whom have grown accustomed to nearly automatic pay raises each year -- would ever view such a system favorably.

As of late 2006, less than 250,000 employees had actually worked under payband systems that allow more flexibility in compensation than the decades-old General Schedule, according to a new report commissioned by the IBM Center for the Business of Government. But that number could grow rapidly over the next few years. An estimated 650,000 civilian employees at the Defense Department alone will eventually fall under paybands if current plans go forward, the report notes.

And with that growth, the report says, comes the need to consider how to balance three competing objectives: efficiency, equity and employee acceptance.

The report, written by James Thompson, an associate professor of public administration at the University of Illinois-Chicago, makes the case that the rigidity of the General Schedule forces new hires to start at the first step of the grade to which their position is assigned. With paybanding, however, new employees can enter at a level above the band minimum, thereby providing an agency an advantage in competing for highly skilled recruits.

Still, recruitment is only half the battle. Equally, and possibly even more important, is retaining the valued employees an agency already holds. And federal labor unions, along with some lawmakers and federal employees, have argued that pay for performance systems, notably those at the Defense and Homeland Security departments, decrease morale and give management too much power.

But the report argues that a "preponderance of data" on performance-oriented pay systems throughout government indicates that they have achieved high levels of acceptance after initial implementation. Even so, the degree of success seems to vary, depending on how the systems were designed and implemented, Thompson says.

A credible pay system requires efficiency, equity and employee acceptance, the report states. In linking pay more closely to performance, paybanding promotes the objectives of efficiency and effectiveness, but potentially at the cost of equity and employee acceptance.

Personnel reform at the Government Accountability Office is a prime example in this regard, the report says. Many have considered GAO's market-based compensation system to be a model for the rest of the federal government, but recent feedback from some employees and lawmakers has not been so positive. That leaves a system that may promote efficiency at the cost of employee acceptance.

The report stops short of saying how an agency can strike the right balance, acknowledging that there are trade-offs among all of the objectives. But it does recommend that agencies induce supervisors to make more "meaningful distinctions" in employee performance, better distinguishing top performers from those with average or low ratings.

Jon Desenberg, consulting director for performance management at the Performance Institute, a group based in Washington, D.C., and San Diego, said his organization is working on a set of recommendations for the next presidential administration, one of which advises the government to de-emphasize the link between performance and pay.

"I think there's a lot of merit in really understanding what engages people," Desenberg said. "That ties to how they are engaged to their work, what helps them get promoted, and most importantly, what helps them get better and more interesting assignments. Pay is not the issue."

Still, there seems to be a consensus among many public policy experts that the government's decades-old compensation system needs an update. Whether momentum on that front continues will be up to the new administration.